ICICI Direct recommended hold rating on Relaxo Footwears with a target price of Rs 715 in its research report dated June 09, 2020.
ICICI Direct's research report on Relaxo Footwears
Disruptions owing to store closures (from mid-March onwards) led to substantial contraction in revenues for Relaxo Footwear in Q4FY20. However, better gross margins, lower taxation rate arrested PAT de-growth, to a certain extent. Revenue for the quarter de-grew 15% YoY to Rs 540.6 crore with volumes down ~18-20% YoY. Favourable product mix, benign RM prices (EVA & PU: crude linked derivatives) led to significant gross margin expansion of 660 bps YoY to 59.8% (up 200 bps QoQ). However, due to negative operating leverage (employee & other expenses as percentage to sales up 313 bps, 277 bps YoY, respectively), EBITDA margin expansion was restricted (up 70 bps YoY to 15.7%). PAT for Q4 de-grew 5% YoY to Rs 51.8 crore, aided by lower tax rate (25.0% vs. 31% in Q4FY20). On the b/s front, stringent working capital policy (18% of revenues) translated to healthy CFO generation in FY20 (CFO/EBITDA: 75%), with FCF of ~Rs 160.0 crore (capex: Rs 116.0 crore). Subsequently, Relaxo retired debt worth Rs 90.0 crore making it virtually debt free. Near term challenges owing to slump in demand, manufacturing constraint are expected impact profitability.
Relaxo Footwear over the years has maintained balance sheet prudence with controlled working capital cycle (NWC days: 65 days), healthy asset turns of 2.5x and generating RoCE of 20%+. With earnings in short-term expected to be negatively impacted (particularly H1FY21E), Relaxo through its strong balance sheet and brand patronage is expected to tide over the current situation. We bake in revenue, EBITDA CAGR of 10%, 15%, respectively, in FY20-22E. The stock saw a sharp run up last month (up 25%) and is currently trading at rich valuations (56.3x FY22E EPS). We continue to remain structurally positive on the stock and its long term growth prospects but post the recent stock price flare up, we downgrade a notch from BUY to HOLD with a target price of Rs 715 (earlier: Rs 775). We would prefer to await better entry points at lower levels from a long term holding perspective.
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