Relaxo Footwears Limited (530517) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Relaxo Footwears Limited Q4 FY '23 Earnings Conference Call hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prerna Jhunjhunwala from Elara Securities Private Limited. Thank you, and over to you.

Good evening, everyone. On behalf of Elara Securities India Private Limited, I would like to welcome you all to 4Q and Full Year FY '23 Post-results Conference Call of Relaxo Footwears Limited. Today, we have with us the senior management of the company, including Mr. Ramesh Kumar Dua, the Managing Director; Mr. Gaurav Dua, Whole-Time Director; Mr. Ritesh Dua, Executive Vice President Finance; Mr. Sushil Batra, Chief Financial Officer; and Mr. Ankit Jain, Company Secretary. Without taking any further time, I would now like to hand over the call to Mr. Sushil Batra, and over to you, sir. Thank you.

Thank you, Prerna. Good afternoon, ladies and gentlemen. Thank you for joining us on this earnings call for the quarter and fiscal year ended 31st March 2023. The earning press release and the investor presentation had been uploaded on the stock exchange as well as at our website, and we hope you have had the chance to go through them. Before we begin the question and answer, I will quickly go through the Q4 and FY '23 performance starting with Q4. In Q4 FY '23, we recorded a revenue of INR 765 crores as against INR 698 crores in Q4 FY '22, recording a growth of 10% year-on-year. On a Q-on-Q basis, the revenue increased by 12%. This is mainly due to volume growth across all categories. Our Q4 FY '23 EBITDA was at INR 118 crores, up by 6% year-on-year, from INR 111 crores in the corresponding quarter of previous year. EBITDA margins were at 15.4% in Q4 FY '23 as against 15.9% in the corresponding quarter. On a Q-on-Q basis, EBITDA margins have grown substantially by 481 basis points due to selling of low cost inventory along with [ costly ] old inventory. PAT at INR 63 crores, on a sequential basis, that grew by [ 110% ] from INR 30 crores in Q3 FY '23. PAT margin for Q4 FY '23 was 8.3%. Our price correction efforts during the last quarter have resulted a good momentum, and we have continued our market share recovery in all major segments during this quarter without relying much on discount and offers. Now moving on to full year FY '23. Despite the challenging environment last year, our strong team responded effectively and our commitment to maintaining our high standard of excellence have made us successful. Revenue for FY '23 was at INR 2,783 crores, up by 5% year-on-year from INR 2,653 crores in FY '22. EBITDA was at INR 336 crores as against INR 416 crores in FY '22. EBITDA margin was at 12.1% as against 15.7% in FY '22. Margins were affected primarily by the high pressure on raw materials pricing during most of the year. PAT was at INR 150 crores in FY '23. We are now a debt-free company with robust cash flow operation due to our strong working capital management. During the year, the company incurred a CapEx of INR 174 crores. With the stabilization of raw fuel prices in Q4, we are currently experiencing strong demand and hold an optimistic view of the future. Our company strategically positioned to take advantage of the opportunities within the industry, allowing us to further expand our market share. Our key strengths lie in our in-house manufacturing capabilities, quality of our product and the strong recall of our brand. We remain dedicated to upholding this strength and will persist. Please strive to maintain their integrity. We are confident that our continued efforts will lead positive outcome for us in the time ahead. Thank you. Now we can open the floor for questions.

[Operator Instructions] The first question comes from the line of Aliasgar Shakir from Motilal Oswal.

Congratulations to finally seeing a good market share trend in your company. I have 3 questions. First is on the current quarter. So I understand from our channel checks that post cleanup of the old inventory, market demand has picked up quite strongly. And in fact, Relaxo has not been able to meet all the distributor demand. So is this true in multiple geographies? And do you think we would have lost any revenue because of that factor, if you could just quantify what could have been the impact of that in this quarter? And has that been now subsided? Or we are still seeing demand not being able to fully be met?

Yes, this is Gaurav Dua. What you said is partly correct, that there is an upsurge in demand, and we are seeing it. One reason is that we have corrected the prices. And second, this is a peak season for us for open footwear. As we are 75% open and 25% closed, so this is the open footwear starting from January to June to July. So -- and regarding the shortages, we are managing. We have inventory with us and the uptake we are seeing across India for the open footwear.

Got it. So can you quantify if we would have lost any revenue because of that in this quarter? And has that been now subsided?

It was -- it happened in February because there were some IT issues, which has been corrected. And now we are able to cover. We have the inventory -- sufficient inventory.

Okay. Got it. Second question is on your margins. So while we have significantly reduced prices, we have seen impact on margins. So can you share, I mean, what is the trend we should expect in the coming quarters as raw material prices are also softening? So should we see that helping us and therefore the margin that we saw in this quarter should improve? How should we see that?

I'm Ramesh Kumar Dua. Market remains challenging, and we have to be very cautious with respect to our pricing of our articles so that we always have a good market share as far as sales are concerned. The EBITDA margin that you have seen in this quarter is likely to continue, and there is likely to some improvement also.

Got it. This is very helpful. On the gross margin also, should we see improvement because of the raw material price softening?

Some improvement, yes.

Understood. And just last question on the closed footwear in the sportswear category. I understand that we have made a lot of changes in our design team, online team. If you could share some thoughts in terms of what is the strategy in the sportswear in terms of the new product development and what is the aim in the next 3, 4 years. Can we expect to reach about INR 1,000 crores in 3, 4 years' time? I mean, if you can just share what is your strategy there.

So if you talk about Sparx sports shoes, we have grown healthily. We have done roughly around 25% growth. And before that, last year, we put up a plant to cater to this need. So still, the plant capacity still we have. It will take 2 to 3 years to reach to that level, and you're talking about INR 1,000 crores, Sparx is already INR 1,000-plus crore brand.

Yes. But sports wear would be relatively lower? Or I mean, of course, Sparx is much bigger, but within that sportswear, if you could just quantify how much would that be?

So that is roughly around -- we do sports shoes and all sports category, roughly around INR 400 crores. So definitely, we have acceleration to become INR 1,000 crores. And it will take 2 years, 3 years, time will tell.

Next question comes from the line of Vikas Jain from Equirus.

For the first question, definitely, we have seen a market share which you have regained from [indiscernible] earlier competitors. So at this point of time, can you really say that you have regained almost all of the market share or some part of it is still left?

Can you repeat the question? It's not so clear.

I was mentioning about the market share. So have you like reached -- regained the entire market share and reached to what we were at the pre-COVID times? Or probably some part of it is still more or less to gain?

Yes, definitely, what we have lost market share in last quarter 1 or quarter 2 last year, we are seeing the good momentum now, and we are gaining the market share back. So definitely, we will recover -- we have recovered. Now we'll recover more.

Sure. Sure. Okay. Sir, second question with respect to the demand. Well, Ramesh sir did mention that the demand environment continues to remain challenging. So probably, is it like the -- how would you -- some comments with respect to how the underlying market is growing, and what do you think it will take for the market to normalize in what time period according to your estimates?

So actually, what we are hearing from the market that this Eid and this festive, there is a demand contraction happening in some parts of India. Rural India is still not able to cover up what -- contribute what it was contributing. But I think this is a temporary phenomenon. The inflation is now getting controlled, and we'll definitely see the uptake in coming quarters.

Understood. And sir, with respect to last -- again, like -- with respect to penetration in South India, so how can broadly break out revenues across on a geographic basis? What is the contribution from the all 4 North, West, East and South?

So North contribute maximum to around 42%; followed by East, 22%; 20% is West and 15% is South. And we are maintaining this from last year, it is similar.

Sure. And with respect to more distributors adding in the South, is that on time? Or how many have you added this year probably?

So it's not a great achievement in adding more distributors. We have maintained what we were having. So always, there will be a churn, new addition and some people leaving. So it's roughly around same.

Next question comes from the line of Kaustubh Pawaskar from Sharekhan.

So my question is on the price cut what we have taken to. So we have taken the price cut to reduce the pricing gap between the lower -- products which are around less than your price point products. But since you said that raw materials pricing had all corrected, have we seen any price reduction undertaken by those bottom of the [ pyramid ] players or lower price point players in the market? And because of which, again, the pricing difference what you were planning to reduce, it has again gone up. Any sense on that?

No. Now our prices are very competitive and there is no room for further price cuts. And even on competition, while we are very competitive, there's no issue. I don't think that there's any room -- competitor can do much about it.

Okay. So you don't see any further price that's happening in the market, right?

No, no. Not so.

Okay, okay. And sir, my second question, you have been consistently talking about expanding your capacity. So any guidance for CapEx going ahead and where you're planning to add capacity?

So last year, whatever capacity we wanted to expand, that had been expanded.

Okay. So there is not going to be...

This year only, money is going on malls, which are regular kind of things, some repair, molds and backward integration, some capital asset generation, that's it.

Okay. Any thoughts on your retail expansion front? By FY '23, how much was your reach and where you want to take it over the next 2 years?

Earlier, we were maintaining around 400. Now, we are expanding this year.

Can you provide some numbers on this, sir?

Earlier, we were earning 400 outlets. Now we are planning to have 465 this year.

Next question comes from the line of [ Omkar kugadrey ] from Shri Investments.

My question was regarding -- it's from your investor presentation. So from FY '21 to FY '23, the average realization has gone up, but the number of pairs sold has decreased. So -- and in this quarter, the average realization has gone down significantly. But number of pairs sold has been -- has increased dramatically. So like what's the management's view on this going forward? What would be the average cost of pairs or like how it is supposed to be in the future?

Last year, we had done major correction in some of our categories like Hawaii, EVA. So that was the reason that the average selling price has gone down. And our volume has gone up. So that is why volume is going up because the average rate has gone down, only because of reduction in prices.

So from here on, what we can expect, a stabilization here? Or like...

Stabilization, very large stabilization.

Okay. You don't see any upside from here on?

On the whole year side because in this quarter, mostly open footwear was in demand. Closed footwear counts in winter season. So overall in the year, again, you will see our last year average price of INR 160 will be back.

Okay. So for the current financial year, you are expecting around INR 160 per pair realization?

Could be a little higher, also depending upon the shoes. If they're a little better, then things will be further. But around INR 160, INR 165, we can expect average.

Okay. And what about the number of pairs? I mean, what could be the ballpark estimate for that?

Definitely further. Last year, we have expected double-digit growth in volume for this year.

Okay. So around double-digit volume growth and around similar kind of average realization per pair or somewhat higher?

Yes.

Okay. As far as the ROE and ROC is concerned, what's your plan on next 2, 3 years since it has come down dramatically, again, from FY '21 to FY '23?

Definitely, it will improve in coming years because last year was a tough year, profits were under pressure, and we did CapEx also. Next year, definitely, it will be much better than this FY '23. We can compare with FY '22, it was well.

Because it has now come down to a single digit now. That's what -- that's why I'm asking.

Definitely. It should be at least between 15% to 20%, that is the intent and if things are well, so definitely, we'll achieve that.

Okay. As far as the demand outlook is concerned, how are you seeing currently this shaping up?

So currently, there is a little challenge in the market. There is a little demand contraction. But I think going forward, quarter 2, quarter 3 onwards, we will be better.

Okay. In the current quarter, you are facing some demand issues?

Yes. Because what we hearing from the market that's still rural is not back on track. It's going to take a little time.

Okay. Any update on what could be the export percentage? And how -- is there any opportunity for Relaxo? Or like the home market is so large that everyone bothered to think about -- or bothered to think about the export market?

[indiscernible] Of course, we have done around 4%, 4.5% of total revenue. And the way we are growing the last 2, 3 years' time, we're giving -- getting double-digit growth. And we are -- in the future also, we are expecting the same. Growth will sustain.

Okay. The margins or they are better than the home market or like how it is?

It is like similar.

Okay. And which are the major countries you are exporting to?

We're exporting to all these like regions we are growing, like Gulf, [ Oceania ] region or even Africa. . Even Central America is now showing back on track because during COVID time, that was badly affected. But that also is going up . So all markets are good.

Next question comes from the line of Ankit Kedia from PhillipCapital.

11% realization drop Y-o-Y and quarter-on-quarter. How much is due to price cut and how much is due to mix change on new -- you introduced INR 105 chapels also in the market last quarter. So can you give us that impact of mix process price cut?

The lowest-priced article that you're talking, that is very minimal. It has no -- any significance. It is just entry better kind of an article. But otherwise, whatever price cuts we could do on account of fall in our raw material prices that we have done, and that's it. No more price cut. They're competitive and optimistic. Since they're growing, we are getting our market share back.

And sir, in this 11% realization drop, can you quantify how much is due to mix and how much is due to price cut?

Very complicated. We have 400 article -- different articles, different pricing, different material consumption. So this is very difficult to quantify. I think everything are different.

Sir, is it fair to assume that the price cut in open footwear could be higher than the price cut in closed footwear, if I could take on a blended basis?

Yes, yes. Because more polymers are required in open footwear, like the EVA or Hawaii slippers. But in sports shoe, upper is a different material, bottom is different material. So you're right. In case of sports shoe, price cut was not [ in there ]. It was almost same.

Understood. So the reading is the 75% open footwear, we would have taken a double-digit price cut, while in closed footwear, which is around 25%, 30% of our business, we would have not tinkered with the prices much.

No, no, not much.

Understood. Sir, my second question is regarding promotions. We have seen higher promotional activity in the quarter in the market. Your competitors also in the month of January, February, March were very active by giving higher dealer commissions and even retailer commissions. So could you please elaborate how was our promotion activity in the quarter? And going forward, how are you looking at your A&P spend?

If we maintain the A&SP spend -- in terms of schemes, we always -- we have -- like depends categories to category. Why we have different types of schemes and [ shoe is the ] reason we have different type of schemes. So seeing the demand, seeing the market scenario, seeing the pricing, we decide what kind of scheme we have to run. And we will see that in the competition also. So we don't benchmark exactly. We see what is our need and then we load the scheme. So we do not exceed -- the competition is doing more, let's get more. We have to analyze other situations also.

Sure. And what is the A&P target for next year? And how much is it for this year, if you can quantify?

So like if you talk about A&SP, we do around 8% to 9%, and we are maintaining this from last 2, 3 years, and we try to maintain a similar pattern in this coming year also. So this includes [indiscernible] and promotion.

And how much would be pure advertising?

Roughly around 4.5%, 4%.

Understood, sir. And sir, if you can just share one of your competitors in sports shoes is going very aggressive in EBOs. While if I look at your EBO count for last 4 years, has been pretty much flat at 390-odd EBOs. Why haven't you expanded EBOs in last 4 years? What is the risk you see in EBO expansion, which has -- while COVID years were also there in 2 years. But still, the expansion has not been compared to the market where we are seeing competitors expand EBOs. So if you can just talk a bit on that?

No. We -- you're right that the last 2 years, we did expand. We wanted to make it a little more efficient because we have to control our bottom line also and our article, 75% open footwear, 25% sports shoe. The competition you are comparing with their only shoe outlets. So keeping in view, a balanced -- so our -- the strategy of our retail showroom is to showcase our products. Share of our retail outlet in the total scheme of things is around 8%.

Right. And is it fair to assume the margins in EBOs would be just near double digit and lower than the company average?

Yes. It's lower than company average, but I think the high single-digit margin, we are in that category.

Next question comes from the line of Manish Poddar from Motilal Oswal AMC.

So primarily 3 questions. One is, can you help me with primary and secondary numbers for this quarter?

Can you repeat again, can't hear you?

Primary and secondary numbers because you are saying that Q1 is still soft, But your volume numbers, when I look at 5.2% versus 4.2% of last year or 4.1% of this quarter -- last quarter, they seem to be doing decent . So I'm just trying to understand what am I missing?

I think it's volume growth. Are you [ referring to ] the number which you have mentioned in investments?

Yes. Volume growth.

We sold more open footwear in this quarter and note of demand was there. So that's why these numbers are very high as compared to earlier quarters.

Okay. But wouldn't that be the case in the base quarter also?

This quarter, the coming...

This current quarter, Q1, you're talking about?

No, no. I'm just saying when I compare Q4 FY '22, where you sold 4.2 crores pairs versus 5.2 crores pairs in this quarter, the mix would be similar, right, this point which...

Yes, yes. Also, I think it will be sustained.

Mix is also similar. You're right, Yes.

So this growth, is it -- the channel was running low on Relaxo products given our pricing and now it has stabilized? Is that a function of that? Or is it a lot of customer uptake also happening?

No, no. It is like what we lost market share in Q1, Q2, Q3. Now we are regaining that market share. So we're getting the space back at shares.

Okay, share space. Okay. And the second point is you are also doing pricing parity earlier. So where are we in the journey now? How is pricing across channels for you now?

Now, we are very competitive. That is why we are able to get the [ commissions ].

Okay. And just one last one, if you could give, let's say, for FY '23 as a whole, just a broad brand-wise split between Sparx, Flite PU, Flite EVA and Relaxo?

Sparx is around 40%; Flite is around 38% and rest is our Bahamas and Relaxo brand.

So Sparx 30%, Flite is 28% and the rest is...

Flite is 38%.

Okay. And how much would be Flite PU and EVA in that 38%?

You can say, 15%, 23%, like that.

15% to 18%. And just one last one in Sparx -- sorry, I didn't catch that one.

So you were asking in split of EVA and PU, EVA was 15% and PU was 23%.

Of the 38%, the breakup we are telling.

Just one last one. In Sparx, how much was closed in stocks?

Total closed has been around 25%.

45% sir?

I think the query is within Sparx you're asking.

Yes, within Sparx. So let's say, this INR 2,800 crores you are saying, Sparx is roughly 40% of sales, roughly INR 1,120 crores. How much is closed in that?

40% is closed and 60% is open in INR 1,000 crores.

In this [ 11 ]. Okay. So it's roughly INR 400 crores now.

Make it INR 450 crores.

Next question comes from the line of Gaurang Kakkad from Haitong Securities.

Congrats on a good recovery in volumes as well as margins. I have 2 questions. Firstly, can you give the trend in terms of how the EVA prices are currently panning out? And what was the Q4 average pricing of EVA for you?

Now EVA prices are stabilized. It's around INR 170, that is what -- this is at what rate we consume, although market maybe at INR 160 only . This -- the current -- the month of -- current quarter that is going on, it is around INR 160, INR 155. It keeps on changing a little bit here and there.

Okay. And last quarter, in the base, this would be very high, right, closer to INR 250, INR 300, Q4 FY '22?

Below INR 250, quarter 1 -- for quarter 1 of this year -- of the past year in '22 and '23.

Right. And currently, the prices are stable at around INR 155, INR 160, which is what the Q4 pricing -- average pricing was.

Correct.

Okay, okay. And secondly, on the EBO outlet strategy, so you have been at those 400 outlets for some time now. And it's heartening to see that there is some plans in terms of expanding that by around like 15% this year. Now is it that we've got the model right in terms of EBO and now we can target healthy margins in the business? Or is it more so given that EBOs are largely Sparx brand focused. So we want to target aggressively and go aggressively on the Sparx brand. So what's the strategy out here?

Naturally, once we are having more efficiency in our stores, so we have started expanding this year, and we will continue the momentum the way things are.

Okay. So like every year, you will have around 60, 70 store expansion in the EBO going ahead?