Analysis: Relaxo Footwears Ltd

The current section of the “Analysis” series covers Relaxo Footwears Ltd, an Indian manufacturer of slippers, sandals and sports shoes.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Relaxo Footwears Ltd: Detailed Fundamental Analysis

Over the years, Relaxo Footwears Ltd did not have any subsidiary; therefore, it has always reported only standalone financials.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of a company present such a picture. Therefore, if a company reports both standalone as well as consolidated financials, then in such a case, it is advised that the investor should prefer the analysis of the consolidated financials of the company, whenever they are present.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

In the case of Relaxo Footwears Ltd, as until now, the company has reported only standalone financials; therefore, we have used the standalone financials in the analysis.

Financial and Business Analysis of Relaxo Footwears Ltd:

In the last 10 years, Relaxo Footwears Ltd has increased its sales from ₹1,180 cr in FY2014 to ₹2,783 cr in FY2023 at an annualized growth of 10%. Sales of the company have further increased to ₹2,900 cr in the 12 months ended September 30, 2023, i.e. during Oct. 2022-Sept. 2023.

The profit margins of the company have fluctuated significantly over the years. Relaxo Footwears Ltd had an operating profit margin (OPM) of 13% in FY2014, which increased to 16% in FY2018. The OPM, then, declined to 14% in FY2019 to subsequently increase to 21% in FY2021. However, in the last two years, the OPM of Relaxo Footwears Ltd has declined sharply to 12% in FY2023. In the 12 months ended September 30, 2023, i.e. during Oct. 2022-Sept. 2023, it has reported an OPM of 13%.

The net profit margin (NPM) of the company has closely followed its operating profitability.

To understand the reasons for the growth of the business of the company over the years and reasons for fluctuations in its profit margins, an investor needs to read the publicly available documents of the company like annual reports from 1997 onwards, credit rating reports, as well as its corporate announcements.

After going through the above-mentioned documents, an investor notices the following key factors, which influence the business of Relaxo Footwears Ltd. An investor needs to keep these factors in her mind while she makes any predictions about the performance of the company.

1) Intense competition in the Indian footwear segment:

The footwear segment is highly competitive due to multiple reasons. First, manufacturing footwear does not require a lot of capital; therefore, it has low entry barriers for new players. As a result, numerous small players from unorganized segments are present in the sector.

Credit rating report by ICRA, December 2023, page 2:

The footwear industry is inherently competitive owing to the strong presence of the unorganised sector. The industry does not have a capital-intensive manufacturing process and hence the entry barriers of new players are low.

It is estimated that almost 60% of the footwear market is served by the unorganized sector.

FY2017 annual report, page 36:

At present, India’s footwear industry is quite fragmented with > 60% belonging to the unorganised sector.

Second, even within the organized sector, numerous players are competing strongly with each other. The competition within the organized segment increased especially after FY2014 when many multinational companies (MNCs) entered the Indian footwear segment.

FY2015 annual report, page 31:

India non-leather footwear industry also went through a transformation in FY 14 with entry of international players

As a result, over the years, the competitive intensity in the footwear industry has been on the rise.

Credit rating report by ICRA, July 2022, page 1:

ratings, however, are constrained by intense competition due to aggressive expansion by the new brands

Relaxo Footwears Ltd faces even higher competitive intensity because its business is predominantly in North India, which has higher competition than other regional markets.

Conference call, November 2023, page 13:

Gaurav Dua:…45% coming from north zone, followed by east zone of 22%, then west 20% and 15% is south

Conference call, November 2022, page 15:

Ramesh Kumar Dua:…North is little more competitive market than South and West.

Due to intense competition, during tough times with sharp increases in raw material prices, many players go out of business.

FY2009 annual report, page 9:

During the year, industry was under tremendous pressure due to unprecedented increase in the prices of Natural rubber, EVA and Fuel. Due to this many small manufacturers in unorganized sector were not able to sustain in the market

Also read: How to do Business Analysis of a Company

2) Very low pricing power of Relaxo Footwears Ltd due to its focus on low-priced, mass-segment, commodity products with low customer loyalty:

The company is focusing on the mass consumption segment with low-priced products like slippers (chappals), sandals etc. As per Relaxo Footwears Ltd, almost 85% of its products are for mass consumption.

Conference call, Nov. 2021, page 12:

Ramesh Kumar Dua: you should appreciate, we are serving masses and 85% business is for masses. Only 15% are others.

As a result of its business focusing on low-priced, mass-consumption products, the average selling price (ASP) of its products is ₹146/-. (Q2-FY2024 results, PPT, page 12).

In this market segment, the consumer is highly price conscious, which is also visible due to the presence of >60% share of unorganized players. Moreover, basic products like slippers, sandals and even shoes are almost commoditized at entry level. As a result, the customer is very quick to switch players/brands if it saves her some money.

The company also highlighted this consumer behaviour in its FY2014 annual report.

FY2014 annual report, page 9:

85% of consumers are evaluating switching to competition brands and ~77% consumers believe that offerings across leading players are not very differentiated.

As a result, very frequently, footwear manufacturers resort to price-based competition to gain market share.

Conference call, Nov. 2023, page 10:

Gaurav Dua: We have mentioned before that there are a lot of competitions, unorganized and organized have entered in this category. So, we are seeing like lot of discounts are being offered by unorganized and other players

In FY2019, Relaxo Footwears Ltd faced strong competition from lower prices offered by other players. Therefore, it had to cut the prices of its products to fight and regain its market share.

Credit rating report by ICRA, August 2019, page 3:

In order to stave off competition and increase market share in the Hawai and Flite EVA slippers segments, the company had to lower selling price in FY2019.

Relaxo Footwears Ltd faced the challenges of low pricing power i.e. customers ignoring its products and switching to competitors and unorganized players multiple times in the past.

In FY2022-FY2023, when raw material prices increased sharply and Relaxo Footwears Ltd had to increase the prices of its products, then it realized that customers had stopped buying its products and were now buying other cheaper products.

Conference call, Nov. 2022, pages 4 and 18:

Gaurav Dua:…what we are seeing the volume degrowth in Hawaii and EVA category. So that clearly mentioned that the shelf has been taken by unorganized players.

Ramesh Kumar Dua: because of unaffordability of our article to the masses, they went for cheaper alternative. So that started affecting our sales.

As the company started losing business to competitors in FY2023, it had to reduce its prices by 15%-20% to gain its market share.

Conference call, Nov. 2022, pages 2, 4:

Sushil Batra:…This prompted the company to take an aggressive price correction in September 2022 to remain competitive in the current market.

Ramesh Kumar Dua: The price correction has been around 15% to 20%.

The company needs to hold on to its market share because if due to high prices, the mass consumer finds its products unattractive, then she will opt for other manufacturers and the shopkeeper will remove Relaxo’s products from the shelf. And once, its products are gone from the shelf, then the company loses any chance to win the customer and do business.

Conference call, May 2022, page 18:

Ramesh Kumar Dua: It’s very important we have the market share; we cannot lose our shelf space…Once we are always there and everything else will only then follow. If we lose our market share, then what are we left with.

Therefore, an investor may appreciate the tough business position of Relaxo Footwears Ltd. It focuses on mass consumers with low-priced products. The customer can easily replace its products with those of its competitors without any significant loss of functionality. Therefore, whenever it increases prices, it faces a loss of market share, which is a big problem because once it is out of the shelf space/customer’s mindshare, then it loses the basic business premises.

Therefore, Relaxo Footwears Ltd has to be extremely cautious before it increases its prices.

Conference call, May 2022, pages 4 and 17:

Gaurav Dua:…There’s a limit to pass on the price to the end consumer.

Ramesh Kumar Dua:…Ultimately our goal at the moment is to focus on our market share in the market and keeping in view the article that we are in, which are meant for masses, lower rank of society

As a result, on numerous occasions in the past, Relaxo Footwears Ltd had to absorb the impact of increasing costs.

For example, in FY2022, the company had to take a hit on its profit margins and its OPM declined to 16% from 21% in FY2021.

Conference call, Nov. 2021, page 3:

Ramesh Kumar Dua:…we are cautious while increasing our prices. So, we have been able to absorb part of the raw material increase in cost.

When an investor reads old annual reports, then the low pricing power of Relaxo Footwears Ltd becomes clear to her as the company had to repeatedly take a hit on its profit margins.

FY2004 annual report, page 35:

The decrease in the rate of operating profit is on account of steep increase in the price of raw rubber during the later part of the financial year 2003-04.

During FY2011 and FY2012, when raw material prices increased, then the company could not pass it on and as a result, took a hit on its profit margins.

FY2011 annual report, page 13:

Net Profit after Tax has decreased from ₹ 37.69 Crores to ₹ 26.71 Crores due to constant increase in material cost during the year.

FY2012 annual report, page 15:

Due to the unprecedented price volatility during the major part of the year, the increased costs could not be recovered to its fullest.

Similarly, during FY2019, the company’s profitability suffered as it faced difficulties in increasing the prices of its products when its costs increased.

Conference call, May 2019, page 2:

Sushil Batra:…During the year, the margins were under pressure due to higher raw material prices

The low pricing power of the company resulted in a decline in its profit margins both in FY2022 and FY2023. In the last two years, the OPM of Relaxo Footwears Ltd has declined to 12% in FY2023 from 21% in FY2021.

FY2022 annual report, page 10:

your Company has absorbed a part of input cost to unburden the consumer

Conference call, May 2023, pages 2-3:

Sushil Batra:…Margins were affected primarily by the high pressure on raw materials pricing during most of the year.

Over the years, illegal players have exploited the high price sensitivity of Relaxo’s target consumer segment by introducing fake/pirated products in the markets. The company had to continuously face the problem of pirated products.

FY2005 annual report, page 37:

RELAXO is also concerned about the adverse impact that counterfeit, spurious and low quality products can have on credibility

Conference call, Sept. 2015, page 2:

Whenever we come across with pirated brands we take appropriate actions which includes police raid

Pirated products are introduced in the market when criminals believe that the target consumer of the brand will buy them if they are priced cheaper than the branded product. This price sensitivity of consumers also limits the pricing power of Relaxo Footwears Ltd.

Also read: How to analyse New Companies in Unknown Industries?

3) Huge, compulsory advertising and promotional expenses of Relaxo Footwears Ltd:

In the highly competitive footwear industry, where customer loyalty/stickiness is low and price-based competition is the way to survive, Relaxo Footwears Ltd had to spend a significant amount of money on advertisements, promotions, and discounts to be visible and appeal to customers.

Over the years, the company has spent almost 10%-12% of its sales on direct advertisements, sales promotions, and cash discounts (AP&D).

The below table shows the AP&D expenses of Relaxo Footwears Ltd over the last 28 years (FY1996 to FY2023).

Please note that over the years, especially since FY2001, the company has been spending 9-12% of sales on AP&D. The expense looks lower from FY2018 onwards because the company stopped showing cash discounts as a separate item in its annual report.

Nevertheless, the company has communicated that it aims to spend about 8-9% of sales on advertisement and promotion expenses.

Conference call, May 2023, page 8:

Gaurav Dua:…about A&SP, we do around 8% to 9%, and we are maintaining this from last two, three years, and we will try to maintain a similar pattern in this coming year also

Relaxo Footwears Ltd’s spending of 8-9% of sales on AP&D expenses is very high when compared to other well-known footwear brands like Liberty Shoes (1.2%, page 127 of its FY2023 annual report) and Bata India Ltd (2.5%, Page 210 of its FY23 Annual Report).

Moreover, high spending on advertisement and promotions has not given any special pricing power to Relaxo Footwears Ltd. This is evident from the earlier discussion on the low pricing power of Relaxo Footwears Ltd over its customers who constitute the extremely price-conscious mass consumer. When the company raised its prices in FY2022 and FY2023, then its customers immediately shifted to other cheaper products and Relaxo Footwears Ltd was forced to cut prices.

Therefore, the high advertisement & promotional spending by Relaxo Footwears Ltd has become a mandatory expense for gaining shelf space and customer mindshare to maintain its market share. This is because if reduces its promotional expenses, then it will lose market share.

Relaxo Footwears Ltd has explained to its shareholders, the mandatory nature of its promotional expenses on numerous occasions.

Conference call, May 2021, page 3:

Ramesh Kumar Dua: The expenditure on brand building this year will be more than it was last year, because for longer periods we cannot keep on saving on brand expenditure like advertisements.

Conference call, Nov. 2021, page 13:

Ramesh Kumar Dua:…Last year we had some cut in marketing and administration expenses but this year we have started these expenses and the brand-building again, we can’t keep it always on the low.

The compulsion of Relaxo Footwears Ltd to keep spending on advertisement and promotions was one of the key reasons for a decline in profit margins in FY2022.

Conference call, May 2022, page 2:

Sushil Batra:…decline in EBITDA margin is mainly on account of increase in raw material prices and normalization of selling, marketing and administrative expenses in FY22 as compared to FY21.

Also read: How to do Financial Analysis of a Company

4) Economies of scale benefit from increased production capacity:

Relaxo Footwears Ltd started in 1984 as a purely marketing arm for Relaxo group and in FY1995 started manufacturing slippers.

Credit rating report by ICRA, Dec. 2023, page 3:

It started as a marketing company for the Relaxo Group and subsequently started manufacturing hawai slippers in 1995.

As per the earliest available annual report of FY1997 (page 23), it had a manufacturing capacity of 50,000 pairs of Hawaii slippers per day. At that time, its business primarily relied on purchasing footwear from promoter group companies and selling them. For example, in FY1997, it sold only 70.7 lac pairs of slippers of its own manufacturing whereas it sold 166.9 lac pairs of footwear purchased from other parties.

FY1997 annual report, page 23:

However, over the years, Relaxo Footwears Ltd has continuously increased its production capacity and currently, in August 2023, it reached a production capacity of 10.5 lac pairs of footwear per day.

Corporate announcement to BSE, August 7, 2023:

With this addition of 50,000 pairs per day, the Company’s total production capacity is 10.50 Lacs pairs per day.

As a result of enhanced manufacturing capacity, Relaxo Footwears Ltd benefited from economies of scale and could improve its profitability over the years.

Credit rating report by ICRA, July 2021, page 1:

The portfolio premiumisation, along with improvement in scale, led to the improvement in its margins over the years.

Moreover, as the company manufactures almost 95% of the products that it sells; therefore, it is able to save on costs, unlike other manufacturers who bear outsourcing costs.

Conference call, May 2019, page 12:

Ramesh Kumar Dua: Around 95% products sold are manufactured in house.

Even though Relaxo Footwears Ltd has increased its capacity significantly over the years to get scale benefits; however, currently, it has to make a large amount of investment every year in moulds and other maintenance expenditures, which is a continuous burden on its resources.

A large portion of this consistent annual capital expenditure (capex) is “moulds,” which it requires to create new footwear designs every year. Due to changing consumer preferences, the footwear industry acts like the fashion industry and every year, companies have to bring in new designs and phase out old ones.

Therefore, out of about 400 different kinds of footwear in the portfolio of Relaxo Footwears Ltd, it changes almost 50% of it every year and to create new designs, it requires new moulds.

As per the company, it spends almost ₹25cr to ₹30 cr every year on moulds, which when added up to other required capital expenditures adds to about ₹100 cr of capex every year for the company without any increase in manufacturing capacity.

Conference call, May 2022, page 17:

Sushil Batra: No, because every year it’s a very fast-moving article and we have to create new designs. Lot of money goes in the mould side, around Rs. 25-30 crores, it’s a recurring CAPEX every year we have to do…some back-end operation…other routine expenditure around IT that is around Rs. 8-10 crores. So Rs. 100 crores almost in this year, it’s always there.

In fact, the credit rating agency, ICRA, has highlighted this mandatory annual capex of about ₹100 cr to ₹150 cr as one of the key constraints on the credit rating of Relaxo Footwears Ltd.

Credit rating report by ICRA, July 2022, page 1:

ratings are also constrained by significant outflows (~Rs. 100-150 crore) towards capex every year, which though funded largely by internal accruals, keeps the company’s free cash flows under check.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Therefore, these outflows of ₹100-150 cr towards mandatory annual capex along with mandatory advertisement and promotions expenditure of 8-9% of sales make the task of Relaxo Footwears Ltd to maintain its market share a very cash-consuming one.

In addition, in its aspirations to become a low-cost producer via benefits of scale, the company has to continuously keep expanding its manufacturing capacity. In Dec. 2023, the company purchased another land parcel in Bhiwadi for ₹135 cr.

Corporate announcement to BSE, Dec. 11, 2023:

announced the successful bid and acquisition of a Land Parcel admeasuring ~ 30 Acres in…Bhiwadi – II, (Rajasthan) which will be used for setting up Manufacturing facilities for future needs…The acquisition is valued at approximately Rs. 135 crores

5) Strategic decisions, which proved suboptimal for Relaxo Footwears Ltd:

Over the years, the company has taken a few decisions, which have not produced desired results for the company. Let us understand a few of them.

5.1) Exclusive brand outlets (EBOs):

Most footwear manufacturers just like other consumer brands sell their products via exclusive brand outlets (EBOs) as well as multi-brand outlets (MBOs). Relaxo Footwears Ltd used to rely primarily on MBOs for its sales; however, it also opened EBOs to promote its brand and gain market intelligence.

However, over the years, it realized that due to its low-priced products focused on highly price-conscious, mass consumers, exclusive brand outlets are not becoming attractive profit centres for it.

In fact, it makes higher profit margins on its sales from MBOs via distributors than its EBOs even though it saves on the distributor commission in EBOs. This is because, EBOs have other expenses like rent, employees, interior designing etc., which are very expensive considering the low-priced, almost commodity products of Relaxo Footwears Ltd.

Conference call, May 2023, page 9:

Ankit Kedia:…is it fair to assume the margins in EBOs would be just near double digit and lower than the company average?

Sushil Batra: Yes. It’s lower than company average, but I think the high single-digit margin

Due to the lower profitability of its EBOs, the company has realized that it can not treat EBOs as a separate profit centre. Instead, it is treating them as cost-neutral marketing centres.

Conference call, Nov. 2019, page 9:

Sushil Batra:…we started opening the outlets as a marketing channel, display cum exhibition. It is a cost neutral model and our objective of it is not as that of a business model like Bata, we have a different consumer.

Ramesh Kumar Dua: We are not very aggressive on it. Our purpose establishing all these EBOs is to display and create awareness of our articles. Ultimately, multibranded outlets give us a maximum sale.

Credit rating agency, ICRA has also highlighted that despite significant investment in its EBOs, Relaxo Footwears Ltd is not able to generate sufficient returns on it.

Credit rating report by ICRA, June 2017, page 2:

Retail channel profitability has been weak despite significant investments

As a result, the company has stuck at about 400 EBOs, which are concentrated in North India. Due to the poor profitability of its EBOs, it is not even considering opening EBOs in South India.

Conference call, Nov. 2020, pages 3 and 14:

Ramesh Kumar Dua:…so currently we have around 400 outlets, but that is enough to understand the market. But if you want to go to south and west then it is a different thing commercially and then it must make economic sense…so currently we do not have any plans to have such kind of outlets in other parts of the country.

Therefore, due to the focus of Relaxo Footwears Ltd on low-priced, mass-market footwear, its investments in the EBO segment could not make sufficient returns for its shareholders.

5.2) Online sales channel:

The company entered into the online sales channel; however, soon it realized that for the majority of its products, which are low-priced, the online channel is economically unviable. This is primarily because of shipping charges and returns, which add significantly to the cost of selling.

Conference call, May 2021, page 4:

Ramesh Kumar Dua:…ultimately our articles are mostly priced around Rs. 125 to Rs. 150 – Rs. 200, these articles are unviable to be sold online.

In the online sales channel, Relaxo Footwears Ltd fears that it will lose control of the price of goods. The company wishes to sell its goods at the same price across all the channels whether online or offline. The company fears that if prices are different across channels, then people may start trading in its products by buying from one channel and selling on other channels.

Conference call, May 2022, page 13:

Gaurav Dua: We try to keep same margins what we have online-offline and retail…we do not want that goods flow from one channel to another because of prices. So, we keep it same.

However, the company realized that in the online channel, heavy discounts are prevalent leading to price wars; therefore, it is difficult to keep the prices same across online and offline channels. As a result, now, Relaxo Footwears Ltd is planning to start an exclusive product range for its online channel, which will not compete with its offline channel.

Conference call, Nov. 2022, page 12:

Gaurav Dua:…going forward, we will have different portfolio, especially SMUs for e-commerce and different products for the offline because we want to control the price, there is sometimes a lot of price war. One channel give you more discount what we have heard in this Big Billion Days

As, even after multiple years, the company has not yet found the right strategy for its products on the online sales channel; therefore, it is not growing its online sales channel aggressively and over the last many years, the share of online as well as new channel is about 10-12%.

6) Cost optimization steps taken by Relaxo Footwears Ltd:

Due to a lack of pricing power, to survive, the company has to become a very low producer of footwear. Therefore, it has to continuously find methods of reducing operating costs.

Over the years, Relaxo Footwears Ltd has taken multiple steps like outsourcing its central distribution centre (CDC).

FY2014 annual report, page 15:

Outsourced functioning of its Central Distribution Centre (CDC) in order to improve working efficiency that is resulting high productivity

It introduced a bidding platform for its suppliers so that it can generate competition in them to get supplies at the cheapest prices.

FY2015 annual report, page 6:

We increased our collaboration with key suppliers and focused on competitive bidding of prices.

Advised reading: How to study Annual Report of a Company

To make its operations more efficient, the company continuously works on optimizing the number of distributors. In FY2021, Relaxo Footwears Ltd increased the security deposit requirement from its distributors to keep only serious distributors in the system.

Conference call, Nov. 2020, page 11:

Sushil Batra: We have increased the security amount from each distributor for new distributor as well as the existing distributor, so just to bring more big and serious people in the business

By FY2022, the number of distributors of the company witnessed a significant decline, the company said that it is focusing only on those distributors, which bring in at least a business of ₹10 lac every month. This is because the business with smaller distributors is not economically viable.

Conference call, May 2022, page 13:

Gaurav Dua:…distributors so less than Rs.10 lakh sales per month…the cost of reaching them it was not viable. We are focusing on good number of distributors who are doing more than Rs. 10 lakhs per month…We have to cut the tail.

In addition, to cut costs after the Coronavirus pandemic, the company discontinued the engagements of consultants and saved on consulting charges.

Conference call, Nov. 2021, page 13:

Ramesh Kumar Dua:…consulting that’s what we can say, that is the only item which we cut last year, and we are not reinstating.

Also read: Operating Performance Analysis: A Simple & Complete Guide

7) Impact of regulatory policies on Relaxo Footwears Ltd:

Footwear manufacturing is one of the most labour-intensive sectors generating significant employment. Therefore, govt. monitors the sector very closely and frequently interferes with policy directives.

FY2009 annual report, page 9:

Indian Footwear Industry is a labour intensive industry

Apart from regulations related to labour management, govt. routinely changes the taxes applicable to the industry in response to the prevailing circumstances.

For example, in FY2014, govt. reduced the excise duty on shoes priced between ₹500/- to ₹1,000/- to support the industry.

FY2014 annual report, page 3:

government has already announced relaxation in the excise duty on footwear in the price range of ₹ 500 to ₹ 1000.

In 2017, when govt. implemented goods and services tax (GST), then a lot of money got stuck as input tax credits and increased the working capital requirement of Relaxo Footwears Ltd.

Credit rating report by ICRA, Dec. 2017, page 1:

ratings, however, are constrained by the increase in working capital intensity of operations post the rollout of Goods and Services tax (GST)

Thereafter, in FY2019, the govt. supported the footwear industry by reducing the GST rate for shoes priced between ₹500 to ₹1,000. Also, the GST calculation was changed from MRP to the actual transaction price.

FY2019 annual report, page 56:

On 27^th July 2018 the GST Council reduced tax rate from 18% to 5% for footwear ranging between MRP ₹ 500 to ₹ 1000. Further on 1^st January 2019 the incidence of tax was changed from MRP to transactional value.

However, in FY2022, the govt. increased the GST on footwear priced below ₹1,000 from 5% to 12%, which impacted the demand for footwear, which impacted the business of Relaxo Footwears Ltd.

Conference call, May 2022, page 2:

Sushil Batra:… Revenue during the quarter was affected due to disruption caused by Omicron variant of COVID, GST rate hike from 5% to 12% w.e.f. January ‘22 on footwear priced below Rs. 1,000…EBITDA margin decreased mainly due to steep increase in raw material prices and extra support provided to trade towards GST rate differential on inventory.

Apart from changing indirect taxes like excise duty, GST etc. the govt. has also supported the footwear sector by levying duties on the import of footwear. In the 2020 budget, to support the footwear sector, the govt. increased import duty on import of finished footwear from 25% to 35% and on parts to make footwear from 15% to 20%. (Source: Budget 2020: Govt hikes customs duty on toys, furniture, footwear products: Financial Express)

Recently, Govt. has implemented BIS standards (Bureau of Indian Standards) for the footwear industry, with an implementation date of January 1, 2024 (Source: From Jan 1, local footwear mfgs to come under BIS lens: Times of India)

Currently, footwear manufacturers are protesting against BIS implementation as it will increase their production costs (Source: BIS norms: Footwear industry protests nationwide: BusinessLine).

Going ahead, an investor needs to closely monitor the regulatory developments related to the footwear industry and check whether Relaxo Footwears Ltd is able to handle its impact successfully.

The tax payout ratio of the company has been in line with the standard corporate tax rate applicable in India. Until FY2019, the company reported an income tax payout ratio of above 30% except in FY2015 when it reported a ratio of 28% as it received tax benefits due to its capital expenditure.

FY2015 annual report, page 5:

Lower effective tax rate due to tax benefits arising out of strategic investments in plant & machinery

From FY2020, the tax payout ratio of Relaxo Footwears Ltd has declined to 22%-25% in line with the new corporate income tax rate implemented by the govt.

Recommended reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Relaxo Footwears Ltd:

a) Net fixed asset turnover (NFAT) of Relaxo Footwears Ltd:

The net fixed asset turnover (NFAT) of Relaxo Footwears Ltd in the past years (FY2013-21) has declined from 3.4 in FY2015 to 2.6 in FY2023. The decline in NFAT is primarily caused by the inability of the company to grow sales (volume) of its footwear in line with its increase in manufacturing capacity.

In recent years, the number of pairs of footwear sold by the company has been declining in FY2022 and FY2023. In FY2021, Relaxo Footwears Ltd sold 19.1 cr pairs of footwear, which declined to 17.5 cr in FY2022 and 17.1 cr in FY2023.

Q2-FY2024 results PPT, Nov. 2023, page 17:

Due to the declining sale of pairs of footwear, the capacity utilization of the company has declined to 50-55%.

Conference call, May 2023, page 16:

Sushil Batra:…last year being a tough year, so that utilization was around 50% – 55% at company level.

Going ahead, an investor should keep a close watch on the capacity utilization levels of the company to assess if it is able to efficiently utilize its plants.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Relaxo Footwears Ltd:

The inventory turnover ratio (ITR) of the company has declined from 7.0 in FY2015 to 4.5 in FY2023. A declining ITR indicates that the efficiency of the company in the utilization of its inventory has declined over the years.

If an investor compares its total inventory and cost of goods sold, then it comes out that the company has to keep almost 5-6 months of cost of goods as inventory with itself.

One of the reasons for such a high inventory requirement is that due to the large size of manufacturing operations, Relaxo Footwears Ltd is not able to source its key raw material from the local market. This is because, first, no supplier in the local market can meet its demand and two, its orders will sharply increase the price of raw material in the local market.

Conference call, Nov. 2022, page 8:

Ramesh Kumar Dua: We cannot depend upon local sources. Otherwise, our factory will not be able to run. Local source, availability is only meant for small manufactures. If we go to the market, the rate will get out of control because of the local market, because our 1,000 tonnes, nobody can match.

As a result, the company has to rely on imports to meet its raw material requirement, which makes its supply chain very long. Therefore, it ends up with a large inventory either in transit or stored in its warehouse so that its manufacturing operations are not interrupted.

Conference call, Nov. 2022, page 20:

Ramesh Kumar Dua:…we cannot be dependent at all on local sources. Our factory will come to a halt. To have uninterrupted, no disruption, manufacturing process, we have to maintain this sufficient inventory in the pipeline.

The company had to pay the price for a long supply chain with inbuilt long-term contracts in 2022-2023 when its cost of raw materials continued to be high even though the spot prices of raw materials in India declined. As a result, local manufacturers who bought raw materials from Indian local markets could enjoy the benefits of lower costs and their products became much cheaper than those of Relaxo Footwears Ltd.

This led to the target consumer segment of the company, being extremely price-sensitive, mass consumers shifting away from its products to cheaper products of its competitors and Relaxo Footwears Ltd losing market share to the unorganized sector.

Conference call, Nov. 2022, pages 3-4:

Ramesh Kumar Dua:…thing which we were getting at Rs.120 a kg, reached Rs.300 kg, and then…it came down to Rs.160…our company has to maintain a long supply chain because materials are imported, it has to be at least 6 months’ supply chain…local market becoming cheaper than the international market at which we got…the local industry or other people who are always sourcing the material from local sources, they became competitive…But as far as our company is concerned, which has a long supply chain, we took our own time. Meanwhile, because of unaffordability of our article to the masses, they went for cheaper alternative. So that started affecting our sales.

Therefore, the long-supply arrangements of the company became a double-edged sword when its cost of raw materials did not decline even though the prices in the Indian spot market had become cheaper. As a result, the company’s business suffered and it had to reduce prices by about 20-25% in Sept 2022, which significantly impacted its profit margins as its OPM declined to 12% in FY2023 from 21% in FY2021.

The decline in sales volume of its footwear as well as the high cost of its raw materials led to a significant increase in its inventory in FY2022 to ₹673 cr from ₹422 cr in FY2021.

Another issue that impacts the inventory of the company whenever it changes the prices of its products is that price changes result in the same goods with multiple MRPs with the distributors and shopkeepers. Therefore, they tend to liquidate earlier inventory before ordering new ones.

Conference call, Nov. 2021, page 4:

Ramesh Kumar Dua: Well, for the time being demand is being affected because people don’t want to keep stock of those things. They just want to reduce their inventory in the pipeline because there have been two price increases.

Therefore, whenever prices are updated, it takes about 3-6 months for the earlier inventory to go out of the system and the new inventory to replace it. During this period, there is a low demand from distributors & retailers, which leads to a build-up of inventory at the company level.

Conference call, May 2023, page 13:

Gaurav Dua:…we have done multiple rounds of price cuts. So they had different types of MRPs, distributors and retailers. But now all of them have been cleared. It took three to six months to clear all the old MRP products.

Another factor leading to a large inventory for Relaxo Footwears Ltd is that it has all its manufacturing plants located in North India in NCR and Haridwar whereas it sells its products across India. Therefore, at any point in time, it has to keep a significant number of goods in the supply chain like in transit, in regional warehouses and distribution centres to supply goods to distributors on time.

Going ahead, an investor should keep a close watch on the inventory position of the company to understand whether it is able to improve the efficiency of its inventory utilization.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Relaxo Footwears Ltd:

Over the years, receivables days of Relaxo Footwears Ltd have increased from 19 days in FY2015 to 34 days in FY2023. It indicates that the company has to offer a longer credit period to its customers (distributors and retailers) to stock its goods i.e. to give it shelf space.

The footwear industry is highly competitive. In addition, the target customer segment of Relaxo Footwears Ltd is highly price-conscious and does not hesitate to switch brands/manufacturers. Therefore, whenever competition increases, then manufacturers have to incentivize distributors and retailers with longer credit terms to stock their goods.

Relaxo Footwears Ltd has been facing such a situation for a long time in its operating history. For example, in FY2001 when its receivables increased significantly, then it explained it because of a scheme that it had run for distributors to increase sales.

FY2001 annual report, page 34:

The steep increase in the amount of Sundry Debtors in the current year are on account of heavy year end sales arising due to expiration of distributors’ scheme in March

In recent years when Relaxo Footwears Ltd faced one of the toughest periods as customers shifted to other players, then it faced challenges in receiving timely payments from distributors and retailers.

Conference call, Nov. 2023, page 14:

Gaurav Dua:…because of inflation their visits have been little reduced. So, that’s why what we are seeing is that the payments are not coming from the distributor and from the retailers.

Going ahead, an investor must keep a close watch on the receivables position of the company.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Relaxo Footwears Ltd for FY2014-23, then she notices that over the last 10 years (FY2014-FY2023), the company has converted its profit into cash flow from operations.

Over FY2014-23, Relaxo Footwears Ltd reported a total net profit after tax (cPAT) of ₹1,650 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹2,138 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Relaxo Footwears Ltd is higher than the cPAT due to the following factors:

• Depreciation expense of ₹744 cr (a non-cash expense) over FY2014-FY2023, which is deducted while calculating PAT but is added back while calculating CFO.
• Interest expense of ₹174 cr (a non-operating expense) over FY2014-FY2023, which is deducted while calculating PAT but is added back while calculating CFO.

The Margin of Safety in the Business of Relaxo Footwears Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

Over the years, Relaxo Footwears Ltd had an SSGR of 13-14% barring the recent two years when it faced a very tough situation when its SSGR declined to 10% in FY2022 and 5% in FY2023. In comparison, the sales growth achieved by the company over the last 10 years (FY2014-23) is 10%. Therefore, the company has managed to fund its growth from its own cash flows.

As a result, over FY2014-2023, Relaxo Footwears Ltd did not require any additional infusion of funds from either equity dilution or additional debt. On March 31, 2023, the company was debt-free from the perspective of loans from lenders and the reported debt of ₹164 cr was primarily lease liabilities.

FY2023 annual report, page 99:

The investor gets the same conclusion when she analyses the free cash flow position of Relaxo Footwears Ltd.

b) Free Cash Flow (FCF) Analysis of Relaxo Footwears Ltd:

While looking at the cash flow performance of Relaxo Footwears Ltd, an investor notices that during FY2014-FY2023, it generated cash flow from operations of ₹2,138 cr. During the same period, it made a capital expenditure of about ₹1,562 cr.

Therefore, during this period (FY2014-FY2023), Relaxo Footwears Ltd had a free cash flow (FCF) of ₹576 cr (=2,138 – 1,562).

In addition, during this period, the company had a non-operating income of ₹107 cr and an interest expense of ₹174 cr. As a result, the company had a total free cash flow of ₹509 cr (= 576 + 107 – 174). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

Relaxo Footwears Ltd used its free cash flow for paying dividends of about ₹286 cr, repayment of debt and has increased its cash & investment balance to ₹299 cr on March 31, 2023.

Going ahead, an investor should keep a close watch on the free cash flow generation by Relaxo Footwears Ltd to understand whether the company continues to generate surplus cash from its business or its expenses like advertisement & promotions and mandatory capital expenditures like moulds start consuming funds more than what its business makes.

Further recommended reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Relaxo Footwears Ltd:

On analysing Relaxo Footwears Ltd and after reading annual reports, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Relaxo Footwears Ltd:

Relaxo Footwears Ltd is promoted by the Dua family. Currently, multiple members across generations of the promoter family are present in executive management positions both on the board of directors as well as other senior positions.

From the senior generation, Mr Ramesh Kumar Dua (age 69 years) and Mr Mukand Lal Dua (age 74 years) are working as the Managing Director and Whole-time Director respectively.

From the next generation, Mr Nikhil Dua s/o Mukand Lal Dua (age 47 years) and Mr Gaurav Dua s/o Ramesh Kumar Dua (age 42 years) are also present on the board as whole-time directors.

In addition, Mr Ritesh Dua s/o Mukand Lal Dua (age 46 years, Executive Vice President – Finance), Mr Rahul Dua s/o Ramesh Kumar Dua (age 35 years, Executive Vice President – Manufacturing) and Mr Nitin Dua s/o Mukand Lal Dua (age 42 years, Executive Vice President – Retail) are also present in the company at senior management levels.

The presence of younger family members in executive positions within the group, while the senior members are still handling responsibilities, looks like good succession planning. This is because the young members can learn about the fine nuances of the business under the guidance of senior members until the seniors decide to retire.

However, in the light of 5 members of the next generation simultaneously working in the company, it might be difficult for the senior promoters to meet the aspirations of each of them. Therefore, it remains to be seen when the time comes for the senior promoters to hand over the leadership to the next generation, then how they assign the responsibilities among the contenders.

As of now, the promoters have said that they are working on a succession plan but have not finalized and disclosed anything.

Conference call, May 2022, page 19:

Mrs. Trivedi: Ramesh ji, my biggest concern is succession plan for Relaxo?

Ramesh Kumar Dua: That thing is in process. We are serious on it, but we can’t divulge beyond anything now.

Therefore, an investor should a close watch on signs of succession planning and get in touch with the company directly to understand it. She should be aware of signs that may indicate any dispute between family members related to succession.

Further advised reading: How to do Management Analysis of Companies?

2) Related party transactions of Relaxo Footwears Ltd with its promoters:

2.1) Merger of Relaxo Rubber Private Limited with Relaxo Footwears Ltd:

In FY2019, the company merged two promoter-owned companies Relaxo Rubber Private Limited (RRPL) and Marvel Polymers Private Limited with itself by issuing shares.

As per the share exchange ratio for the merger, each shareholder of Relaxo Rubber Pvt. Ltd received 3,124 shares of Relaxo Footwears Ltd for every 100 shares held by her in Relaxo Rubber Pvt. Ltd. (Source: page 8)

we consider that the exchange ratio of equity shares for the merger of RRPL with RFL should be 3,124 equity shares of RFL of INR 1/- each fully paid up for every 100 equity shares of RRPL of INR 100/- each fully paid up.

Upon reading older annual reports, an investor notices that, until FY2015, Relaxo Footwears Ltd held 6,040 shares of Relaxo Rubber Private Limited as non-current investments. In fact, it had made this investment long back in 1996-1997. (In FY2007, Relaxo Rubber Ltd changed its name to Relaxo Rubber Pvt. Ltd.)

FY1997 annual report, page 17:

In FY2016, Relaxo Footwears Ltd sold its shares in Relaxo Rubber Pvt. Ltd.

FY2016 annual report, page 61:

The company had purchased these shares for ₹6 lac in FY1997 and sold them for ₹4.32 cr in FY2016 and recognized a profit of ₹4.26 cr. on this sale as an exceptional item in its P&L statement (FY2016 annual report, page 53).

It seems that the company sold these 6,040 shares to promoters because when in FY2019, Relaxo Footwears Ltd merged with Relaxo Rubber Pvt. Ltd, then it declared that Relaxo Rubber Pvt. Ltd is a promoter entity. Moreover, the pre-merger shareholding pattern of Relaxo Rubber Pvt. Ltd indicated that all the shareholding was held by the Dua family (Source: page 2).

Taking the share-exchange ratio into account, for the 6,040 shares of RRPL purchased by promoters from Relaxo Footwears Ltd, they got 188,689 shares of Relaxo Footwears Ltd (= 3,124 * 6,040/100).

The shares in exchange for shareholding for the merger were issued by Relaxo Footwears Ltd on Feb. 2, 2019. (FY2019 annual report, page 13).

Company in its meeting held on 2nd February, 2019 has allotted 36,18,453 equity shares to the shareholders of Marvel Polymers Private Limited and Relaxo Rubber Private Limited.

The date of issue of these shares, Feb 2, 2019, was a Saturday; therefore, if one considers the closing price of the previous day, Feb 1, 2019 (₹745.55 on BSE), then it turns out to be a value of ₹14 cr (₹745.55 * 188,689 = ₹14.06 cr).

Therefore, it might seem like a case where the promoter purchased 6,040 shares of Relaxo Rubber Pvt. Ltd from Relaxo Footwears Ltd for ₹4.32 cr in FY2016 and after 3 years, in FY2019, sold these shares back to Relaxo Footwears Ltd for ₹14 cr.

An investor may contact the company directly to understand, if, between FY2016 and FY2019, RRPL purchased assets of about ₹45-50 cr without taking debt. This is because if RRPL had purchased additional assets of ₹48 cr in this period, then the net asset value of 6,040 shares would have increased by about 10 cr (48 * 6,040/29,040 = ₹10 cr).

Based on the above information, an investor may arrive at her own conclusion about this transaction.

2.2) Purchase of goods from related parties:

Over the years, the company has purchased footwear/goods from promoter group entities for trading/selling them. At times, the size of these transactions has been significantly large. For example

• In FY2012, it purchased goods for ₹165 cr from promoter entities and in FY2013, it purchased goods for ₹99 cr (FY2013 annual report, page 46).
• In FY2011, it purchased goods for ₹172 cr and in FY2010, it purchased goods for ₹134 cr (FY2011 annual report, page 50).

Similarly, it had been regularly making large purchases from related parties throughout its existence until FY2013.

FY2014 onwards, these purchases seem to have stopped.

2.3) Unsecured loans taken from promoters and related parties:

In the past, Relaxo Footwears Ltd has also taken large unsecured loans from its promoters. For example, in FY2015, the company took unsecured loans of ₹57 cr from related parties, which were ₹48 cr in FY2014.

FY2015 annual report, page 52:

In FY2015, the company paid an interest of ₹5.63 cr and in FY2014, an interest of ₹5.19 cr on these loans. (related party transactions section on page 66 of FY2015 annual report).

It indicates that promoters charged the company about 10-11% interest on these loans, which is more than what they could have got if they had deposited these funds in fixed deposits with banks.

As per FY2015 annual report, page 53, the company had raised loans from foreign lenders even at a competitive rate of 9.25%.

Repayable in 16 quarterly installments with last payment due on 15th October, 2015 alongwith interest @ 9.25% per annum.

Relaxo Footwears Ltd repaid these loans in FY2016.

2.4) Taking properties on lease from related parties:

Apart from the purchase of goods and unsecured loans, the company has also taken properties on lease from its promoters and pays rent to them.

In FY2023, the company paid a rent of ₹5.5 cr to its promoters, which was ₹4.76 cr in FY2014 (page 137 of FY2023 annual report).

The amount of annual rent payments used to be almost double until FY2018 (₹11.9 cr) and declined in FY2019 (₹5.7 cr, page 104 of FY2019 annual report), when Relaxo Footwears Ltd merged two promoter-owned entities, Marvel Polymers Private Limited and Relaxo Rubber Private Limited with itself.

The company issued 36,18,453 equity shares to the shareholders of Marvel Polymers Private Limited and Relaxo Rubber Private Limited for this merger (FY2019 annual report, page 13).

Company in its meeting held on 2nd February, 2019 has allotted 36,18,453 equity shares to the shareholders of Marvel Polymers Private Limited and Relaxo Rubber Private Limited.

As per the closing price of shares of Relaxo Footwears Ltd on the previous day, Feb 1, 2019 (₹745.55 on BSE), the company paid a price of ₹269.77 cr for acquiring these two companies (3,618,453 * 745.33 = ₹269.77 cr).

As per page 76 of the FY2019 annual report, the company received gross assets of ₹153 cr on acquiring these companies.

While assessing the value of this merger, an investor may look at the factors like the company paid a value of ₹267.77 cr to save on rental expenses of ₹6.2 cr per year. Or that the company paid a value of ₹267.77 cr to receive gross block/assets of about ₹153 cr.

In case, an investor needs any clarifications, then she may contact the company directly and make her own opinion.

An investor should always be cautious while analyzing related party transactions between a publicly listed company and its promoters & their entities. This is because such transactions, if are not done at market prices, then have a scope of shifting economic benefits from the minority shareholders to the promoter e.g. if purchases are done at a price higher than the market price, loans are taken at a higher interest rate than the market rate, properties are leased at a rent higher than the market rate etc.

Also read: How Promoters benefit from Related Party Transactions

3) Remuneration of promoters of Relaxo Footwears Ltd:

The data on promoters’ remuneration over the years indicates that the company has framed their remunerations to fully utilize the legal limits put under the law. From FY2015 to FY2020 when the company clearly disclosed the statutory limit on remuneration of executive directors, at times, Relaxo Footwears Ltd paid out remunerations up to the last decimal point of the maximum limit.

For example, in FY2016, the statutory limit of remuneration of executive directors was ₹19.3137 cr and the company paid out a remuneration of ₹19.3137 cr out of which more than 91% i.e. ₹17.5975 cr was taken equally by the promoter brothers Mukund Dua and Ramesh Dua at ₹8.79875 cr each.

FY2016 annual report, page 27:

Similarly, in FY2017, the promoters maximized the remuneration up to the last decimal point of the statutory limit of ₹20.0554 cr and the promoter brothers Mukund Dua and Ramesh Dua took home an exactly equal remuneration of ₹9.1289 cr each.

FY2017 annual report, page 27:

Similarly, for the other years in which Relaxo Footwears Ltd had to clearly state the statutory limit on remuneration, the promoters have utilized almost the full limit.

• In FY2015, the company paid out ₹15.74 cr of remuneration out of ceiling of ₹15.89 cr (page 24 of FY2015 annual report)
• In FY2018, the company paid out ₹26.98 cr of remuneration out of ceiling of ₹27.14 cr (page 27 of FY2018 annual report)
• In FY2019, the company paid out ₹29.60 cr of remuneration out of ceiling of ₹29.79 cr (page 33 of FY2019 annual report)
• In FY2020, the company paid out ₹32.08 cr of remuneration out of ceiling of ₹32.24 cr (page 46 of FY2020 annual report)

Another thing to note is that every year, the promoter brothers Mukund Dua and Ramesh Dua have taken exactly the same salary. For example, in FY2023, both the promoter brothers took home a remuneration of ₹9.7001 cr.

Similarly, among the members of the next generation, the elder 4 out of 5 members (Gaurav, Nikhil, Nitin and Ritesh) have drawn exactly the same salary. In FY2023, all 4 of them took home a remuneration of ₹1.3176 cr each. Only the youngest of them, Rahul Dua, took home a slightly lesser remuneration of ₹1.1976 cr.

FY2023 annual report, page 23:

The above data indicates that one, the promoters might intend to take as much money as remuneration as is legally possible and two, the company pays remuneration to the promoters in terms of their age/stature and inter-se relationship. The seniormost members are paid one slab of exactly equal remuneration, the intermediate members are paid the next slab of exactly equal remuneration, and the youngest member is paid slightly lower remuneration.

If the remuneration of multiple people is exactly the same, then such a structure might not represent meritocracy because different people with different profiles add different values to the organization.

Also read: How to identify Promoters extracting Money via High Salaries

4) Scope of improvement in internal controls and processes:

Over the years, some incidents indicate a scope for improvement in the internal controls and processes at Relaxo Footwears Ltd.

4.1) Dispute over Sparx brand with Bata India Ltd:

In 2009, a leading footwear company, Bata India Ltd sued Relaxo Footwears Ltd claiming that it owned the “Sparx” brand/trademark and that Relaxo had infringed its copyrights by launching footwear with the Sparx brand. (Source: Bata drags Relaxo to court over brand infringement: Business Standard, Dec 04, 2009)

“Relaxo has falsely claimed use of ‘Sparx’ trademark since April 2002,” said Bata in its petition, alleging that it was already selling shoes under ‘Sparx’ mark in 26 countries including USA, Malaysia, Thailand, Canada, China, Mexico.

In India, they have already registered their ‘Sparx’ trademark in November 1978.

The dispute was settled between Bata and Relaxo in FY2015 when Relaxo agreed to buy the trademark from Bata India Ltd. (Source: Relaxo reaches settlement with Bata over ‘SPARX’ trademark: Economic Times, Aug 01, 2015)

“The company has executed a deed of settlement with Bata India for assignment of trademark ‘SPARX’ in favour of Relaxo Footwears Ltd,” Relaxo Footwears said in a BSE filing.

As per the FY2016 annual report, page 59, Relaxo Footwears Ltd had to pay ₹66 cr to buy the Sparx brand from Bata India Ltd, which it showed in the annual report as an addition to the trademarks under intangible assets.

An investor may think that Relaxo Footwears Ltd should have done more homework before launching the Sparx brand and making it one of its flagship product ranges. It should have properly checked whether anyone else is already using this brand or has its trademark in India. Such homework would have saved at least ₹66 cr of shareholders’ money that it had to pay Bata India Ltd.

Also read: How to Identify if Management is Misallocating Capital

4.2) Fire incidences:

On multiple occasions, the plants of the company caught fire. First, in FY2001, the whole unit-II of the company at Bahadurgarh was damaged in a fire leading to extensive loss of property.

FY2001 annual report, page 3:

operation of the Company during the year was affected due to a mishap of fire which gutted the whole of Unit-ll situated at Bahadurgarh (Haryana) which caused the collapse of the building structure and extensive damages to the plant & machinery.

Thereafter, in FY2009, the company had another fire incident in its Bhiwadi plant.

FY2009 annual report, page 29:

Gross Block & Net Block includes Assets of 1265.60 lacs and 756.76 lacs respectively destroyed in fire at Bhiwadi Plant.

Recently, in the FY2023 annual report, on page 107, Relaxo Footwears Ltd disclosed “Insurance Claims Receivable” of ₹30.5 cr; however, we are not able to find any other related detail in the annual report.

An investor may contact the company directly to know what these insurance claims pertain to and whether there has been any other fire incident or mishap.

4.3) Noncompliance with statutory guidelines:

As per the FY2023 annual report, Relaxo Footwears Ltd did not comply with legal guidelines as it did not maintain separate people as chairman of the company and the chairman of the Nomination and Remuneration Committee (NRC) and did not file certain documents to the Registrar of Companies (RoC) and stock exchanges in time. In addition, the chairman of its audit committee did not attend its AGM, which was otherwise required under the law.

The secretarial auditor of the company highlighted these events in its report in the FY2023 annual report on page 25:

Company has generally complied with the provisions…except as mentioned below:

(i) The Chairman of Audit Committee has not attended the Annual General Meeting (“AGM”)

(ii) During the period April 01, 2022 to April 21, 2022, the Chairman of the Company and Nomination and Remuneration Committee (“NRC”) was the same Director of the Company.

(iii) The Company has delayed/non filing of certain forms with Registrar of Companies.

(iv) The audio recordings of certain earning calls of the Company have been submitted by the Company with the stock exchanges within twenty-four hours from the conclusion of such calls but not before the next trading day from the conclusion of such calls.

4.4) Delays in spending money on corporate social responsibility (CSR):

Over the years, Relaxo Footwears Ltd has delayed spending its CSR obligations. For example,

• In FY2023, the company was required to spend ₹6.72 cr on CSR; however, it spent only ₹0.38 cr on CSR (page 31 of FY2023 annual report)
• In FY2022, it needed to spend ₹6.45 cr on CSR; however, it did not spend anything on CSR in the year (page 30 of FY2022 annual report)
• In FY2021, it was required to spend ₹5.43 cr on CSR; however, it did not spend anything on CSR during the year (page 118 of FY2021 annual report)

4.5) Delays in interest payments:

On multiple occasions, the annual report of Relaxo Footwears Ltd contains amounts under “Interest Accrued and Due” that indicate that the interest amount was due for payment on or before March 31 of the year; however, it was not paid by the company.

For example, in FY2016 as well as in FY2015, the company reported interest accrued and due to ₹21 lac and ₹10 lac respectively.

FY2016 annual report, page 58:

Similarly, in FY2014, the company had interest accrued and due of ₹31 lac and in FY2013, ₹13 lac (FY2014 annual report, page 38).

In FY2012, the company had interest accrued and due of ₹56 lac and in FY2011, ₹41 lac (FY2012 annual report, page 38).

Similarly, in multiple other years, we find “interest accrued and due” on borrowing on the balance sheet date. The amounts are usually small; less than ₹1 cr, which is not big to create a liquidity crunch for the company. However, a delay in payment of these amounts may reflect laxness on the part of the people responsible for making these payments.

Also read: Steps to Assess Management Quality before Buying Stocks

5) Data presented by Relaxo Footwears Ltd in its annual reports:

While reading the annual reports of Relaxo Footwears Ltd, at times, an investor comes across instances that indicate that the investor needs to be cautious while analyzing the presented data.

For example, in the FY2005 annual report, the company stated that its promoters had provided guarantees and collaterals of ₹39 cr in favour of the company.

FY2005 annual report, page 31:

However, in the next year’s annual report (FY2006), while presenting the data of guarantees and collaterals for the previous year (FY2005), the company stated that its promoters had given guarantees and collaterals of ₹44.1 cr on its behalf.

FY2006 annual report, page 36:

An investor may contact the company directly to understand the reasons for such a discrepancy, whether it is a typographical error or after releasing its FY2005 annual report, it realized that the data of guarantees and collaterals published in the FY2005 report is not correct; so, it rectified the same in the FY2006 annual report.

In FY2007, in the cash flow from financing activities, Relaxo Footwears Ltd reported that it had an inflow of ₹16.97 cr from long-term borrowing and it had outflows of ₹1.02 cr as dividends and ₹9.51 cr as interest payments i.e. total outflows of ₹10.5 cr. As a result, from financing activities, it had a net inflow of ₹6.4 cr. However, in the annual report, while presenting this net outflow, the company made an error and presented it within parentheses ( ) showing an outflow.

FY2007 annual report, page 21:

In its older annual reports, until FY2002, the company classified financial expenses as an outflow under cash flow from operating activities instead of the normal practice of putting financial expenses as an outflow under financial activities.

FY2002 annual report, page 31:

In all the previously available annual reports, the company has shown financial expenses as an outflow under operating activities. FY2001 (page 26 of the annual report), FY2000 (page 22 of the annual report), FY1999 (page 30 of the annual report), and FY1997 (page 26 of the annual report).

From FY2003 onwards, the company rectified this practice and started showing financial expenses as an outflow under cash flow from financing activities (FY2003 annual report, page 30).

At times, Relaxo Footwears Ltd has shown reasonably large liabilities in its balance sheet; however, it has not provided any details about what these liabilities pertain to. As a result, the investor does not get sufficient information to arrive at any conclusion about such liabilities.

For example, in the FY2010 annual report, the company reported “Other Liabilities” of ₹25 cr about which no further detail was provided in the annual report. Similar is the case with ₹13 cr of “Other Liabilities” for FY2009.

FY2010 annual report, page 43:

Advised reading: How to study Annual Report of a Company

The Margin of Safety in the market price of Relaxo Footwears Ltd:

Currently (January 11, 2024), Relaxo Footwears Ltd is available at a price-to-earnings (PE) ratio of about 114 based on consolidated earnings of the last 12 months (Oct. 2022 – Sept 2023).

Moreover, we recommend that an investor read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be sign of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Relaxo Footwears Ltd seems like a company that has made its space in a highly competitive, low-priced footwear targeted at price-sensitive mass consumers. The company has created a demand for its products by spending a significant amount of money on advertisements, brand-building and promotions. As a result, the company has grown its sales by 10% year on year over the last 10 years (FY2014-FY2023).

However, the highly price-conscious target customer of Relaxo Footwears Ltd does not give it any pricing power and quickly switches to other producers whenever the products of Relaxo become costlier or other players offer goods cheaper. Therefore, despite having well-established brands, which required large investments in celebrity endorsements, the only way Relaxo Footwears Ltd gain market share is by cutting prices.

After spending 10-12% of its revenue on advertisement & promotions for more than a decade, the company has realized that it can not increase prices even to the extent of maintaining its profit margins when its costs increase. At such times, the company has to absorb the costs and take a hit on its profit margins because the customer is simply not willing to pay a higher price for Relaxo’s products.

The company relies on multibrand outlets (MBOs) for most of its business who are quick to replace its products on shelves with cheaper alternatives from competing brands or unorganized players if customers switch their preferences. Losing shelf space/market share is the biggest fear for Relaxo because in low-priced footwear “out of sight” is “out of mind”.  It is rare for a consumer who goes to buy slippers in a shop to come back empty-handed if Relaxo’s slippers are not available in that shop. She will simply buy slippers of any alternative brand.

Due to low-priced products with low customer loyalty, the company is not able to establish exclusive brand outlets (EBOs) and online channels as dominant profit centres.

Due to the lack of pricing power, Relaxo Footwears Ltd has to focus on lowering costs by way of economies of scale. It has continuously increased its manufacturing capacity over the last 2 decades and has recently bought another land parcel for future expansions. Even in the periods when it is not expanding capacity, it has to spend significant money (₹100-150 cr) on equipment like moulds etc. to keep its products attractive to customers.

Large manufacturing capacity has turned out to be a double-edged sword for Relaxo Footwears Ltd because it to ensure uninterrupted operations of its plants, it can no longer rely on local Indian suppliers and has to source from overseas players, which makes its supply chain long and costly. In addition, due to long contracts, it can not benefit from lower spot prices in the Indian market, which puts it at a disadvantage to local unorganized players. This was the main reason for its loss of market share in FY2023 and the sharp decline in its profit margins.

The company has entered into many transactions with promoters and other related parties. Once, promoters seem to have bought shares from the company for ₹4.3 cr and after 3 years sold the same at about ₹14 cr to the company via a merger transaction. The company has entered into other transactions like the purchase of footwear, unsecured loans, and leasing properties on rent from promoters, which require due diligence.

Currently, two generations of the promoter family are working in the company. The company has been paying remunerations almost up to the maximum permissible limit to promoters. In addition, promoters seem to be drawing exactly equal remunerations as per their age and stature in the family.

Many incidences indicate that there is scope for improvement in internal controls and processes within the company. It did not check properly intellectual rights around its brand “Sparx” before making it a flagship product. As a result, it had to pay ₹66 cr to Bata India Ltd.

Going ahead, an investor should keep a close watch on its profit margins, sale volumes of its footwear, advertising and capital expenditures. She should focus on its inventory levels, asset turnover and receivables collection to see if it uses its assets efficiently. The investor should monitor its transactions with related parties like promoter remuneration, rent payments etc.

The investor should keep a close watch on the succession planning of promoters to check for signs of any dispute among family members over their roles and responsibilities.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Relaxo Footwears Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.