Footwear firms may be hit
Stocks touch 52-week high; but price increases, GST hike, Omicron could affect demand
From the start of May to their 52week highs in November, listed footwear majors such as Bata India (Bata) and Relaxo Footwears (Relaxo) have outperformed their BSE500 peers, gaining 40-66 per cent during this period. The unlock process led to a rise in discretionary spends, helping these companies’ sales almost reach the pre-pandemic levels.
The gains were also on expectations that expansion, higher operational leverage, and premiumisation would boost the revenue growth and margins of the two companies. While the Street is bullish about these companies’ prospects in the medium term, there are some near-term headwinds that could derail demand and margins.
One of the headwinds is the increase in goods and services tax (GST) from 5 per cent to 12 per cent on footwear costing up to ~1,000. The revised rates are meant to reverse the inverted duty structure, wherein raw materials for the footwear sector are taxed at 12 per cent, while the finished products were taxed at 5 per cent, resulting in input tax credits. There could be a twin impact on margins as well as demand from the GST rate hike.
Analysts, led by Himanshu Nayyar of YES Securities, expect some near‐term margin pressure as companies might offer additional discounts to aggressively liquidate the existing inventory with channel partners, where changing prices might be difficult.
Inventory level for Relaxo at the end of September stood at ~542 crore while that for Bata was ~728 crore. Given that the average selling prices per unit of Relaxo is ~150, while that for Bata is ~750, they would be impacted due to the hike.
The other headwind would be the impact on demand as companies pass on the GST hike to consumers. “With persistent inflation and this added increase in GST rates, a further 15‐20 per cent price hike in the upcoming season can be expected, which has the potential to disrupt the recent recovery seen in consumption,” says Nayyar of YES Securities.
In fact, high raw material costs had led to margin pressures in the September quarter (Q2). Relaxo’s gross margins fell 660 basis points (bps) while operating profit margins were down 560 bps over the year-ago quarter. The decline in margins came despite a 15 per cent hike announced by the company so far this year.
The headwinds for the sector come at a time when demand is picking up on the back of higher outdoor activity, opening up of educational institutions, and improved sales across categories. Average growth for footwear companies, according to Anand Rathi Research, was up 41 per cent year-onyear (YOY). Bata reported the highest growth followed by Khadim India at 33 per cent and Relaxo at 24 per cent.
While demand for slippers and open footwear was higher over the past year, the trend was reversing, with volumes of outside wear and closed footwear increasing in Q2. Similarly, fashion, wedding, and festival segments too saw an improvement, but it may get impacted if there are higher curbs on events/travel due to the new Covid variant.
Among the major listed companies, Bata India’s overall sales recovered to 85 per cent of pre-covid levels, while formal and school footwear are at 60-65 per cent. The company is seeking to increase the share of casual footwear (Power, North Star, Floatz), which is currently at 40 per cent of revenues as compared to 30 per cent before Covid. Higher sales from the digital channel, which is currently at 14 per cent of revenues, could be another trigger.
Relaxo has been a key beneficiary of higher demand for slippers/open footwear over the past year as these products (including brands such Flite, Bahamas, Relaxo, Sparx) contribute 85-90 per cent of sales. The company’s focus on premiumisation will translate to more premium products in each category, which should boost gross margins.
Given the near-term pressures, investors should await the impact of pricing action by the companies, demand trends and margins before considering Bata and Relaxo.