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Tuesday, September 15, 2009

Relaxo Footwears Ltd:Is it a buy/hold or sell?Future prospects

Scripscan:Relaxo Footwears Ltd

Story:Relaxo Footwear Ltd is one of the large listed players in the footwear segment in India. It has one of the largest production capacities in the country. The recent performance of the company reflected in the Q4FY09 and Q1FY10 results has been quite
impressive and the company could repeat this going forward.Constant capacity additions and strong brand value could enhance the company’s presence in the country and the fact that the company is looking into increasing exports of its products means that it could do well in the coming quarters. The two new plants are coming up in September 2009 and April 2010. The real impact of both could be felt only in FY11. When compared to its close listed peer Liberty shoes, RFL trades at a steep discount in terms of P/E ratio.RFL also plans to set up wind farms of an aggregate capacity of 6 MW at a cost of Rs.35 cr over FY10/FY11. This will be partly funded by debt of Rs.25 cr. Apart from generating a new source of income by way of power sales and being entitled to carbon credits, it will also result in tax savings for the company. RFL has announced Sept 19, 2009 as the book closure for determining the shareholders who would be paid dividend of Rs.0.75 per share. The stock could go ex-dividend on Sept 17, 2009, meaning that investors who buy the stock till Sept 16,2009 would be entitled to receive dividend.We think that RFL could record net sales of Rs 510 crores (up 25%) in FY10 and report an EPS of Rs 28.8. Given the fact thatit is engaged in a fast moving products industry, has a brand name and has a retail presence, there is scope for expansion of its P/E going forward. It has thepotential to quote at 4-4.5x FY10 (E) EPS, translating into stock price of Rs 115-130 in thenext 2-3 quarters. Investors could look to buy the stock at the current market price of Rs 86.05 and add if the scrip falls to Rs 63 – Rs 66 band.

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