How I do Business Analysis – Relaxo Footwear Example

My blog readers always want to know the process I use to select a company for investing. So today, I will share the complete business analysis of Relaxo Footwear in a step by step process.

Please note that this business analysis is not a recommendation to invest in Relaxo Footwear. I am not a SEBI registered broker to recommend any stock. Instead, I have chosen Relaxo Footwears to help my readers understand how one should analyse a business. Still, I will not talk about the price information, and everything I am sharing here is already available in the public domain.

I am sharing business analysis information for Relaxo Footwear because when you invest in the business for a decade, you should get as much information as possible about the team and the management. In addition, it will help you build the confidence that one needs to remain invested when the stock price isn’t doing well.

So now, without much ado, let’s begin.

Step 1: Reject a Business for Investing

From the past business analysis of TTK Prestige, Fine Organics and PI Industries, I am sure you know that the first step is to reject a company for investment without too much effort.

There are more than 3000 companies trades on NSE and BSE. If you have to analyse each of them, it can take a very long time to revisit a stock investment. So if I can reject the wrong businesses to invest in, it can save me a lot of time and energy that I can spend on good companies.

So the first set of rules for business analysis is to reject a business using the financial ratios and investment checklist.

• ROCE of consistently above 15%
• Debt to Equity ratio of under 0.5
• Operating Profit Margin or OPM in at least double-digit.
• Consistent EPS Growth for 3,5 and 10 years.
• Promoter Holding depending on how large a company is.
• What is the Cash Flow to Net Profit Ratio?

Initially, I was pretty rigid on the financial ratios. I learned it by missing the investment opportunity of Avenue Supermart or DMart. It has a low OPM of under 10%, so it made me think that Amazon will be a threat to DMart and let the investment opportunity pass.

However, I realised some businesses do compromise on the margin for high growth. So, now I am also ready to compromise on some params for higher growth.

However, I never take debt lightly.

Step 2: Sector Analysis or Opportunity Analysis

Once the business passes the basic financial checks, it is an ok to invest in it. Still, it doesn’t mean you can invest in the business.

The numbers represent the past, and we have to invest in the future. So, it is essential to see how well the business keeps doing what it has managed.

Like for example, Reliance Industries in the past has always been an excellent company to invest in. However, oil as a sector had a minimal opportunity for growth. Whereas Asian Paints was an excellent company to invest in, the industry was growing.

So sector analysis is a crucial aspect to invest in. Rather than calling it sector analysis, I like to call it business opportunity analysis.

Considering the example of Relaxo Footwear for business analysis, the company has been in the footwear business for the past 35+ years. It is the largest footwear manufacturer in India. As per their annual report, it has a production capacity of more than 600k pairs per day.

Still, the market share of Relaxo is single-digit only. It means there is a massive runway for growth for the company.

So the opportunity is enormous, and Relaxo has a long way to go.

Step 3: Business Analysis

Finally, we will do the actual analysis of the business. Again, I use my business checklist to analyse the company.

I prefer to invest in a unique business with very little competition. However, in the footwear industry, you may think so many players give tough competition to Relaxo footwear.

However, if you dig a little deeper, you will find that no company in the footwear segment is a direct competition to Relaxo.

Let me explain how.

There are two types of footwear manufacturers in India.

• The first kind is manufacturers who also sell directly, like Relaxo and Bata.
• The second kind is manufacturers who don’t sell directly. Instead, they do labelling for the companies.

The second type of manufacturers cannot compete with Relaxo. They can’t optimise the production cost because everything is outsourced.

On the other hand, Bata is for the premium segment and is not into the low-cost segment.

Relaxo serves the low-cost segment of the market. Because they have in-house manufacturing, they are the lowest cost manufacturer. So they gain market share from the local vendors because they can price a good quality product at a rate that doesn’t even cover the cost of production for others.

The result is they can grow much faster than the sector.

It is a similar story to Page Industries.

So now let’s look at

• Pricing Power of Business
• Entry Barriers for New Entrants
• Simple Business Model
• Sustainability of Growth
• Sector Leadership or Market Share
• Operating History and Management Pedigree
• Operational Efficiency

Anything and everything that can help me remain invested or even add to the position in bad times.

Pricing Power of Business

There are some unlisted players like VKC Pride which are a direct competition to Relaxo. However, because they are a few times bigger than the following manufacturer in India, they dominate the space and price their product to crush the competition.

Entry Barriers for New Entrants

There are no entry barriers for new entrants, but it is nearly impossible for the latest player to match the operation efficiency of Relaxo Footwears.

Simple Business Model

There aren’t many subsidiary companies within Relaxo footwear that do a diverse set of business. So, yes, it is a relatively simple business to understand.

Sustainability of Growth

There is enormous room for growth and innovation in the Indian footwear industry. However, the industry is very fragmented, and we can see consolidation as we move forward.

So I believe there is a considerable growth potential for the company.

However, recent financials, especially for the years 2020 and 2021, has little to no growth. However, these are not the ideal years to judge a companies potential.

Sector Leadership or Market Share

Relaxo is a sector leader in Hawai chappals or flip-flops. However, they are expanding to sandals as well as shoes.

Operating History and Management Pedigree

The best way to understand the management pedigree is to check the annual reports for the worst performing years.

How the company handles bad times tells you a lot about the management. You have to read companies current as well as past annual reports.

Operational Efficiency

In the years 2020 and 2021, they worked on improving the operating profit margin. Now Relaxo has managed to get the OPM to be around 20%.

Companies with an operating profit margin or OPM of close to 20% are good enough to invest.

Final Thoughts

When I invest in a company, I invest as if I will be ready to start the business.

So my analysis of business does mean I need to know a lot about the efficiency of the business and the team before investing in a company, and Relaxo Footwear is no different.