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Relaxo Footwear, a household name in the value-for-money footwear segment, is navigating a period of transition. Inflation, changes in consumer demand, and increased GST rates on footwear have posed challenges. However, with strategic pricing corrections and a focus on growth levers, Relaxo is laying the foundation for a recovery. Here’s a closer look at its current business landscape, future prospects, and the strategies driving its transformation.

Corrective Pricing Actions: Bridging the Gap

In response to surging raw material costs and a GST rate hike from 5% to 12%, Relaxo implemented price hikes of 25-30% in late FY2022. However, this created a pricing gap compared to unorganized players, adversely impacting sales volumes in Q4FY2022 and H1FY2023.

To counter this, the company has recently reduced prices by 12-15% on key brands like Relaxo, Flite, and Bahamas. These corrections aim to make its offerings competitive and drive volume recovery. Additionally, the focus on closed footwear and scaling up contributions from high-demand categories is expected to further boost sales in the coming quarters.

Muted FY23, Optimistic FY24 Outlook

• Short-Term Challenges:
  FY23 is anticipated to be subdued, with Q2FY23 reflecting weak consumer sentiment and higher inventory costs. Relaxo’s Q2FY23 revenues are expected to decline by 7-9%, while EBITDA margins may shrink by 200-230 basis points (bps) year-over-year to 14%.
• Recovery in Sight:
  The company expects a recovery from Q3FY23 as the benefits of price corrections and declining raw material costs begin to materialize. Ethylene-Vinyl Acetate (EVA), a major input, saw prices peak at ₹300/kg but has since dropped to ₹160/kg. This will ease margin pressures and improve profitability from Q3FY23 onward.

Strategic Growth Drivers

Relaxo has identified key levers to sustain growth in the medium term:

1. E-Commerce Expansion:
   Currently contributing 8-10% of revenues, Relaxo aims to capitalize on the growing popularity of online shopping. The closed footwear category, in particular, holds significant potential for growth in the e-commerce space.
2. Closed Footwear Growth:
   Although 85% of Relaxo’s revenue comes from open footwear, the company is increasing its focus on closed footwear. Capacity additions in this segment are expected to raise its contribution to 20% in the medium term.
3. Exclusive Brand Outlets (EBOs):
   Relaxo is experimenting with EBOs, which house all in-house brands under one roof. With 50-100 stores already operational, this model aims to boost per-store profitability and brand visibility.
4. Exports Expansion:
   Exports, which generated ₹100 crore in FY2022, are projected to grow by 20-25% annually. This low-base growth is expected to bolster Relaxo’s overall revenue mix.
5. Steady Realization Growth:
   A strategic improvement in the product mix and minor price increases are expected to drive realization growth by 8-10% annually.

Financial Strength and Valuation

Relaxo’s robust, debt-free balance sheet positions it well to weather short-term challenges. The company is expected to achieve a revenue and earnings CAGR of 14% and 22%, respectively, over FY2022-FY2025. With a rolling price target of ₹1,185, Relaxo remains a buy recommendation, trading at 80.6x/59.6x its FY2024E/FY2025E earnings.

Operational Highlights

• Balanced Distribution:
  North and Northeast India contribute ~55% of revenue, while the remaining 45% comes from the West, South, and Central regions. Key brands, including Hawaii, Bahamas, Sparx, and Flite, provide a balanced mix of offerings, each contributing significantly to the topline.
• Capex and Utilization:
  Current capacity utilization is at 60-65%. While no major capex is planned, Relaxo is adding capacity for the shoes category to meet future demand.
• Inventory Management:
  Falling raw material prices and liquidation of older stock will ease inventory pressures, optimizing working capital.
• Design Innovation:
  A high churning rate of ~40% ensures frequent updates to product designs, keeping the brand fresh and relevant to evolving consumer preferences.

Risks to Watch

• Demand Slowdown:
  Any prolonged softness in consumer demand could impact growth targets.
• Raw Material Price Volatility:
  A significant rise in raw material costs could pressure margins and offset gains from pricing corrections.

Conclusion

Relaxo Footwear is at a pivotal moment, addressing near-term challenges while laying the groundwork for sustained growth. With strategic pricing actions, expansion into promising segments, and a focus on operational efficiency, the company is poised for a strong recovery starting FY2024. Investors can remain optimistic about its medium-term prospects, supported by its robust fundamentals and clear growth trajectory.

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