Digital Strategies And Retail Expansion Will Drive Future Brand Loyalty

Key Takeaways

• Strategic enhancements in retail, distribution, and marketing are likely to boost sales, improve brand positioning, and increase revenue.
  
• Operational and product quality improvements aim for cost efficiencies, market penetration, and long-term brand loyalty.
  
• Rising competition and higher costs, alongside weak market demand and static pricing, threaten Relaxo's revenue growth, market share, and profitability.

Catalysts

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

• The company is focused on improving its retail network and adding new distributors, which could help in increasing sales and, consequently, revenue growth.
  
• Relaxo is optimizing its back-end operations to drive cost efficiencies, which is likely to improve net margins in the future.
  
• The company is investing in marketing strategy shifts, focusing on digital and direct consumer engagement, which could enhance brand positioning and increase revenue.
  
• A dedicated e-commerce product portfolio is being developed to minimize conflict with general trade channels. This could result in better market penetration and stabilized revenue streams.
  
• Relaxo's focus on maintaining product quality and staying compliant with BIS standards, despite temporary market pressures, positions it well for long-term brand loyalty and potentially improved margins.

Relaxo Footwears Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Relaxo Footwears's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 8.6% in 3 years time.
• Analysts expect earnings to reach ₹3.3 billion (and earnings per share of ₹12.73) by about May 2028, up from ₹1.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹3.8 billion in earnings, and the most bearish expecting ₹2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 66.3x on those 2028 earnings, up from 58.2x today. This future PE is greater than the current PE for the IN Luxury industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.76%, as per the Simply Wall St company report.

Relaxo Footwears Future Earnings Per Share Growth

Risks

• The decline in revenue from operations in Q2 FY '25, by 5% year-on-year due to weak market demand, indicates potential challenges in sustaining revenue growth.
  
• Management's decision not to reduce prices despite faced pressure may impact market share and volumes in the near term as consumers down-trade to cheaper options, negatively affecting revenue growth.
  
• The rise in competition from new and unorganized players, exacerbated by lower raw material prices, poses a risk to maintaining market share, which could impact long-term earnings and revenue stability.
  
• Higher depreciation costs mentioned for Q2 FY '25 have dampened profitability, which could continue to affect net margins if sustained capital expenditure does not translate into higher sales or operational efficiencies.
  
• Increased inventory levels due to subdued demand could lead to additional holding costs or write-downs if demand does not recover, affecting net margins and cash flow.

Valuation

• The analysts have a consensus price target of ₹567.571 for Relaxo Footwears based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹770.0, and the most bearish reporting a price target of just ₹370.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹37.9 billion, earnings will come to ₹3.3 billion, and it would be trading on a PE ratio of 66.3x, assuming you use a discount rate of 14.8%.
• Given the current share price of ₹410.05, the analyst price target of ₹567.57 is 27.8% higher.
• 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.