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Donald Francis is an independent analyst and young investor in the Indian stock market. Donald specializes in the healthcare and banking sector. He blogs regularly at his website aimed at Stock Market for Beginners ( Donald enjoys a regular game of badminton,... More
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  • Relaxo Footwear Management Q&A | 16 Feb 2011

    Relaxo Footwear has made some rapid strides in the last few years. Sales have grown almost 3 fold from 200 Cr in FY06 to about 553 Cr in FY10. Earnings have far outstripped Sales growth going up from 3.26 Cr in FY06 to over 37 Cr in FY10 - a more than 10x increase or a CAGR of over 80%.

    Read the Relaxo Footwear stock story to learn about its good track record, and why Relaxo made it easily to Valuepickr's shortlist of promising small-cap stocks - that our in-depth process for hand-picked stock-picks throws up.

    There are a few questions that came up during ValuePickr's detailed analysis on Relaxo Footwear, its prospects, and risks as we see it. (of course that is entirely based on published sources and without the benefit of a meeting/interview with Management).

    ValuePickr put forward these questions to Realxo Footwear Management with a request for a meeting/visit to its premises. ValuePickr visited Relaxo and talked with CFO Sushil Batra for almost 2 hours and he patiently answered all questions posed.

    You can read the complete interview with Relaxo Footwear CFO Sushil Batra at ValuePickr Relaxo Management Q&A 16 Feb 2011
    1. We are very impressed by the strides made by Relaxo Footwear in last 5 years. Earnings have far outstripped Sales growth going up from 3.26 Cr in FY06 to over 37 Cr in FY10 - a more than 10x increase or a CAGR of over 80%. This probably has been achieved in the backdrop of increasing share of high-margin products, tremendous improvements in Working Capital management over last 5 years, reduction in power costs and a gradual softening in raw material prices over the years. Year on year EPS growth in FY10 was ~165% on the back of huge decreases in RM prices. However the situation has got reversed in FY11 with RM prices hardening significantly and FY11 is set to see EPS degrowth.

    What do you attribute the successes to? Despite several of these advantages like moving up the value chain to high margin products, better working capital management, etc, the RM price volatility seems too much of a drag – dragging down margins drastically. Please comment on margins sustainability and countering the RM challenges going forward.

    If you look closely at Relaxo Footwear, you will notice that real growth started happening post 2006 when we invested in Flite and subsequently with Sparx. Before that we were only a Hawaii company. With investments going into expanded capacities, branding, opening of company owned retail stores, we started getting known for quality at affordable prices. Customers started asking for our products - retailers needed to start stocking!

    Yes, the raw material situation is tough and has worsened in recent quarters. Earlier we needed to effect price changes once a year. We effected a price hike in January 2011, but the last one before that was in April 2010. But with the current situation we will most probably be effecting another hike in Mar 2011. We are watching the situation and moves by competition closely.

    There is great brand pull, customers ask for our products and retailers/distributors have to come and get the stock from us. But does that mean we have any real pricing power - No. Our Hawaii slippers will find it difficult to sell at Rs. 2 more (than the Rs 27 currently).

    2. Current capacities are at 3.35 lakh pairs a day. 2 lakh pairs of Hawaii slippers per day, 105,000 pairs of Flite per day and about 30,000 pairs of Sparx (shoes & sandals) per day. & factories spread across Haryana, Uttaranchal, Rajasthan.

    What is the current revenue mix and margin contribution from these products? And where is Relaxo Footwear's focus for future growth? What kind of plans going forward on Sparx/Flite. What kind of promotional budgets will be required for this? What incremental capacities can the current locations take. What is the space available? Any possibilities of multiple shifts?

    35% revenues are from hawaii slippers, 30% is from Flite, another 30% is from Sparx and others bring up the balance 5%. Hawaii slippers are low margin business, while Flite and Sparx bring in higher margins. We are already running 2 shifts. There is enough space for further capacity expansion.

    Going forward both Sparx and Flite are our Flagship brands. we will continue to make investments in line with demand.

    3. All three brands – Relaxo, Flite and Sparx are quite well known and well accepted in the market.

    The Relaxo brand is jointly owned with a group company. However no royalty is currently being paid by RFL. Is this arrangement set to continue or the Management has some plans on consolidating its brand ownership? The “Sparx” brand is also involved in some trademark infringement suite with Bata? Can you please explain the circumstances and the current status/ What are the threats to the company from this?

    The Relaxo brand is jointly owned. The promoters have equal stake in the group entities, so it should not be a problem. Discussions have taken place and there is some progress on assigning a nominal value and bring the "Relaxo" brand within the company fold. The assigned value will not be in Crores for sure, but of the order of a few lakhs.

    Bata owns the Sparx brand and operates it in some 27 countries. Yes, it is registered in India since 1978, but has never used it in India!

    Relaxo Footwear started using Sparx since 2004-5 and since then has been making continual investments in it. Actually the litigation was started by us in 2009, when we came to know of their plans to start using Sparx, and prayed for a direction from courts for the rights of Bata on Sparx to lapse. As per Indian trademark laws, the right to a trademark can lapse, if the firm cannot show any use of the trademark for a number of users. We filed more than 600 documents showing our use of the brand in Invoicing and the like, while Bata could produce only 2-3 bills dating back to late 70s and nothing after that.

    Our legal advice is that we have a strong case and we are pursuing it. We are also hoping for an out-of-court settlement. However these things can go either way, and so we have registered and started using an alternate brand "Spark" with the same styling as 'Sparx". That should help us switch with minimum damage.

    4. While Sales have gone up more than 2.5x in 5 years, working capital/Sales is just over 5% in FY10 coming down from 7.5% in FY07. Debtor days are at an unbelievable 14 days in FY10, down from 32 in FY06. This shows a management focused on improving operational efficiencies. 90% of the business is driven through its retail distribution network (balance from the company owned stores numbering 100) and this indicates strong acceptance and brand pull in the market.

    Please elaborate on the factors contributing to this superlative performance on the working capital front. Is this a result of many factors coming together synergistically or its plain old-fashioned persistent focus on improving operational efficiencies and strategic thinking. How many distributors and retailers. How much of Relaxo Footwear business is driven through retail distribution network? What is the role of company-owned stores in this play?

    Like we mentioned before we are in a happy position as far as demand pull for our products are concerned. Quality & Value for money is what we stand for and the brand has got associated in the customers mind. They ask for it by name and distributors are always at our doors for stocking our products.

    60% of our business is done in advance today. That has led to the gradual reduction in debtors days. Inventory days has gone up because of moving up in the chain with higher value items. [A hawaii slipper costs Rs 27, an Flite from Rs. 40 onwards, while a Sparx shoe costs Rs. 700 onwards.]

    Company owned stores have been playing a big part in helping change consumer perception. That we are not just a hawaii slipper company, but have a very wide range of offerings with lightweight slippers and sports shoes, canvas and sandals. They help drive demand for our products. We are in line to have 125 company owned stores by March 2011. Company owned stores typically break-even by 18-24 months, with new stores added every year. Till the time they break even they work to a clearly defined loss-budget (apportioned from the promotional budget for the year).

    5. Relaxo Footwear over the last two-years has also shown increase in its exports from just Rs 1.5 crores in FY08 to Rs 7.1 Crores in FY09 to Rs. 10.58 Crores in FY10. The current exports are to Europe (~70%) and the Middle East (~30%). The Company intends to increase its revenue from exports further with the 2 new plants.

    What kind of capacities are now dedicated to exports? Will export markets grow to be a significant contributor in the near future, by when? Are margin realizations higher in export markets?

    Relaxo Footwear a leader in the domestic market and will continue to focus there. We are doing some exports to increase our presence and utilise our capacities better. We did 10 Cr last year and this year we may be able to do 20 Cr in exports, so in percentage terms the exports growth is great. However on an absolute basis, exports will probably remain a small segment. The margins are lower in export sales.

    You can read the complete interview with Relaxo CFO Sushil Batra at ValuePickr Relaxo Management Q&A 16 Feb 2011
    Tags: small caps
    Feb 25 3:20 AM | Link | Comment!
  • ValuePickr Quality Small Cap Stocks Screener

    Quality Small Cap Stocks. You might have wondered how one can research such stock ideas in India stock market? Check out how to shortlist quality small cap companies in the Indian stock market


    For some time now I have wanted to research this space extensively. 
    This is the first time that we are coming close to be able to do that, on a regular basis, from now on. Voila! courtesy the ValuePickr stock screener.

    In case you are not familiar with the term, you can find a brief on a stock screener and its capabilities in our Stock Screening Basics section.


    Check out ValuePickr's Quality Small Cap screen selections for the Indian Stock Market, here.


    Setting the Universe

    We wanted to shortlist stock ideas from the small cap stocks unioverse. So a criteria of annual sales between 100-500 Cr, for the current year, is used.

    Secondary or Conditioning Criteria

    We mentioned "Quality" small cap stocks, right. Which means we do not want the filter to pass companies with poor fundamentals. We want companies that have reported negative operating cashflows for last 2 years and have high debt-to-equity OUT. And we want IN, companies that report high Return-on-Equity and pay some dividends.

    You could use probably a few more such fundamentals filters, but the above are deemed sufficient conditions.

    Primary Criteria

    Now this is where the objective of your screen gets defined. What kind of companies are we attempting to uncover? Small cap companies that are increasing earnings year over year for atleast the last 5 years. But thats not enough; we want only those that are available at attractive prices today. The PEG ratio is a good measure that compares the Price to Earnings ratio (NYSE:PE) to the earnings growth rate of the company. In order not to be misled by a year of growth spike, or some one-off extraordinary other income skewing earnings growth last year, we use the 5yr average earnings growth rate, for the comparison.

    And that sets up our Quality Small Cap stock screener nicely! So enjoy the shortlist! Go ahead and dig into these companies. Let me know if you find Gold anywere!

    When looking at the results, it is useful to keep in mind that there are no miracle screens that produce lists of guaranteed winners. A well-designed one however, would provide us with a shortlist of stocks that hold some promise.

    Even the most well-designed screen is only a preliminary search!

    Remember that even the best designed screen is only a preliminary search for investments using a small set of quantitative factors. A complete in-depth analysis of shortlisted stocks that explores both quantitative and qualitative factors should follow any screen.

    If you want to follow any of the shortlisted stock ideas, the best place to start is the companies website; start by digging at the Annual Report (usually found in the Investor section); look at analyst presentations if available, press releases and also search for more information on the company, recent newsflow, etc. Find out all you can about the company and its competitive environment. 

    Disclosure: This article is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The author, a Director at ValuePickr Investments, frequently invests in the shares discussed by him.
    Aug 05 4:08 AM | Link | 2 Comments
  • A Market Entry Exit Strategy | Statistically informed look at CNX Nifty valuation levels

    29 Sep 2009

    Market Entry Exit Signals? The CNX Nifty is today trading at a PE of 22.55.

    Many senior investors I speak to, have started getting cautious. They are cutting their exposures and not making fresh entries. While there may still be some stock-specific value left, valuations are rich in many frontliners.

    With the FIIs continuing to pour in money, there is also talk of whether the market can touch new highs! With increasing inflows, the FIIs also reckon if the Indian currency were to appreciate to Rs. 40 to a dollar from current levels, even if that were to take 1-2 years, that's a straight 20% gain on the currency! As the Raring Bull is fond of saying, who's to argue with what valuation is right for the Indian market?

    Having learnt my lessions in 2007 & 2008 (I remained invested throughout and did not book even partial profits), I am now in search of some kind of a market entry exit decision-making model for myself. A senior prompted me to look at long-term historical Nifty Valuation data. He suggested a statistically informed look at valuations can introduce some predictability to investment returns!

    Between January 1999 and September 2009, the Nifty traded at low PEs of below 11 and high PEs of 28+. It hit those extreme valuations rarely. The average PE was 17.72 while the median was 17.58 and the modal value was 14.31. The standard deviation was 3.64

    The Median indicates that exactly half the time, the Nifty traded below 17.58. And the Mode shows it most commonly traded between 14-15. Most of us are probably aware of this on an intuitive basis, even if we may not have it on our fingertips.

    Let's first check whether the 10yr CNX Nifty data above holds a normal distribution pattern. The laws of normal distribution suggest valuations between 14-21 (within one standard deviation of the average) around 68 per cent of the time and valuations between 10-25 (within two SDs) around 95 per cent of the time. The actual stats are 67 percent and 95.6 percent respectively, so the reality is very close to what is expected of normally distributed Nifty PE data.

    Now this is a good Bell Curve. If we look at the Nifty PE distribution data/graph above, we can see that the market is at an unusual valuation, when outside Mean+/- 1SD. And it is at an extraordinary valuation, when outside Mean+/- 2SDs.

    We are always told by seniors to look for PEs lower than the long-term average, as a buying signal. Similarly higher than long-term average PEs, would signify a sell signal, right? My market entry exit model, is now refined by the laws of normal distribution! It looks something like the following:

    a. At the higher end of the 14-21 scale, start cutting exposure; book partial profits
    b. When it starts creeping up over 23, start selling
    c. If I am still around & milking, and it goes beyond 25, exit most; make portfolio zero cost
    d. At 13 or below, start buying & heavily

    In October 1999, the Nifty was at PE 23 – a strong sell signal. In May 2004, it was at PE 14 – a good buy signal. Mar 2009, the NIfty PE went to being just over 12, but that wasn't as strong a signal as October 2008, when PE went below 11. It is currently (Sep 2009) at PE 22.55 - a time to get cautious again, signal!

    I am convinced by the senior's suggestion of using the long-term historical Nifty PEs as a guide for my market entry exit strategy. Executing that is another matter though, and will take loads of discipline. Do I have it in me? I am asking myself this, daily:). It might interest you to know that the Franklin Dynamic PE fund follows a similar market entry exit strategy.

    If I am able to shut out conflicting emotions and decide to act rigidly on the sell-heavily signals, it probably would also mean forgoing extraordinary returns at peaks. The CNX Nifty peaked in February 2000 at 1800 levels and at PEs of 27+. It peaked again in January 2008 at 6200 level, and at PEs of 28+!

    However the discipline to forgo the cream, might also mean tremendous capital safety for me. I would not again be caught in a situation of hopelessly remaining fully-invested; worse still - be unable to bet heavily on the very stong buy signals in Oct 2008 and Mar 2009, because all my funds were tied-up in buy-and-hold!

    Happy Investing!


    Sep 29 1:10 PM | Link | 1 Comment
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