RELAXONSEQ2 FY2023November 9, 2022

Relaxo Footwears Limited

8,050words

193turns

18analyst exchanges

5executives

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Management on call

Ramesh Kumar Dua

MANAGING DIRECTOR

Gaurav Dua

WHOLE TIME DIRECTOR

Ritesh Dua

EXECUTIVE VICE PRESIDENT (FINANCE)

Sushil Batra

CHIEF FINANCIAL OFFICER

Vikas Tak

COMPANY SECRETARY

Key numbers — 40 extracted

Rs.670 Crore

rview of the numbers of Q2 and H1 FY2023. During Q2 FY2023, the company reported total revenue of Rs.670 Crore as compared to Rs.714 Crore in Q2 FY2022, registering a decline of 6.3% year-on-year. The perform

Rs.714 Crore

H1 FY2023. During Q2 FY2023, the company reported total revenue of Rs.670 Crore as compared to Rs.714 Crore in Q2 FY2022, registering a decline of 6.3% year-on-year. The performance remained subdued mainly

6.3%

total revenue of Rs.670 Crore as compared to Rs.714 Crore in Q2 FY2022, registering a decline of 6.3% year-on-year. The performance remained subdued mainly on account of fall in volumes in Q2 FY2023

Rs.59 Crore

coming quarter and ultimately improve our volume number going ahead. EBITDA in Q2 FY2023 was at Rs.59 Crore as compared to Rs.117 Crore in Q2 FY2022. This degrowth in EBITDA was mainly due to steep increas

Rs.117 Crore

tely improve our volume number going ahead. EBITDA in Q2 FY2023 was at Rs.59 Crore as compared to Rs.117 Crore in Q2 FY2022. This degrowth in EBITDA was mainly due to steep increase in raw material prices. EB

8.9%

as mainly due to steep increase in raw material prices. EBITDA margin during the Q2 FY2023 was at 8.9% and declined by 748 bps year-on-year. The profit after tax was at Rs.22 Crore in Q2 FY2023 as com

748 bps

p increase in raw material prices. EBITDA margin during the Q2 FY2023 was at 8.9% and declined by 748 bps year-on-year. The profit after tax was at Rs.22 Crore in Q2 FY2023 as compared to Rs.69 Crore in

Rs.22 Crore

uring the Q2 FY2023 was at 8.9% and declined by 748 bps year-on-year. The profit after tax was at Rs.22 Crore in Q2 FY2023 as compared to Rs.69 Crore in Q2 FY2022. Moving to our H1 FY2023 performance, the to

Rs.69 Crore

ined by 748 bps year-on-year. The profit after tax was at Rs.22 Crore in Q2 FY2023 as compared to Rs.69 Crore in Q2 FY2022. Moving to our H1 FY2023 performance, the total revenue was at Rs.1,337 Crores and g

Rs.1,337 Crore

mpared to Rs.69 Crore in Q2 FY2022. Moving to our H1 FY2023 performance, the total revenue was at Rs.1,337 Crores and grew by 10.3% year-on-year as compared to Rs.1,212 Crore in H1 FY2022. EBITDA was at

10.3%

2022. Moving to our H1 FY2023 performance, the total revenue was at Rs.1,337 Crores and grew by 10.3% year-on-year as compared to Rs.1,212 Crore in H1 FY2022. EBITDA was at Rs.146 C

Rs.1,212 Crore

rformance, the total revenue was at Rs.1,337 Crores and grew by 10.3% year-on-year as compared to Rs.1,212 Crore in H1 FY2022. EBITDA was at Rs.146 Crores from Rs.183 Crore in H1 FY2022. The c

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Guidance — 20 items

Sushil Batra

opening

“Strong fundamentals complemented by wide distribution reach, strong brand recall and better sourcing capability we are optimistic about overcoming this tough phase and focus on delivery, steady revenue growth in both domestic and export going forward.”

Gaurav Jogani

“Because we understand that your distributors would have destocked initially, and because of which also there will be some volume impact.”

Ramesh Kumar Dua

“Even earlier, we were able to predict what will be the price of this material next year.”

Ramesh Kumar Dua

“But now our purchase department is not able to tell in guarantee what is going to be the price next quarter, such is the kind of volatility and instability.”

Ramesh Kumar Dua

“But in this quarter, that is October, November, December, all that old inventory will be flushed out, and January, February, March, there, our cost of production will be definitely low, and things will be better.”

Bharat Chhoda

“So this high-cost inventory will be there for one more quarter at least?”

Ramesh Kumar Dua

“This quarter, it will be flushed out, by November or maybe December by all means.”

Gaurav Dua

“It will be increasing, but by how much we have to see.”

Harsh Shah

“Sir, my question is we have made a press release where we have stated that we have canceled some 15,000 stock option under our ESOP plan to 5 employees because of their resignation.”

Harsh Shah

“And that will be operationalize by what time, sir?”

Risks & concerns — 15 flagged

During Q2 FY2023, the company reported total revenue of Rs.670 Crore as compared to Rs.714 Crore in Q2 FY2022, registering a decline of 6.3% year-on-year.

— Sushil Batra

So, in such kind of volatile situation, where our company has to maintain a long supply chain because materials are imported, it has to be at least 6 months’ supply chain.

— Ramesh Kumar Dua

They just want to while away this difficult period, which they are facing for inflation.

— Ramesh Kumar Dua

Never mind, it will affect our bottom line, but to be in the market, have volume sales, that is a kind of cautious call to maintain our market share in the market.

— Ramesh Kumar Dua

Under such volatile chaotic conditions, things have become quite challenging, and now we are keeping a close watch on the market and taking timely corrections, not based on our costing, but based on market conditions.

— Ramesh Kumar Dua

Although raw material conditions are quite volatile, but we have a long supply chain, and we have a lot of goods purchased at higher prices, Last year also we are carrying inventory.

— Ramesh Kumar Dua

Now that we have seen that this raw material can be so highly volatile, anything we are doing to reduce this import component and reducing the supply chain?

— Priyam Khimawat

No, this gross margin under pressure until December.

— Ramesh Kumar Dua

But one thing I must tell you, the raw material situation is very volatile.

— Ramesh Kumar Dua

Because that is where, from what we understand, is where the maximum pressure has come because of the long supply chain?

— Mithun Soni

And out of the 50% to 60%, how many of this business would be like where we had reasonably priced products like Hawaiis of the world and it is at the mass segment because that is where you would have faced most of the pressure or you have faced the pricing pressure even in the Hawaii category?

— Mithun Soni

Ramesh Kumar Dua: We have faced this pricing pressure at the Hawaii which comes under brand Relaxo and Bahamas, and also EVA coming under Flite brand.

— Mithun Soni

The second thing, like as one of the participants asked that there is a clear shift what we are seeing that the premium, semi-premium has been doing well and versus the mass segment has been facing the pressure, and there is the market which is moving over there?

— Mithun Soni

So basically, what we are looking at is there is a decline in the EBOs those 398 as of March 2021, those have declined to 388 as of Q2.

— Anush Mokashi

Because if you just read today newspaper Economics Times, clearly mentioned Rural India Big Pressure by Hindustan Lever, ITC, all.

— Gaurav Dua

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Q&A — 18 exchanges

Thank you for the opportunity Sir, my first question is with regards to the sharp volume decline that we have seen, and you have also mentioned that you have taken aggressive price cut in September 2022. So, one, if you can highlight what is the quantum of the price cut that you have taken, and how much of that has impacted the initial volumes? Because we understand that your distributors would have destocked initially, and because of which also there will be some volume impact.

Ramesh Kumar Dua

Yes, I am Ramesh Kumar Dua this side. Just in the background, I want to tell you a few things. The main cause of our price increase in the past 1.5 year had been some of the raw material polymers like EVA, PVC, polyethylene, they have started gradually rising and kept on rising to an extent, the thing which we were getting at Rs.120 a kg, reached Rs.300 kg, and then this started falling also, and it came down to Rs.160. So, in such kind of volatile situation, where our company has to maintain a long supply chain because materials are imported, it has to be at least 6 months’ supply chain. So w

I think I have concluded we can go to next question.

Management

Thanks for the opportunity Sir, Our cost of goods sales for per pair has been around Rs.60, Rs.65 over the last few quarters or so, and then probably this quarter, it has gone to Rs.88 per pair. So in the ensuing quarters, do you see like in Q3, Q4, that could come down to between Rs.75, Rs.80 or even lesser than that? Do you see that possibility?

Ramesh Kumar Dua

Yes. Although raw material conditions are quite volatile, but we have a long supply chain, and we have a lot of goods purchased at higher prices, Last year also we are carrying inventory. But in this quarter, that is October, November, December, all that old inventory will be flushed out, and January, February, March, there, our cost of production will be definitely low, and things will be better. So probably from Q4 onwards, we would see normal gross margin things returning? Since we started improving, topline will start improving, but at the same time, we have to keep ourselves competitive,

Hi, Thank you for the opportunity, my question is in continuation to what we have asked earlier, if you can just break up your volume or revenue, and just give us some directional view in terms of how is the performance of some of the lower-end categories or price points versus some higher-end categories?

Gaurav Dua

Actually, the out-of-home category, which is sports shoes, formal slippers that has grown well and indoor, like we have Hawaii and Flite EVA, that has degrown. So now after lockdown, there has been a shift, people are going for more premium out-of-home categories. So that is growing well. But in Hawaii segment, we are feeling the heat here. Out-of-home would be what percentage of your revenue? See, in out-of-home also like we have Flite category in which we have EVA and PU, so PU is more than 50%, so that is growing more. If you say open footwear. But if you add Sparx, Sparx is also giving mor

Just wanted to understand, you alluded that price of polyurethane has moved from Rs.120 to Rs.300 per kg and then again falling back to Rs.200 per kg. What percentage of raw material is this for us? Ramesh Kumar Dua: What you want to know, consumption of the material?

Priyam Khimawat

Breakup of a raw material in terms of what percentage of raw material is this component? That is different in category-wise, you are not able to make anything out of it. I just told you, our total consumption of this polymer is around 1,000 tonnes a month, and the volatility has been Rs 120 to Rs 300 and then Rs 300 to Rs 200. 20% is consumption of EVA in the total cost of the materials. And if you could give some color on what are the other components in our raw material? There are so many other materials. The EVA is there. The PVC is there. These are the major polymer, natural rubber is ther

Sir, my question is we have made a press release where we have stated that we have canceled some 15,000 stock option under our ESOP plan to 5 employees because of their resignation. So just wanted to enquire are these senior, mid-senior level exits and when have they resigned? What is that perspective, sir?

Sushil Batra

We gave the ESOP to our AGM and above. There are 110 people in that category. So out of these 5 people have left the company and one was retirement case. So these are the senior mid-level, you can say. So this is basically exit by retirement? Some retirement and some people left voluntarily. Okay, thank you for clarifying that and secondly, sir, what is our current capacity of Sparx, and what will be our capacity of Sparx in the next 2 years? Currently, it is around 50,000 pairs a day of Sparx and which we are increasing the production to 100,000 pairs a day. And that will be operationalize by

Thanks a lot sir, a couple of questions. First is on your sportswear. So, if my understanding is correct, out of about 20% of closed footwear, about 50% is sports and athleisure, right, which should be ballpark around Rs.250-odd Crores. So just wanted to understand, what are our plans there? A few of the recently listed companies and in fact, overall market, also a lot of smaller players have rapidly grown in the recent past. So, what are our plans here? we recently also added capacity in the sportswear. So how do we plan to grow this business over the next probably 3 years, if you could share

Gaurav Dua

So, this sports shoe segment this divided into online sale and distributor sales, the channel sale. So, in both channels, we are seeing a good demand coming from the market, and that is why we have added the capacity there only. And we are adding more designs every year, like this year also we have added a lot of designs and we are giving a lot of trust to a placement of products in the market. So, we are expecting a good growth coming from these Sparx segments specially sports shoes. Ok, So, could you share what is our plan over 3 years, if you could share some number what growth we can expec

Sir, the price cuts are 15% to 20%, which you alluded in the open footwear category, is it in line with the raw material price deflation what we have seen, or the price cuts are more towards volume protection and not towards RM fall which you have seen from average perspective?

Ramesh Kumar Dua

Price revision has been taken keeping a view of the local market conditions, affordability of the consumer and what is the competitive environment. To be competitive, we have brought these prices, and we have to always remain competitive in the market. That is what we have done. Is it fair to assume that the price cut is more than the RM deflation, which we have seen in the market and hence, the gross margins could bleed actually because of this? No, this gross margin under pressure until December. It will start looking up in January onwards. But one thing I must tell you, the raw material sit

Just wanted some clarifications. So how much of our revenue comes from the EVA-based product? Because that is where, from what we understand, is where the maximum pressure has come because of the long supply chain?

Ramesh Kumar Dua

EVA consuming is around 50% to 60%. And out of the 50% to 60%, how many of this business would be like where we had reasonably priced products like Hawaiis of the world and it is at the mass segment because that is where you would have faced most of the pressure or you have faced the pricing pressure even in the Hawaii category? Ramesh Kumar Dua: We have faced this pricing pressure at the Hawaii which comes under brand Relaxo and Bahamas, and also EVA coming under Flite brand. These 2 categories we have faced this problem. And the price correction, 15% has been taken across the entire portfoli

Thank you for taking my question. I wanted to understand what would be the breakup of open footwear and close footwear in our revenue for 6 months?

Gaurav Dua

It is same like what it was last year. It is around 80% open and 20% closed. So Sparx would be a part of the close footwear or some part of it will also be open? Yes, it has both. It has open and closed. Both. Open is sandals and close is sports shoes. Ok fine, and in terms of our press release, we have mentioned that since we have taken the price cut, it has been welcomed by trade and consumers. So are we seeing some volume uptick till now in Q3, like have you seen after taking price cut in September? Has there been some increase in volume on the Hawaii side? Yes, it is happening and in the m

Hi Sir, So traditionally, we have been strong in the northern and the eastern market. However, in the Sparx category, we are just starting in the northern and eastern markets. So are we facing some headwinds in these 2 markets?

Ramesh Kumar Dua

Can you repeat the question? Yes, the traditional Relaxo has been very strong in the northern and the eastern market. However, in the Sparx sports shoes category, we are just starting off. Majorly, our revenue is coming from South and the Western market. So what are the specific headwinds that we have faced in these 2 markets? Why are we not take right now in the Northern and the Eastern market in Sparx sports shoes? North also we are focusing, and North is little more competitive market than South and West. All manufacturing ways of footwear is this side. In North, West and South, there were

My first question, would you be able to quantify how much of the EBITDA margin erosion in the first half of the year is because of the inventory losses?

Sushil Batra

There is no effect of inventory on the EBITDA margin, it is mainly raw material prices, that is hitting. Otherwise, generally, we never sell below cost. It will never happen. So we either decrease the prices, but it is never below the cost. So impact upon EBITDA is mainly due to the raw material prices. Ok got it, the price hikes we took last year, right, and the channel feedback was suggesting that some of our bigger competitors have not taken the hikes in context to what Relaxo took. So has the shift happened from Relaxo to the other big competitors? Or have they gone largely to the unbrande

Yes. Sir, my question is around EBOs. So basically, what we are looking at is there is a decline in the EBOs those 398 as of March 2021, those have declined to 388 as of Q2. So can you please help us understand the reasons behind that?

Ramesh Kumar Dua

No. We generally are maintaining at 400. But sometimes, a few stores which are not doing well then, we rationalize and then we put out stores. Can you share any guidance on the EBOs side over the next few years? How much are we looking at? Ramesh Kumar Dua: We are presently maintaining around 400. That is what we would like to have this year, 400. Essentially, do we have any plans to go international in EBO if you have any guidance on that? Ramesh Kumar Dua: We are already exporting. Our share of export is around 4%. Opening up of maybe Sparx EBO. No, no. Internationally, we are not opening an

A couple of questions. First is, what is the total Capex for FY2024 and 2025?

Sushil Batra

FY2024, FY2025, see we have been spending around Rs.80 to Rs. 100 Crore every year. So this year, FY2023, we have planned around Rs.140 Crores. So 2024 and 2025, it should be between Rs.80 to Rs. 100 Crore. It is an ongoing Capex, we always have to expand. And when you say you have not lost market share, how do you get a gauge on that? Sorry, we have not lost the market share, next, what you are saying. You mentioned on the call that you have not lost market share. So I am just trying to understand how we get a gauge on that. You track shelf space, how do you get a sense of that. We have our s

Thank you for the opportunity I have a couple of questions. My first question is around, as you mentioned, the opening remark, right, that the EVA prices in the domestic markets are around Rs.200 per kg. So does it mean that now there is an even playing ground for us and other unorganized players?

Gaurav Dua

Yes, now it is better because now after taking price correction, we are at same level because we are buying at Rs.200 and they are also buying at Rs.200. Right, and are there any further price cuts expected by us? No, I do not think so. So my next question would be around the Sparx brand. So is there any competition from the organized sector from other listed or other large players in the sector, in Sparx brand? Yes, there are a lot of organized players, and there is a competition, no doubt about it. But we have a different market, different product portfolio and the athleisure demand overall

Just one question from my side. Usually, we have seen in a category where there is a large participation by unorganized sector. Inflationary period is always beneficiary for organized players because of the scale, ability to manage supply chain volatility and in procurement, planning, production. Understandably, they should have an upper hand versus unorganized players. So in our case, it did not play out like that. So just wanted to understand, was it different in our case or there were some more headwinds or unprecedented headwinds which did not allow us to capitalize on this opportunity?

Ramesh Kumar Dua

So as long as we were rising, we were in a better position. It is only because there was a decline of the price of our main material from Rs.300 to Rs.160. If you consume 1,000 tonnes a month, at that time, local market availability of the material came down at Rs.160 - Rs.180. But we have a long supply chain, which we are buying, and our average price was Rs.240 for the year. So it was just in this 3 - or 4-month period when they became advantageous because we have a long supply chain thereby supply short supply chain. But this happens once in a life that prices go down and they became advant

Thank you all for joining the call. This is all from our side. Looking forward to joining you again. Thank you.

Management

Aggarwal City Square, Plot No.10, Mangalam Place, District Centre, Sector-3, Rohini, Delhi-110085 (India) CIN: L74899DL1984PLC019097 Website: www.relaxofootwear.com

Management

Speaking time

Ramesh Kumar Dua

Gaurav Dua

Moderator

Ankit Kedia

Mithun Soni

Sushil Batra

Priyam Khimawat

Bharat Chhoda

Aliasgar Shakir

Harsh Shah

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Opening remarks

Aliasgar Shakir

Thank you so much. Good evening, everyone. On behalf of Motilal Oswal Securities I am very happy to host the senior management of Relaxo Footwears for Second Quarter FY2023 Earnings Conference Call. Welcome all to this call. From the management, we have with us today Mr. Ramesh Kumar Dua, Managing Director; Mr. Gaurav Dua, Whole Time Director; Mr. Ritesh Dua, Executive Vice President; Mr. Sushil Batra, Chief Financial Officer; and Mr. Vikas Tak, Company Secretary. I will hand over the call to the management for opening remarks, and then we can open the floor for questions. Over to you, sir.

Sushil Batra

Thank you, Ali. Good afternoon, ladies and gentlemen. Thank you for joining the Q2 and H1 FY2023 earnings call of Relaxo Footwears Limited. We have already uploaded our earnings press release and presentation at the exchanges, and we hope you have got an opportunity to review them. Before we open the floor for question-and-answer session, I would like to take you through an overview of the numbers of Q2 and H1 FY2023. During Q2 FY2023, the company reported total revenue of Rs.670 Crore as compared to Rs.714 Crore in Q2 FY2022, registering a decline of 6.3% year-on-year. The performance remained subdued mainly on account of fall in volumes in Q2 FY2023 in the categories serving the masses. With consumer facing inflationary pressures affecting affordability, there has been a shift in consumer habits as they moved towards cheaper alternative at the cost of quality. This prompted the company to take an aggressive price correction in September 2022 to remain competitive in the current marke

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