Investor's Eye: Update - Relaxo Footwears, Capital First

Investor's Eye [September 19, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE   Relaxo Footwears Recommendation: Buy Price target: Rs575 Current market price: Rs480   Confidence reaffirmed; price target revised to Rs575   Key points  We attended the first ever investor meet organised by Relaxo Footwears (Relaxo), presided by the joint promoter and managing director, Ramesh Dua, along with the entire key management team of Relaxo. The meeting re-instated our confidence in the management and business model of the company, which is poised for a strong earnings growth and a re-rating. Thus, we maintain our Buy rating on the stock with a revised price target of Rs575. The following are the highlights of the meeting.  The company would remain focused on the consumer with the introduction of value-added and premium products under each of its brands. Thus, product premiumisation and steady volume growth would drive the revenues and margins ahead. We expect Relaxo to post a 22.8% revenue growth over FY2014-17. Over the years, it has built a strong manufacturing base; its current capacity is 160 million pairs as against 110 million pairs sold in FY2014. Thus, the company has adequate capacity to take care of the volume growth for the next two years. This would aid in asset utilisation, thereby improving the return ratios. We expect Relaxo's RoE to improve from 21% in FY2014 to 25.4% in FY2017.  Relaxo's strong presence in the lucrative mid priced footwear segment (through its top-of-the-mind recall brands like Hawaii, Flite and Sparx) along with its integrated manufacturing set-up, lean working capital requirement and vigilant management puts it in a sweet spot to cash in on the strong growth opportunity unfolding in the footwear category due to a shift from unbranded to branded products. Thus, we remain positive on the business. We introduce our FY2017 estimates in this note, expecting the revenues and earnings to grow at a CAGR of 22.8% and 33.5% respectively over FY2014-17. We also roll over our multiple from FY2016 estimate to FY2017 estimate to arrive at our revised price target of Rs575 (valuing the stock at 22x FY2017E). We thus maintain our Buy rating on the stock.     Capital First Recommendation: Hold Price target: Rs360 Current market price: Rs325   Valuations not cheap anymore, put on Hold with revised price target of Rs360   Key points  Capital First has appreciated by 72% since our initiation (on January 2013) and by 116% on a YTD basis led by a strong growth in the balance sheet and improved profitability. While we believe the company will sustain the high rate of growth leading to improved RoE, the current valuation (1.8x FY2017E) has turned closer to that of the bigger NBFCs with better operating metrics. The company has invested significantly to build newer businesses (two-wheeler loans, consumer durable loans etc), which are growing at a strong pace. Though execution risks persist in these businesses (defaults are relatively higher in these segments), but stringent credit processes and an experienced management team should adequately weather the challenges. Since the stock has appreciated significantly from our initiation price and its valuation looks fair (1.8x FY2017E BV), we recommend investors to take some profit off the table. The valuation gap with the bigger NBFCs having better operating metrics has narrowed leaving limited room for upside in the near term. We, therefore, revise our rating on the stock to Hold with a revised price target of Rs360, valuing the stock at 2x FY2017E BV. Capital First may benefit from operating leverage which should bring its RoE closer to that of its peers by FY2018. Hence, from the long-term perspective we are sanguine about the stock.   Click here to read report: Investor's Eye      Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team