Overvaluation Risks Will Challenge Legacy Footwear And Spur Reforms

Key Takeaways

• Continued focus on low-cost footwear and slow digital adoption risks losing market share to premium and online-focused competitors, eroding core customer loyalty.
  
• Margin pressures from raw material volatility and dependence on the domestic market threaten long-term growth and earnings stability amidst execution challenges in distribution.
  
• Channel reforms, premium product focus, tech investments, export expansion, and exclusive retail growth are expected to boost margins, earnings quality, brand strength, and operational efficiency.

Catalysts

Engages in the manufacture and sale of footwear for men, women, and kids in India and internationally.

• Reliance on low-ASP footwear and continued exposure to the economically vulnerable segment is a significant risk, as rising disposable incomes and urbanization are spurring a shift in preference toward premium or international footwear brands, which may erode Relaxo's traditional core customer base and hamper long-term revenue growth.
  
• The company faces intensifying competition from agile digital-first and direct-to-consumer footwear brands, particularly online, where Relaxo's e-commerce share has stagnated at around 10 percent of revenue. This digital lag threatens market share and could drive pricing pressure that weighs on both revenue and net margins.
  
• Margins face persistent structural headwinds from raw material inflation and volatility in rubber and petrochemical prices; despite current efficiency initiatives, future input cost pressures and the need for competitive pricing in a crowded market are likely to compress EBITDA margins.
  
• Heavy dependence on the domestic Indian market and a lack of substantial, proven international expansion expose Relaxo to cyclical macroeconomic shocks, rural demand volatility, and evolving domestic consumer preferences, which could lead to ongoing stagnation or even declines in topline and earnings.
  
• Ongoing distributor resistance and structural challenges in shifting from wholesale to an organized, technology-driven distribution network create friction in execution; this transition has already led to sales declines and disruptions, with uncertainty lingering about the pace of recovery and potential future impacts on revenue growth and sales stability.

Relaxo Footwears Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Relaxo Footwears compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Relaxo Footwears's revenue will grow by 7.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.5% today to 8.6% in 3 years time.
• The bearish analysts expect earnings to reach ₹2.9 billion (and earnings per share of ₹11.51) by about August 2028, up from ₹1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 51.4x on those 2028 earnings, down from 62.2x today. This future PE is greater than the current PE for the IN Luxury industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.27%, as per the Simply Wall St company report.

Relaxo Footwears Future Earnings Per Share Growth

Risks

• The company is implementing significant distribution channel reforms, including stricter credit terms and a shift from primary to secondary sales focus, which have led to temporary volume declines but management expects these changes to drive stronger, higher quality sales growth over the medium to long term, supporting improved revenue and stability.
  
• Relaxo is increasing its focus on premiumization, expanding into higher average selling price segments and launching new products such as sneakers in the 1200 to 2500 rupee range, which can enhance product mix, lift average selling prices, and improve net margins in the future.
  
• Investments in technology, including the Relaxo Parivaar retailer app and digital supply chain management, are enabling better consumer data capture and more effective upselling and channel management, which could yield operational efficiency benefits and support earnings growth.
  
• The company retains surplus manufacturing capacity and is targeting export opportunities, especially leveraging new agreements with markets like the UK, which could result in incremental revenue streams and improved utilization, positively affecting overall earnings.
  
• Relaxo continues to expand its exclusive retail footprint and modernizes its outlets, which can strengthen direct-to-consumer relationships, improve brand loyalty, and drive higher EBITDA margin through increased controlled sales channels and reduced reliance on wholesale.

Valuation

• The assumed bearish price target for Relaxo Footwears is ₹385.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Relaxo Footwears's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹741.0, and the most bearish reporting a price target of just ₹385.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹33.1 billion, earnings will come to ₹2.9 billion, and it would be trading on a PE ratio of 51.4x, assuming you use a discount rate of 15.3%.
• Given the current share price of ₹436.75, the bearish analyst price target of ₹385.0 is 13.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.