RELAXO FOOTWEAR - ECONOMIES OF SCALE

My article on Relaxo  is based on Sanjay Bakshi's thesis on  the company way back in 2008

Relaxo is a low cost player, and its not easy to drive it out of the industry. Infact, it is a disruptor. By keeping margins low (due to high spent on ad and publicity), Relaxo is likely to keep competitors at bay. And because of its efficiency (as reflected by high turnover ratios), the company can still earn a very respectable ROE.

Two things that explain Relaxo’s ability to earn high ROEs on a sustainable basis are brands and low cost advantage arising out of scale. So it enjoys a strong moat.

This is not a business that is going to become obsolete anytime. Unlike high technology businesses neither will people go back to being barefoot, nor will the technology involved in this business change. And we love to invest in such businesses because they are so predictable. Relaxo is how it’s moved up the value chain over the years. Many many years ago, the company used to be a contract manufacturer for Nike. Today, it’s one of the world’s largest non-leather footwear manufacturer with branded products. So, very possibly there is untapped pricing power in Relaxo, which is a significant source of value. Over time, two things can happen in Relaxo: (1) Average realisation will continue to grow;  (2) Costs will not grow in line with average realization. So, margins will improve

Relaxo Market Share- (5-6%). Relaxo will continue to grow faster than the market by taking market share from the unorganized players— just as it has been doing over the last several years.

                                                                                   (From Prof Sanjay Bakshi thesis)

N.B- I hold Relaxo in my personal portfolio, and this is not a reccomendation. Writer is not responsible for any financial losses caused by through this blog. Intention is to make people aware about some good companies listed in India.