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Last Updated : Apr 03, 2018 04:42 PM IST | Source:

Footwear companies Q3: Finding growth pathways amid challenges

Tailwinds such as increasing disposable incomes, growing preference towards branded discretionary items, and inroads made by organised retailers across the country are the key catalysts that could give this sector a noticeable fillip in due course.

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Post GST, as the Indian economy transitions from an informal setup to a formal one, the country’s renowned footwear players have been successfully outpacing their unorganised counterparts by leveraging the advantage.

Furthermore, tailwinds such as increasing disposable incomes, growing preference towards branded discretionary items, and inroads made by organised retailers in the smaller, fast-growing regions are some of the additional catalysts that could give this sector a noticeable fillip in times to come.

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Bata India

Bata’s year-on-year (YoY) sales growth was pretty muted because of higher GST incidence absorbed by the company. However, the company’s operating margins rose due to emphasis on product premiumisation, re-negotiation of lease agreements, and cost control steps.

Going forward, introduction of new product varieties (particularly for women), a rebound in wholesale business post-GST, higher marketing spends, store openings (300-350 franchise-run outlets over the next 3 years), and focus on high-value footwear should yield healthy top-line growth.

Higher contribution from value-added products to total revenue (from 30 percent at present to 45 per cent by Q3FY19 end), discontinuance of unprofitable products, reduction in raw material procurement costs through bulk purchases, and rental renegotiations could lead to an uptick in margins.

Khadim India

Khadim’s YoY revenue growth was aided by growth in both its divisions (retail, distribution) and institutional sales of Rs 29.6 crore to the UP government. The margin profile was affected because of weaker margins in the distribution arm (25 percent of annual sales) and an increase in overall expenses.

Khadim aims to add 75-80 stores every year, primarily through the franchise route, in a bid to generate better returns on capital. Consequently, the company targets achieving revenue growth of 15/30 percent from its retail/distribution segment, respectively.

A greater degree of Khadim’s impetus will be directed towards its 9 sub-brands (under the retail segment), that fetch higher average selling prices per pair. An increase in capacity utilisation at the company’s 2 facilities from 73.5 per cent to 85-90 per cent over the next 2-3 fiscals could yield operating leverage too.

Mirza International

Mirza registered decent sales growth YoY on the back of a good performance in the domestic branded business, distribution network augmentation, and traction in e-commerce portals. The margins were flat from a YoY perspective mainly because of a tepid performance in the unbranded footwear segment.

Geographic expansion of the existing 150 ‘Red Tape’ stores (through 70-100 online and offline outlets by December 2018 end) through a Rs 35-40 crore capex in FY19, coupled with product launches in the women’s and fashion footwear categories, will play a key role in boosting the company’s turnover.

Higher realisations in case of premium and athletic footwear (‘Red Tape’ brand) and volume-driven sales growth (in connection with ‘Bond Street’, a value fashion mens footwear brand) should enable Mirza to improve its EBITDA margins from the domestic market, the outlook for which is promising.


Relaxo’s good YoY top-line growth was attributable to a pickup in sales volume, store additions, and an increase in online sales. Moreover, in Q3, higher contribution of premium products to total revenue, cost efficiency measures, and a major reduction in finance costs caused the company’s margins to inch up.

Addition of new variants (beachwear and sportswear) to the product portfolio, foray into new markets in south and west India, and the ability to leverage tie-ups with approximately 800 distributors (through 50,000 retail touch points) will be crucial in determining Relaxo’s turnover growth in the long-run.

A gradual change in product mix in favour of branded premium footwear and value-added products, low capex till the end of FY21, raw material sourcing from local suppliers, and complete control over the manufacturing processes (implying liberty to decide on pricing) can help Relaxo earn better margins.


Sales growth due to a low base (demonetisation in Q3FY17), geographic diversification through entry in new regions, cost-efficiency, and reduced dependence on debt for business operations enabled Sreeleathers to put up an impressive Q3 show.

Sreeleathers will continue to capitalise on its strengths by adding new outlets mainly in its target markets. The company’s tried and tested strategy of prioritising volume-driven sales growth in price-sensitive tier 2/3/4 cities of India, prima facie, is unlikely to be altered.

Economies of scale by virtue of locational clusters (for most outlets) and higher asset turns through the franchise model can help Sreeleathers boost its operating margins and derive better returns on capital employed. Since the debt-equity ratio is very low, the benefits will reflect in the bottom-line too.

Roadblocks ahead

Though the moats stated above appear convincing, some company-specific risks ought to be considered.

Bata has been grappling with difficulties relating to muted same-store sales growth because of sluggish stock movements at its retail outlets and availability of better offerings by its peers at cheaper price points.

Though 85 percent of Khadim’s high-margin retail segment’s manufacturing operations are outsourced to keep the business asset-light, the effect of the same hasn’t been visible in the company’s financials so far.

Mirza’s export business (nearly 50-60 percent of the annual turnover) faces headwinds pertaining to lacklustre demand in international markets and reduced drawback rates. The trend will persist for a while.

A considerable chunk of Relaxo’s product portfolio includes economically priced products, where brand loyalty is non-existent. Except for northern and eastern India, the company’s presence is not robust enough.

Small dealers in tier 3 and 4 Indian cities, that happen to be some of Sreeleathers’ important clients, have not been able to resolve teething issues in connection with GST, which, in turn, could impact the top-line.

Which stocks are investment-worthy?

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Bata, Relaxo, and Khadim seem to be trading at a steep multiple, thus implying that their near-term growth prospects are fully discounted in the price. Moreover, neither of them has corrected much over the past year. Investors may, therefore, keep these on their radar for accumulation on price dips.

Mirza, despite being reasonably valued, is yet to make its presence felt on the bourses, especially since the last 6 months. Even though the company is optimistic and well-poised to make the most of the demand growth in India, the outlook for its export division is bleak, particularly in the immediate future.

Sreeleathers, even after witnessing a bout of corrections over the past 6 months, trades at a level considerably cheaper than industry front runners such as Bata and Relaxo, while simultaneously outperforming them over a period of time, as indicated in our earlier article. At 19.1x FY20 projected earnings, the undemanding valuation shouldn’t be overlooked.

For more research articles, visit our Moneycontrol Research Page.

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First Published on Apr 3, 2018 04:30 pm
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