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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