Relaxo Footwears – A Value for Money Investment

 

  • Date: 4th Nov 2017
  • Industry: Footwear
  • CMP: Rs. 581
  • P/E: 56.4 and P/B: 11.5 times
  • Mid Cap: 7,003 crore mkt cap
  • Advice: BUY with a target price of Rs. 905 by May 2019
  • We prefer this stock to an IPO open currently.

Summary

  • Overview: Relaxo Footwear is a firm into footwear products for over 40 years; is India’s largest footwear maker and sold 13.5 cr. pairs in FY17. RXO offers comfort, style and affordable footwear. 70% of RXO’s sales is from the
  • RXO’s revenue in FY17 was Rs. 1,741 cr. and profits Rs. 123 cr. Revenues, EBITDA and PAT have grown at 19.8%, 24.1% and 30.9% CAGR from FY09-FY17.
  • Key new trends include growth in non-leather footwear and eCommerce. The firm is going to expand faster using the franchise model. Margins and volumes are likely to improve this year due to reduced interest & tax costs, new value added products and a favorable macro environment. RXO has adapted itself over the years to changing consumer needs.
  • Risks: The key risk is a rise in raw material prices could impact margins.

Here is our report on RXO Footwears Ltd. (RXO)

Relaxo Footwear – Description and Profile

  • RXO is engaged in the mfg. and sale of footwear products made of textile, rubber, PU (synthetic leather) and EVA (ethylene vinyl acetate). Today RXO is India’s largest footwear firm.
  • RXO’s revenue in FY17 was Rs. 1,741 crores and profits Rs. 123 cr. It has 4,855 employees.
  • RXO has its HO in Delhi and mfg. at Bahadurgarh (H’yana), Bhiwadi (Raj.) and Haridwar (U’khand).
  • RXO stepped into the footwear industry in 1976 when brothers Mukund Lal Dua and Ramesh Kumar Dua started off with the mfg. of slippers and subsequently expanded the range.
  • At present, RXO makes 6,75,000 pairs per day with capacity utilization of 60%. Products include slippers, canvas shoes, flip flops, PVC DIP shoes, sport shoes and sandals. The brands are Bahamas, Flite, Casualz, Schoolmate, Sparx, Elena, Mary Jane, Kidz Fun and Boston.
  • Unlike Bata and Metro Shoes, RXO has taken a conscious decision to stay away from leather products where the prices may be higher but the market size is much smaller.
  • RXO sells its products through 275 exclusive COCO stores {Company Owned and Co. Operated}, large format retail stores and e-commerce. However, the majority of company’s business comes from general trade, with 800 distributors and 50,000+ retailers across the country. 75% of the COCO stores are located in north India particularly in UP, Delhi, Haryana and Punjab.
  • As a part of its product positioning, RXO offers a combination of comfort, style and affordable footwear. See Fig 1. RXO has 6,000 SKUs and 400 articles (products).

jainmatrix investments, relaxo footwear

Fig 1 – RXO Product positioning; Fig 2 – RXO Geographical presence; Fig 3 – Brands  

  • RXO brands are promoted by Salman Khan, Akshay Kumar, Shahid Kapoor and Shruti Haasan from the film industry. Fig 3 highlights the positioning and target market of each brand.
  • Key Executives are: Ramesh Dua (MD), Mukund Lal Dua (Whole Time Director), Sushil Batra (CFO), Gaurav Dua (ED Marketing) and Ritesh Dua (ED Finance, Exports and HR).
  • Shareholding pattern % is: Promoters 74.9, DII 1.8, QFI 4.5, Individuals 5.0 and Others 13.8.

Business Notes, Strategies and Events

  • RXO reported a 1% rise in profit YoY at Rs. 37 cr. in Q1 FY18. Revenues grew by 19% to Rs. 483 cr. in Q1 FY18 YoY. Revenue growth was high in Q1 FY18 due to pre-ponement of sales prior to implementation of GST. However, the same kind of growth is not expected in Q2 FY18, but it may revive in subsequent quarters. This PAT growth was flat due to sharp increase in cost of materials by 37.1% YoY.
  • Management expects double digit revenue growth (mid-to-high teen) for FY2018 driven by improvement in sales volume and better realization (due to improvement in revenue mix).
  • GST has improved prospects as footwear priced up to Rs. 500 is now taxed at 5% (earlier 9.5%) and the rest at 18% (earlier 23.1-29.5%). This is a positive for organized footwear players.
  • RXO changed its 40-year old logo in Jan 2017 to stay relevant amid the changing consumer preferences.
  • RXO has always owned the resources like land, machinery, factory etc. to keep a check on quality. It has recently adopted the franchise model to accelerate reach in untapped markets.
  • In 2009 Bata had filed a case against RXO in the Delhi HC accusing it of infringement of its brand Sparx. The issue was settled out of the court in 2015 in favor of RXO.
  • RXO is setting up its 9th mfg. unit in Bhiwadi, Rajasthan with a capex of Rs 100 cr. to make the Hawai brand of footwear as current capacity is fully utilized. This should boost revenues.
  • eCommerce is an important channel with an Online Presence with shopatrelaxo.com and Online Shopping Websites like Amazon, Flipkart, Snapdeal, Jabong, etc.

Industry Outlook

  • The total footwear industry is of Rs. 55,000 cr. and organised sector is of Rs. 10,000 cr.
  • Relaxo has a 3% market share within the entire industry and 20% of the organized footwear market in value terms, and 5-6% in volume terms. It sold 13.5 cr. pairs of footwear in FY17.
  • The domestic footwear market in India is projected to grow at a CAGR of 15% from FY16-20. The key drivers for the footwear segment will be: a) increased adoption owing to versatility in usage, and b) shift from unbranded to branded.
  • Men’s footwear dominates this market with 54% share, next is women (37%) and children/ school (9%). But women’s segment will outpace Men’s to take 41% of the market by FY 2020.
  • Branded footwear market is expected to grow at a CAGR of 20% to account for 50% of the organized market by FY 2020 from current 40%.
  • Footwear market is among the most organized categories in the country with 26% of the organized share with presence of EBOs (Exclusive Brand Outlets). The unorganized pie of 74% will grow at 14% while the organized market will grow at 18% CAGR to account for 29% of the market by FY21. (Source RHP)
  • Bata India has the largest store network followed by Khadim’s and Liberty Shoes. See Fig 4.
  • 54% of the retail stores sales are under the Rs. 500 category and 30% in the range of Rs. 500-1000. See Fig 5. 70% of Relaxo’s sales is generated from the

jainmatrix investments, relaxo footwear

Fig 4 – Store network of footwear brands / Fig 5 – Average Selling Price and Shares

Stock Evaluation, Performance and Returns

  • The share price has grown at 54.2% CAGR over 5 years and at 34.6% over 2 years. This includes a split in Nov 2013 (FV 5 to FV 1) and a bonus in July 2015 (1:1). See Fig 6.
  • The FY17 remuneration of Mukund Dua and Ramesh Dua is high at Rs. 9.12 cr. each. Under Companies Act, the ceiling in pay to key managers is 10% of profits. This limit is being given as remuneration.

jainmatrix investments, relaxo footwear

Fig 6 – Price History

  • Revenues, EBITDA and PAT have grown at 19.8%, 24.1% and 30.9% CAGR from FY09-17. We can see improvements in Operating & Profit margins even as Revenues grew steadily. See Fig 7.
  • Dividend growth has been good. RXO has generated positive Free Cash Flow in the last 8 years indicating conservative financial management, Fig 8.

jainmatrix investments, relaxo footwear

Fig 7 – Quarterly Financials / Fig 8 – Cash Flow 

jainmatrix investments, relaxo footwear

  • The historical average for PE is at 37.6 times of the last 5 years. However in the last 2 years, it has risen to 45.2 times, implying a re-rating. Currently RXO has PE of 56.4 times and is the top quadrant. See Fig 9.

jainmatrix investments, relaxo footwear

Fig 9 – Price and PE Chart / Fig 10 – Price and EPS TTM Chart

  • The earnings of RXO grew 4x from Jan12 – Jan16. In Fig 10, we show the EPS growth in a channel. Employee costs rose sharply from Mar 2016 affecting the EPS growth. Later demonetization also affected business.
  • ROCE and ROE are 25.7% and 22.6% respectively which is robust.
  • The D/E of the firm has fallen from over 0.96 to 0.38. This is a positive. As per mgmt. in Q1 FY18, RXO’s interest costs fell over 50%. This is likely to drive the margins up.
  • However earnings revival will be witnessed now due to benefits arising from GST, fall in interest costs, premiumization of product portfolio and adoption of the franchise model for faster expansion.

Benchmarking and Financial Estimates

We present a benchmarking exercise with listed peers in similar product categories. Since Mirza Intl. is focused on exports, it is not strictly comparable. See Exhibit 11.

  • In terms of P/B the valuations appear high. However this is explained by RXO strategy of owning the mfg. plants. P/E appears little high. RXO has good growth and a low D/E ratio compared to the peers.
  • RXO leads on margins, which reflects on good sales and costs controls. They are likely to improve as the management continues to focus on premiumization products while also focusing on cost reduction.
  • The return ratios are robust with a leading RoE score. The dividend yield is fair.
  • In all we can conclude that RXO looks more attractive than Khadim whose IPO is due.

jainmatrix investments, relaxo footwears

Exhibit 11 – Benchmarking / Exhibit 12 – Two year Projections  

Financial Projections: We present 2 year financial projections for RXO, see Exhibit 12.

Strengths                                                     

  • Key new trends include growth in non-leather footwear and eCommerce. RXO has only a small fraction of leather, and may benefit from this. On eCommerce RXO has its own website and tie ups with popular portals to grow online presence.
  • Strong brand equity strength & Celebrity endorsement: RXO has many brands, and has created good brand equity by endorsing celebrities to connect brands with customers, like Salman Khan, Akshay Kumar, Shahid Kapoor and Shruti Haasan. These activities positively impact volume growth.
  • GST: 70% of RXO’s sales falls in < Rs 500 price which has been positively impacted by lower GST.
  • Improved Financials: RXO has reduced debt over 5 years and current D/E is at 0.2 times, lowering interest costs in Q1 FY18. Along with premiumisation these will improve margins in the medium term.
  • RXO is a well-managed firm financially. The return ratios have historically been high and the cash flow management is good. This is a positive from an investment perspective.
  • Exports is a priority and will help RXO ramp up volumes in future.
  • RXO owns all its mfg. facilities. This allows better quality control and higher returns.
  • While the two brothers have been running the firm for 40 years, the next generation appears to have smoothly taken charge along with senior professionals. There should be continuity at RXO.
  • Focus on fashion: The key driver at RXO is to be in-sync with changes in fashion for consumers. Many of the new brands, design changes and premiumization initiatives are to tap consumer behavior. The new logo of Relaxo has also been created to appeal to the younger crowd.
  • A fall in rubber and raw material costs in recent times has helped RXO to improve margins.
  • The initiative around franchisee network growth will help RXO expand reach and availability.
  • Capacity utilization at RXO is 60% so there is ample room to grow volumes.

Risks and Challenges

  • The IPO of Khadim which is ongoing may throw a spotlight on the sector, and make valuations expensive. RXO has already gained close to 20% in the last 1 month.
  • Also some investors in Relaxo may like to exit it and enter Khadims.
  • High valuations – at a PE of 56 times, a lot of growth and profitability expectations are baked into the price. Any non-delivery of such performance will result in a big correction of price.
  • Any change in Govt. policies, and GST tinkering can affect the company’s performance.
  • Rubber and crude oil prices volatility can affect the costs structure and margins. The key raw materials, ethylene vinyl acetate (EVA) etc., are crude derivatives and hence prices follow the crude cycle with a lag effect. A sharp rise in these crude prices could significantly affect input cost.
  • Intensifying competition – entry of MNCs such as Nike, Adidas, Puma and many top brands can affect RXO. However our feel is that currently these firm’s products are priced much higher and so will not affect RXO.
  • Macro-economic factors like a downturn in the economy, unforeseen political and social upheavals, natural calamities and below normal monsoon can affect RXO.
  • Any sharp fluctuations in dollar price can adversely impact the cost of imported raw materials.
  • In family owned businesses there is always a risk of breakups and business separation.
  • High promoter compensation – it is at prescribed limits.

Overall Opinion, Outlook and Recommendation

  • In India the per capita consumption of footwear is 1.66 per year compared to 3 pairs globally and 6-7 pairs in advanced countries. This indicates high potential demand.
  • RXO has a positioning of a Value for Money but visible and good quality footwear. There is a massive unorganized sector in footwear. With GST and other tax initiatives, RXO may capture a lot of marketshare vacated by unorganized sector while taking up premiumization and brand strengthening.
  • The management is planning to expand faster using the franchise model. FY17 was flat financially on account of demonization and higher employee expenses. The margins and volumes are both likely to improve this year on account of reduced interest & tax costs, introduction of more value added products and a favorable macro environment.
  • RXO has adapted itself over the years to changing consumer needs and preferences. This financially reflects well on the company in terms of superior return ratios and good cash flow management.
  • Valuations are expensive at P/E of 56.1, but good companies tend to be richly valued for long durations.
  • We project a target price for RXO of Rs. 905 by May 2019, a rise of 55% absolute and 33% annualized.
  • Investors can BUY this share with a 2 year investment horizon.

Disclaimer

  • This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same.
  • The basis for the Financial Projections in Exhibit 12 and Target Price are revenue growth per footwear pair at 8% p.a. for FY18-20, volume growth of 11% p.a. for FY18-20, margins at Q1FY18 levels, a P/E target of 50x, management commentary and analyst judgement.
  • Punit Jain has no position in Relaxo Footwears. In addition, JM has no known financial interests in Relaxo Footwears or any related group.
  • Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of Investments can go down as well. The suitability or otherwise of any Investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

 

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Godrej Consumer Products

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V-Guard Industries – Electrifying Growth

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  • Date: Dec 11th, 2014
  • CMP: 1095 and P/E: 41.5
  • Mid Cap: with mkt cap 3200 cr.
  • Industry: Consumer Electricals and equipment
  • Advice: Downgraded to a Hold due to excessive valuations

We first published this for Subscribers on 10 Sept 2014. The share has appreciated 38% in 3 months. Sign up for the Investment Service to get the latest valuable reports. 

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V-Guard is a small manufacturer of household electricals like voltage stabilizers, UPS, pumps, water heaters, cables, ceiling fans, etc. After success in South India, it is rolling out nationally. Strengths include strong brand, good R&D and smart manufacturing and sourcing operations. It’s a high demand sector, with growth prospects due to affluence and rising no. of households. Revenues, EBITDA, Profits and Share Price grew at 33%, 27%, 11% and 42% CAGR over last 7 years. The share has given 16X gains since March 2008. Risks include high valuations, national scaling challenges and crowded new product categories.

V-Guard Industries – Profile

  • V-Guard Industries (VGI) is a Kerala based firm into electrical equipment for households.
  • Revenues in FY14 were Rs 1,518 crores and profits Rs 70 cr. Market Cap is 3,200 cr.
  • Started in 1977, with voltage stabilizers, it has expanded its product segments, see Fig 1.
  • VGI has 1599 employees and a network of 407 distributors, 4,344 channel partners and 25,000 retailers across the country. It has factories in Coimbatore and Perundurai (TN), Kashipur (Uttarakhand), and Kala Amb (HP), but VGI also has a smart outsourcing strategy for production.
  • Key Executives are: Kochouseph Chittilappilly (Chairman), Mithun Chittilappilly (MD) and V. Ramachandran (Director Marketing & Strategy).
  • Shareholding pattern % is: Promoters 66.2, FI/FII 19.0, Individuals & HNI 9.3, MFs 4.1 and Others 1.4.
  • The successful IPO of Wonderla Holidays, a sister company is a feather in the cap of this group.
VGuard Products, JainMatrix Investments

Fig 1 – V-Guard Products (click image to expand)

Product Notes

The product range is depicted by Fig 1, while the product revenues of FY14 are in Fig 2.

  • House Wiring Cables: This is the largest product segment of VGI. The demand in the market is high and the firm is going ahead with a capacity expansion at the Kashipur Plant.
  • Voltage Stabilizers: This is VGI’s flagship product and continues to be one of the largest contributors to revenue and profitability of the Company. Revenues are directly related to white goods sector.
  • Pumps and Motors: This is one of the established segments for VGI contributing to major parts of sales. VGI continues to enjoy premium pricing over competition in the Southern markets.
  • Digital UPS: The digital UPS segment has been the fastest growing segment for VGI. Increased brand penetration for the product, coupled with the frequent power outages in most parts of the country has driven the growth for this segment.
  • Fans: VGI launched fans in 2006 and has more than 30 models with variants of ceiling, pedestal, table, wall, ventilating and exhaust fans. The overall fan market is expected to witness sharp expansion going forward on the back of strong expected growth in the housing sector.
V-Guard Product Revenues, JainMatrix Investments

Fig 2 – V-Guard Product Revenues

  • Other revenue segments of VGI business constitutes of LT Cables, Electric Water Heaters, Solar Water Heaters, Desktop UPS, domestic switch gears and induction cookers.
  • VGI has built its presence in the kitchen appliance category by launching mixer grinder (in 2014) and induction cooker (2013), and both have been well accepted in the market. The launch of Pebble, its new range of water heaters, was successful. It also unveiled Enviro, a hi-speed pedestal fan.

Business Notes

  • Management: The first generation entrepreneur Kochouseph Chittilappilly started this company from scratch in 1977. They later diversified into amusement parks, and Wonderla Holidays is now run by Arun Chittilappilly, his brother. His son Mithun joined VGI in 2004, and is now the MD. The Vice Chairman is Cherian N. Punnoose, an experienced CA and professional. The Director-Marketing & Strategy is V. Ramachandran, ex LG and HUL. Thus VGI may have stepped beyond a family business and has professionalized management, a necessary condition for stability and growth.
  • Vision: The leadership has a vision to become No. 3 player in each category in the next 3-4 years.
  • The VGI brand is strong, particularly in South/Kerala, and is now expanding all India. Fig 3.
  • VGI has expanded beyond the initial success of voltage stabilizers into related UPS, then house wiring cables, pumps and motors and household devices like fans, water heaters, etc. Fig 1 and 2.
Sales Distribution, JainMatrix Investments

Fig 3 – Sales Distribution

  • VGI owns two wind energy converters type E30 at Erode in Tamil Nadu with a capacity of 230 KW. Currently it produces 13 lakh units per annum, which is transferred to the state electricity grid.
  • Manufacturing: Considering the strong demand for wires, VGI has decided to double the capacity at the Kashipur plant in Uttarakhand from 3.3 million coils per annum to 6.6 million coils per annum in two phases. The investment for this was Rs 18 cr. VGI’s new plant for producing solar water heaters at Perundurai TN has gone on stream in 2013, with annual capacity of 90,000 solar water heaters.
  • It has an asset light model, and outsources more than 60% of its production.
  • Operational improvements in FY14 included reduction in its working capital cycle (by 8 days to 76), improvement in inventory days by 8 days and debtor days by 2 days, generating good cash flows.
  • R&D: VGI’s R&D Centre in Kochi was certified by the central govt’s Dept. of Scientific and Industrial Research (DSIR). Good R&D has reduced power consumption and improved products continuously.
  • VGI has recently won the ‘Innovative 100’ Awards 2013 hosted by Inc. India magazine, for the brand’s constant effort to bring in smart innovations in their product categories.
  • Advertising: VGI spent around 58 cr. (4.3% of revenues) on advertising in FY13, then increased it marginally in FY14 to 60 cr. (3.9%). Most of the expenditure in FY14 was targeted at the IPL.
  • Ad spends are to be maintained at 3.5-4% of revenues in FY15 as well.

Business Challenges:

  • Competition: In recent few years VGI has faced competition from Honeywell Automation, Genus Power Infra and Pearl Electronics. BEL is the largest player in electronics components in India. Havells is a large player in house wiring cables and fan segments in Non South regions.
  • Fans, heaters and kitchen appliances are established categories with organized and unorganized sector competition.
  • Many of the products have a negative correlation to overall development. The core voltage stabilizers product is threatened by improved power delivery by electricity utilities. It is also challenged by fridges and ACs bought pre-fitted with stabilizers.
  • Laptops and tablets too do not require UPS due to in-built chargeable batteries.
  • Seasonality affects demand – pumps, motors and stabilizers depend on rainfall and power supply.

Stock Evaluation, Performance and Returns

  • The price and dividend history (LINK) has shown a fine growth since it got listed in Mar’08.
  • The share is currently at its all-time high range. Dividend too has grown steadily in the last 7 years.
  • Revenues, EBITDA, Profits and Market Price grew at 33%, 27%, 11% and 49% CAGR over last 7 years.
  • Profit appears low only due to a high base effect in FY08. See Fig 4.
Quarterly Financials, JainMatrix Investments

Fig 4 – Quarterly Financials, by JainMatrix Investments

  • Revenues growth has been excellent, while the operational and profit margins are flat. The EPS has surged due to the volumes growth.
  • In addition, good operational decisions like more sourcing v/s in-house mfg have kept costs in check.
  • The Free Cash Flow has been positive in only 2 of the last 7 years. Fig 5. However the operational Cash Flow has been positive for 4/7 years. Investments have been made into capacity expansion and factories. The recent years show FCF is much higher. This is positive.
  • The historical average for PE of VGI is 20 times, and a range of 10-30 times over 7 years. See Fig 6.
  • The price chart shows an accelerating rise. The PE too is at 41.5 times, at all-time high levels. Thus it appears that VGI is overpriced at these levels.
  • The EPS for VGI peaked in Mar ’13 but has crossed these levels in the Q2FY15. See Fig 7.
Cash Flow and Dividend, JainMatrix Investments

Fig 5 – Cash Flow and Dividend, by JainMatrix Investments

Price, PE and EPS, JainMatrix Investments

Fig 7/8 – Price, PE and EPS, by JainMatrix Investments

  • ROCE and ROE are 26.1% and 24.2% respectively which is positive for the company.
  • The D/E of the firm has fallen to 0.47 (Q2FY15) from 0.6 (FY13), a good improvement.
  • Price to Book Value is at 10.3 (Q2FY15), which is high, but a sign of high insourcing of products.
  • PEG is 1.96 times, indicating high valuations.

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Benchmarking and Financial Estimates

We present a benchmarking exercise with listed peers in similar product categories.

VGuard Benchmarking, JainMatrix Investments

Fig 9 – Benchmarking, by JainMatrix Investments

  • VGI has excellent growth, returns and D/E characteristics.
  • Current Valuations are high, but overall VGI does fairly well in the comparison.

Financial Projections

We have carried out a financial projections exercise for VGI.

Fig 11 - VGuard Projections, JainMatrix Investments

Fig 11 – Financial Projections, JainMatrix Investments

Risks and Challenges

  • VGI has high brand recall in Kerala and Southern states. Future growth is dependent upon VGI being able to repeat and roll out its brand and distribution success nationally.
  • Dependency on the seasons like rains and summer. Here variations are getting worse every year.
  • Dependency on poor state electricity distribution for voltage fluctuations. This may improve slowly.
  • High competition in newer product categories like kitchen appliances, fans, geysers, etc. In particular VGI has to stay away from well-established global categories like computers, audio and audiovisual.
  • Volatility in raw material prices could impact margins in case cost escalations cannot be passed on to consumers.

Overall Opinion, Outlook and Recommendation

  • Strong brand that can be well leveraged for new products in South and all products in Non South.
  • Management that has grown businesses with good ambition, corporate governance and shareholder rewards.
  • Demand drivers for VGI include India’s rising population & affluence and the switching of consumers from unorganized sector to VGI products. These trends should drive demand for VGI products, even as competition in these categories intensifies.
  • The growing housing /real estate market can boost overall demand. Massive growth opportunities exist across household electrical and semi-electronic gadgets and equipment.
  • Robust distribution and dealer network setup in South that is being replicated across the country.
  • However at a PE of 41.5, PEG of 1.96 times and PB of 10.3 times, we feel valuations are stretched.
  • VGI is a Hold today due to excessive valuations.

JainMatrix Knowledge Base:

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Disclosures and Disclaimer

  • This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation.
  • JM has been publishing equity research reports since Nov 2012.
  • Punit Jain has been a long term investor in VGI since Oct 2014. Other than this JM and its promoters/ employees have no financial interest in VGI and no known material conflict of interest as on date of publication of this report.
  • This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.
  • The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same.
  • Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.
  • Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.
  • Any questions should be directed to the director of JainMatrix Investments at jain@jainmatrix.com

Bata India has Happy Feet

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  • Date: July 27, 2012
  • CMP: Rs 895
  • Large Cap – Market Cap 5,750 crores
  • Advice:  Buy systematically
  • Target:  2 year target of 1258

Bata India is the largest manufacturer and marketer of footwear products in India. Riding the ‘consumption’ theme, the growth figures are impressive as FY11 sales at 1659 crores are up 15%, EBITDA 31%, and Net Profit 30% CAGR over the last 5 years. Bata is investing in new stores, manufacturing improvements and branding. Domestic competition is set to intensify, but Bata is a deeply embedded brand, that is just starting to discover it’s rightful place in the Indian market.  Buy systematically with a 2-year target of Rs. 1258. 

Bata India – Description and Profile

  • Bata India is a large Calcutta based retailer and manufacturer of footwear in India since 80 years. It is part of the Bata Shoe Organization with HQ in Switzerland. The FY12 revenues were 1659 crores and PAT 152 cr.
  • Manufacturing is located at Batanagar-WB, Bataganj- Bihar, Faridabad-Haryana, Peenya- Karnataka and Hosur- Tamil Nadu. It employs 6,800 personnel. Listed since 1973, Bata today has a market Cap of 5682 cr.
  • Bata has a market share of 35%. The brands include Hush Puppies, Dr Scholls, Weinbrenner, North Star, Power, Marie Claire, Bubblegummers, Ambassador, Comfit, QUOVADIS and Wind India.
  • Bata sells through 1300 retail stores spread across 500 cities/towns. It also operates a non-retail distribution network through its urban wholesale division and caters to customers through over 30,000 dealers.
  • Bata won the ‘Consumer Awards 2010’ as ‘India’s Most Preferred Retailer’ given by CNBC Awaaz.
  • Shareholding pattern is: Foreign Corporate Promoters – 52%, MFs/ DII 12.8%; FIIs 18.6%, Bodies Corporate plus others 2.8%, Individuals retail /HNI 13.8%. We can see that the shareholding is well distributed.
  • Key Executives are: Uday Khanna – Chairman, R Gopalakrishnan – MD and Ranjit Mathur, Director – Finance.
  • ICRA has reaffirmed a rating of [ICRA] A1+ to Bata India for its CP programme, the highest for short-term debt.

Recent Events and Strategies executed by Bata

  • Bata straddles the entire range of footwear – from value to premium. With a current slowdown, it is currently focusing on value/ volume. It has the flexibility to switch to a premium focus in a short period, if required.
  •  The Bata group through a Singapore firm provides guidance and managerial support in functions like store layout, marketing, shoe line, up gradation of factories, manager training and guidance from senior managers.
  • Growth is excellent. In 2011, Bata opened 146 stores, (compared to 69 in 2009 and 108 in 2010) with average floor size >3,000 sq.ft. and also remodeled 30 small stores into the larger format stores. Some unviable small stores, which could not display the variety of footwear collections, are being shut down.
  • Through retail, Bata sells over 5 cr pairs of footwear annually, serving 1,50,000 customers every day. The wholesale division operates with a network of 275 distributors and 20,000 independent shoe dealers. Industrial division caters to the safety footwear needs of various industries. Export sales in 2011 were about 3 million pairs worth Rs 16.9 crores compared to Rs.11.8 cr in 2010.
  • Bata is seeing store expansions in Tier II and III cities, higher same store sales growth and higher realizations due to increasing share of leather shoes in overall sales (about 70%).
  • The Bata website www.bata.in has been set up for online search, shopping and home delivery.

Product notes

  • The Bata brands include
  1. Hush Puppies range of footwear in the premium segment and dress comfort segment brands Comfit, Ambassador and Mocassino.
  2. In theladies segment, the trendy Marie Claire range.
  3. The youth focused brand North Star and specialty outdoor brand Weinbrenner.
  4. For children Bubblegummers offers lightweight all-weather footwear and Naughty Boy is a school shoe.
  5. A new retail concept, FOOTIN, offers affordable fashion and trendy styles.
  6. The CHIARA shoes Collection (with elastic tape upper) has been launched here after international success.
  • For Bata, the opportunities include the low penetration of organized footwear retail (40%) and large presence of unorganised players in the women footwear market (86%).
  • Bata India was selected as a POWERBRAND in the POWERBRANDS 2010. The selection is done after an extensive pan India research conducted by Indian Council for Marketing Research.

Industry Note:

  • India’s per capita shoe consumption or the number of footwear (shoes, chappals, sandals) worn by an individual has gone up from 1.4 shoes a year in 2004 to 2.2 shoes per year in 2010. (Government report).
  • Footwear is the second most organized retail category in India, next only to watches.
  • Today, about 220 cr pairs of shoes are made in the organised and unorganised sector. India is the second largest footwear manufacturer in the world, next only to China. The Indian footwear market is currently estimated to be Rs 15-20,000 crore, growing at 12% per year. Of this, 40% is organized, with rural India accounting for 75% of the consumption.
  • This retail market is classified:
    • Men’s Footwear accounts for 48% and is the largest segment.
    • Women’s Footwear accounts for 41%. Growth rate is highest here.
    • Children’s Footwear accounts for 11%.
  • The competitors for Bata are Liberty, Red Tape, Woodland, Khadim and Metro.
  • Retailers are highly sensitive to regional preferences with wide variations in styles, festivals and consumers.

Stock Valuation, Performance and Returns

  • Bata has been listed for a long time. For our analysis purpose, we will consider the period from 2007-12.
Bata Price Chart, JainMatrix Investments

Fig 1 –  Bata Share Price over 5 years,  JainMatrix Investments, Click to Enlarge

The Bata share is up 41% CAGR over the last 5 years. The all time peak of 922 was achieved recently on May 29, ‘12. It is today within 3% of this.

Quarterly Sales and Profits, JainMatrix Investments

Fig 2 – Quarterly Sales and Profits, JainMatrix Investments,  Click to Enlarge

  • The growth numbers are excellent with Sales up 15%, EBITDA 31% and Net Profit 30% CAGR over 5 years.
  • Profit margins have improved steadily, and are at 10.4%. Operating margins are at 15% this quarter.
Bata - Dividend and Price movement, JainMatrix Investments

Fig 3 – Bata – Dividend and Price movement, JainMatrix Investments

This rapid business growth is also accompanied by an increase in dividend. See Fig 3. The dividend at 60% gives a dividend yield of only 0.7%.

EPS and Cash Flow, JainMatrix Investments

Fig 4 – EPS and Cash Flow, JainMatrix Investments

  • The annualised EPS is up a very healthy 30% CAGR over the last 5 years. However, cash from operations peaked in 2009, and has reduced due to investments into new stores and manufacturing improvements.
  • ROCE and RONW are in the 40-41% range. The Equity Capital has been steady at 64.3 crores for the last 7 years. This is a sign of good capital stability.
Price and PE Graph, JainMatrix Investments

Fig 5 – Price and PE Graph, JainMatrix Investments

Price and PE Chart, Fig 5, indicates that in 6 years, the average PE has been 25 times. Current PE of 35.6 times (TTM, trailing 12 months) indicates market acceptance of the consumption & growth prospects of Bata.

Price and EPS Graph, JainMatrix Investments

Fig 6 – Price and EPS Graph, JainMatrix Investments

  • The view of the EPS charts in Fig 6 shows that EPS growth has accelerated after 2009.
  • The EPS is today at all time high of 25.53 TTM, including Apr-June quarter 2012.
  • The EPS of Bata is expected to stay in the channel as per Fig 6.
  • PEG is at 1.2 – indicates fairly valued status.  

Benchmarking and Financial Estimates till FY15

In a Benchmarking exercise, we have compared Bata to Mirza International (a Peer), Titan Industries and Marico (two consumer oriented firms with retail presence), see Exhibit 7.

Peer Comparison, JainMatrix Investments

Fig 7 – Peer Comparison, JainMatrix Investments

All the firms with strong brands have high PEs. Bata seems to be a bit overpriced. But it scores high on many parameters, and excels in terms of margins.

The financials and PE of Bata have been projected for the next 3 years. See Exhibit 8.

Financial Projections, JainMatrix Investments

Fig 8 – Financial Projections, JainMatrix Investments

Risks:

  • Intense competition at the higher end of footwear market from Gucci, Jimmy Choo, and other global brands.
  • The unorganized and small scale sector still own 60% of the Indian market. While Bata will be a first stop for an upgrade by these consumers, the competition from lower price points is intense.
  • The Government of India has allowed 100 per cent FDI in single-brand retailing in India and has plans to allow upto 51 per cent FDI in multi-brand retailing in the near future.
  • Rapidly evolving footwear market – Bata will need to be sensitive to new tastes.
  • The Bata brand itself while strong, has an ageing appeal, and needs to be refreshed, recharged and replaced where necessary to keep winning in this market.

Opinion, Outlook and Recommendation

  • Footwear is an exploding category in India, and Bata remains one of the best plays in India, on the basis of favorable demographics, retail presence, manufacturing improvements and good marketing/ branding.
  • Significant opportunities stem from growth against the unorganized sector, in upgrading current customers and in dominating the domestic market. Exports too are an opportunity given Bata’s global presence.
  • At CMP of 895, Bata is at high valuations of 35.6 times TTM. In difficult equity market conditions, the ‘safety in consumption’ theme is playing out, where such firms all have PE valuations in the 30s.
  • We expect Bata to continue at these high valuations for the next 2 years. Business performance will also continue on the growth and profitability path we have seen in the last 2 years.
  • Buy Bata systematically for a 2-year target of 1258, a 40% appreciation from current levels.

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Consumer Sector – Who leads the FMCG pack?

Date: June 7, 2012

The comparison of four leading FMCG / Consumer stocks, ITC, HUL, Godrej Consumer and Asian Paints throws up some interesting insights. ITC is keeping up excellent margins while investing in 4-5 newer areas beyond cigarettes. HUL has the best brands, but is seeing growth constraints. Asian Paints is a dominator in Paints and has good international presence. But the surprise packet is from the smallest player. Godrej Consumer is growing through acquisitions and international business, and has the best financials. 

Introduction

This research looks at four firms from the FMCG sector and finds out the best for the long-term investor. In this report, we research two blue chips, Hindustan Unilever, the FMCG bellwether, and ITC, which is a conglomerate, but mostly a cigarette firm. And also two large caps, Godrej Consumer and Asian Paints.  (They will be referred to as HUL, ITC, GC and AP).

Five Year Snapshot of Key Financials

Let us first look at a 5-year snapshot of financials of the firms. This can give us good visual feel of the relative and absolute financials of the firms.

Hindustan Unilever:

Business Snapshot:

  • The Indian subsidiary of Unilever is 52.5% owned by parent firm.
  • Business can be classified as Foods, Personal care and Home care. Major Brands include Lux, Lifebuoy, Surf, Rin, Wheel, Fair & Lovely, Pond’s, Lakmé, Pepsodent, Closeup, Axe, Brooke Bond, etc.
  • The 16,000 Indian employees manage 2,000 suppliers and 2,900 stockists to ensure product distribution and direct coverage of 15 lakh Retail outlets and indirect coverage of another 64 lakh.
  • Business is a function of population penetration and affluence and is growing faster in rural areas.
HUL Financials, JainMatrix Investments

Fig 1 – HUL Financials, JainMatrix Investments, Click to enlarge image

Financial Snapshot

  • Revenues, EBITDA and PAT have gained by 8%, 26% and 7% CAGR over 5 years.
  • P/E has moved in a range of 17-33 times. Current P/E is at 32.4 times.
  • Operating margins are excellent at 27%. Profit margins are flat at 12%.
  • Dividend has been increased to 750%, or Rs 7.5, indicating a dividend yield of 1.8%.
  • PEG is at 4.1 – indicates clearly overvalued status.

ITC Ltd

Business Snapshot:

  • The firm is owned by Indian Institutions, who hold 52% of the firm.
  • Business segments in ’11 were Cigarettes 44%, FMCG 18%, Agri 20%, Paper/ Packaging 14% and hotels 4%.
  • Dominates Indian Cigarettes market, with a reach of 2 million outlets.
  • Attempting to diversify from cigarettes into other segments.
ITC Financials, JainMatrix Investments

Fig 2 – ITC Financials, JainMatrix Investments, Click to enlarge image

Financial Snapshot

  • Revenues, EBITDA and PAT have gained by 15%, 22% and 19% CAGR over 5 years.
  • P/E has moved in a range of 15-31 times. Current P/E is at 29 times.
  • Operating margins and Profit margins are superior at 43% and 23%.
  • Dividend has been increased to 450%, or Rs 4.5, indicating a dividend yield of 1.9%.
  • PEG is at 1.54 – indicates somewhat overvalued status.

Godrej Consumer 

Business Snapshot:

  • The promoter group Godrej owns 64% of GC.
  • It has Household and Personal Care Products brands like Good Knight, Cinthol, Godrej No1, etc.
  • The revenues by categories are Personal Wash 22%, Hair Care 19%, Home care 47% and Others 12%.
  • Growth has been organic, as well as by acquisition, in India as well as Internationally. GC has international operations in Europe, Australia, Canada, Africa and the Middle East.
Fig 3 - GodrejConsumer Financials, JainMatrix Investments

Fig 3 – GodrejConsumer Financials, JainMatrix Investments

Financial Snapshot

  • Revenues, EBITDA and PAT have gained by 45%, 55% and 47% CAGR over 5 years.
  • P/E has moved in a range of 20-27 times. Current P/E is at 26 times.
  • Operating margins and Profit margins are good at 26% and 15%.
  • Dividend has been increased to 475%, or Rs 4.75, indicating a dividend yield of 0.82%.
  • PEG is at 0.55 – indicates attractive undervalued status.

Asian Paints:

Business Snapshot:

  • The promoter group of Choksi, Dani, etc. own 53% of AP.
  • Group operations are in 17 countries with consumers in 65, through JVs and subsidiaries.
  • Major Product Segments are Automotive, Home, Industrial and Paint related Services.
Asian Paints Financials, JainMatrix Investments

Fig 4 – Asian Paints Financials, JainMatrix Investments

Detailed Comparison

Next we will look at a detailed comparison of the firms in terms of valuation, growth characteristics, debt, shareholding pattern, etc.

Comparison Table, JainMatrix Investments

Fig 5 – Comparison Table, JainMatrix Investments

We can see from this analysis that on 5 important parameters:

  • Valuation – ITC is the cheapest, AP the most expensive
  • Growth – GC leads on Sales and Profits
  • Management effectiveness – HUL leads
  • Solvency and Margins – ITC clearly leads, as debt is low across the sector.
  • Market performance – AP and GC split the honors

The Decision Table:

We compare the 5-year CAGR growth across key parameters: (Price, PE and Mkt Cap are of June 6, ‘12)

Sector Decision Table, JainMatrix Investments

Fig 6 – Sector Decision Table, JainMatrix Investments

Conclusions:

1.       Among Large Caps, ITC is better

  • ITC leads HUL, as ITC has superior Operating and profit margins. In terms of valuation, ITC is cheaper. Also on margins, it is better. HUL is superior on Management effectiveness.
  • ITC leads on the 5-year growth on financials.
  • ITC dominates cigarettes and commands great margins here. It has been using this to invest in an array of new growth sectors, this is bearing fruit and will drive future performance.

2.       Among the mid-large caps Godrej Consumer is better

  • GC leads over AP because: While GC and AP share honors for market performance, but on all other parameters, GC leads AP – Operating & Profit Margins, Lower valuations and Revenue, EBITDA, PAT & EPS growth.
  • GC has a smaller market cap than AP, about half. GC is present in many more product categories, and has far more room to grow.

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A Titan for the long term

——————————————————————————————————-

There is an update of this report dated Nov2012, Titan – The Jewel in the Crown 

Titan Industries is a power brand and the largest specialty retail chain in India. It is translating the success in watches into new categories by adding one every 5-7 years, and now also straddles jewellery, eye wear and precision components. Titan is at a very early stage of revenue and profit growth. Invest.

Titan Industries – Description and Profile

  • Titan Industries is a Tata group company selling watches, jewellery, eye wear and precision components. Titan has built excellent brands that drive sales in these consumer categories.
  • They have also set up specialty retail chains to display these products and improve the customer experience. This chain is the largest specialty retail chain in India.
  • Started in 1984 with a joint venture between the Tatas and the Tamil Nadu Industrial Development Corporation for watches, it expanded in 1995 into jewellery and in 2007 into eye wear.
  • Today the turnover is 6050 crores, PAT 430 cr and sales has grown 35% CAGR over the last 6 years.
  • Here is a graphic of Titan’s products, distribution, brands and future growth drivers

Titan Industries

Fig 1 – A snapshot of Titan’s products, brands, distribution and future growth (click to enlarge)

  • The demand for Titan products depends on consumer disposable incomes, and straddle the mid to high end segments
  • In watches, the owned brands are Fastrack, Xylys, Titan and Sonata. High end licensed watch brands include Tommy Hilfiger, fcuk and Hugo Boss.
  • In eye wear, the three in-house brands are Titan, Eye+ and Dash, while the international and luxury brands include Gucci, D&G, Armani, BOSS, Esprit, Daniel Swarowski and Mont Blanc
  • There has been a steady growth in consumer demand except for 2008-09. Recovery is complete, and this trend is expected to continue and even accelerate.
  • Watch parts which were sourced from China, are now being transitioned to production in house in India. This is due to increase in prices from Chinese parts. Even though Titan’s investments requirements and cost of production increase, this gives Titan greater control over the supply chain and quality control.
  • Titan operates 85–90% of its stores through the franchisee model – this allows flexibility in scale and lower cost expansion

Stock evaluation, performance and returns

The Price and Dividend history of Titan is detailed below:

Titan Industries

Price and Dividend History

Fig 2 – Price and Annual dividend history

(Dividend in Rs/share, FV Rs 1) Click to enlarge graphic

Titan IndustriesFig 3 – Quarterly revenues and Profits have grown steadily over the last 8 years

Titan Industries

EPS and Cash Flow

Fig 4 – Cash Flow and EPS are up substantially

  • Sales are growing at 35% CAGR over the last 6 years.
  • Over the same period, EPS (on a steady equity base) has grown 57%. This is remarkable profitability.
  • However, cash from operating activities is up only 19.8% – this is because Titan is investing in building the retail chain as well as in the manufacturing facilities.
  • Putting these together, Titan appears to be in a virtuous cycle of investment – growth – profits that (barring any India/ global slowdown) – is a multi year business acceleration.
Titan Industries

Price and PE

Fig 5 – Price and PE Graph

Titan Industries

Price and EPS

Fig 6 – Price and EPS Graph

  • Even with the rapid appreciation of Titan’s share price in the last 2 years, the PE is around 46. This is historically in the medium/ average range for Titan over the last 7-8 years. Investors seem to have always expected more from Titan :-)
  • EPS  has increased steadily, barring the 2008-09 period where overall the economy had slowed. Post this period, the earnings have rebounded and caught up with the previous growth path
  • ROCE has been at an amazing 42-48% in the last 2 years.
  • PEG is at 0.81 – indicates safety and still undervalued status
  • Very low debt equity ratio, and good cash position indicates strength in the balance sheet.
  • The company has recently approved a share split to 1 Re face value (from 10Rs), and a bonus issue of 1 for 1 held. This will reduce market price by 1/20 and boost retail participation (and shareholder returns in the short run).

Risks:

  • Titan is seen as a proxy for gold. In recent times, Titan has been enjoying appreciation on the inventory due to gold appreciating. A fall in price of gold can be a risk to the gold inventory and the jewellery demand at Titan.
  • Competition in India is intensifying with a host of jewellery and eye wear brands challenging Titan.
  • Precision components is a commodity type business, needing volumes, compared to watches, jewellery and eye-care, which are branding, manufacturing and retailing oriented. This business may never reach profitability levels compared to the other three.
  • So what next after eye care? In the next 2-4 years Titan needs to enter into a new business that falls in it’s sweet spot of takeover of unorganized sector – precision manufacturing – consumer retail where it’s strong brand can be deployed successfully. If it does not, business in India can taper off in the next 7-10 years.

Opinion, Outlook and Recommendation

  • In India the ‘demographic dividend’ and GDP growth have pulled the per capita income to over Rs 54,000. Experts expect consumption to accelerate now, as consumers have more discretionary spending power, (and spend less of total income on food). Titan’s watch, jewellery and eye care categories will ride this consumption wave.
  • In Jewellery and eye care, Titan is addressing a relatively unorganized sector, and by leveraging it’s national brand and distribution network, building credibility and loyal consumers. This is a sustainable model, and Titan enjoys a first mover advantage.
  • Exports too are a big driver of future growth, as the Indian success story is replicated in 26+ countries. In these business categories, margins can be much higher in developed countries, so there is high potential here.
  • Precision components manufacture, while being a lower margin business, has a very large global potential. Anecdotal evidence from Titan’s procurement for watch parts suggests that Indian parts are gaining in competitiveness compared to Chinese equivalents.
  • Titan has built capabilities in branding, design and manufacturing that are strong core competencies.
  • In the last 2 years, share price has appreciated 4 times. For new investors, it may appear to be a case of, closing the stable door after the horse has bolted :-). However, this stock is expected to continue to perform strongly for several years to come.
  • Invest now and systematically for long term outperformance
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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/
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