Relaxo Footwear reported strong September Quarter 2023 results supported by strong double-digit volume growth. After underperforming in FY23, Relaxo is back on stable footing in FY24 reporting strong performance over the past three quarters. Strong performance was supported by market share gains, liquidation of high-cost old inventory and stabilization of raw material prices. Highly impacted by movement of crude prices, the second largest footwear manufacturer is getting back on track, but is double-digit volume growth of 27% YoY in H1FY24 sustainable.
Operating margins expand as raw material cost stabilizes
Revenue from operations came in at Rs 715 crore in September Quarter 2023, up 7% YoY driven by strong recovery in open footwear volumes. Relaxo footwear is the market leader in the open footwear category in India.
Operating margins in September Quarter 2023 stood at 12.79% compared to 8.87% in the same period previous year. According to the management, softening of raw material prices and better operational efficiencies led to strong margin expansion of 392 basis points (bps) in Q2FY24.
With robust operating margin performance, net profit doubled to Rs 44 crore in September Quarter 2023. The management expects double-digit revenue growth and margins of about 14% in H2FY24.
Price corrections aid volume growth and market share gains
Relaxo’s underperformance in FY23 was mainly due to high-priced inventory in its distribution channels. The company imports raw material such as ethylene-vinyl acetate (EVA), polyurethane foam (PU) and natural rubber. EVA and PU are crude derivatives linked to crude oil price variations. Thus, high-cost inventory accumulated in early FY24 was liquidated by Q4FY24. Along with unwinding of high-priced old inventory, Relaxo undertook price corrections from Q2FY23 which led to improvement in volume growth and increase in market share. Speaking on regaining market share, Gaurav Dua, Wholetime Director at Relaxo Footwear said, “Last year if we lost around 20%-25% in volume, in the open footwear mainly in Hawaii and Flite, that we have regained back now. So, there is a 27% YoY in H1FY24 growth in volumes. You can see that, what share we lost last year we have gained back.”
Will volume growth be enough to drive profitability
Relaxo reported strong volume growth of about 27% YoY in H1FY24 on a lower base. The company expects volume growth to be around 15% in the second half of FY24. The company expects lower volume growth mainly due to sluggish consumer sentiment prevalent in the footwear industry. Untimely rains and inflation pressure has subdued demand in the mass open footwear segment where Relaxo is a key player. According to the management, walk-ins have reduced and discretionary spending is not there in rural India. Hopefully the festive season will stimulate demand both in the rural and urban regions. The company is also focussing on its distribution network to drive volumes. Speaking on distribution expansion, Gaurav Dua said, “There are 1 lakh multi brand outlets in India. So, currently we are at 65,000 outlets. Every year we are going to add more and more outlets to grow.” But to drive topline and overall profitability, Relaxo needs to improve its average selling price (ASP) which is below Rs 200 compared to Bata India and Metro Brands with ASP of approximately Rs 700 and Rs 1500. Relaxo’s low priced open footwear constitutes 80% of its overall business and closed footwear is 20% with higher ASP. Closed footwear segment has not performed well for Relaxo over the past seven months. Popular brand ‘Sparx’ (closed footwear) has also underperformed with nominal growth of just 3-4% YoY in H1FY24. Sparx price range is around Rs 1000-1500. To increase ASP, Relaxo is focussing on premiumization in Flite, Bahamas, Urban Basics and especially in Sparx category. “Though this year has been a little challenging. there are a lot of premium articles in Sparx, and we are getting good traction”, said Ramesh Dua, Managing Director at Relaxo Footwear. He further added that the company will open retail outlets and utilize e-commerce to stimulate sales in Sparx category.
