Liberty Shoes Ltd. (LSL)

Transcription

1 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Initiating coverage (Wholly owned subsidiary of Bank of Baroda) BUY Liberty Shoes Ltd. (LSL) Forefront of Emerging Markets ; initiate with BUY We initiate coverage on Liberty shoes Ltd. (LSL) with a BUY rating and a price target of Rs.388 implying 49%upside. LSL, second largest footwear brand company in India, is turning to strong growth path. It has shown healthy growth in FY14, in spite of having a slowdown in the economy. We expect that the revenue /Earnings to grow at ~16% /~26% CAGR over FY14-18E respectively. It is driven by strong volume growth, big portfolio with healthy product mix and reduction in excise duty burden. Portfolio of Strong Brands: Liberty is famous as a family footwear brand and has a big portfolio with ten brands (i.e. Coolers, Fortune, Warriors, Windsor, Senorita, Tiptop, Gliders, Force10, Footfun and Perfect). It caters to all genders and age groups. LSL is one of most trusted brand in the footwear and have touched the lives of over 6 crore customers with over 5000 styles. We believe that the company will be able to fulfill the ever increasing demand, which would have a positive impact on volume growth. Deep penetration to increase volume growth: The Company is planning to open about 100 stores each year. 60 new stores would be franchise-owned, while 40 stores would be company-owned specially in tier II, tier III cities with focus on southern region which includes Kerala, Telangna, Andhra Pradesh, Kerala and also in Gujarat where the potential for growth is significant. We expect that the volume would grow at a 15% CAGR over FY14-18E. Margin expansion led by volume growth and restructuring: We believe that LSL would grow at CAGR ~16% over FY E (likewise its previous year growth over ). Margins would expand on account of strong volume growth, better product mix, reduction in excise duty from (12% to 6% on leather product >Rs 1000) and less royalty payment due to restructuring of group companies. Rising trend of ROE & ROCE: We expect that the ROE and ROCE of the company is likely to reach at 17.6x from 9.8x and 14.6x from 11.1x respectively. This indicates the optimum efficiency of operations and would help the company to get better returns going forwards. Valuation & recommendation: We expect the company s revenue /earnings to grow at ~16%/~26% CAGR over FY14-18E respectively. This is due to volume growth, aggressive retail expansion and margins expansion. At CMP of Rs 261, the stock is trading at around 23x FY15E PE. We value the Company at P/E of 20x to arrive at our price target of Rs.388 (49% upside). Price Price Target Up/Down (%) Rs. 261 Bloomberg Code LBS IN Rs.388 Reuters Code LIBS.NS Share Holding (%) As on 31st Dec Promoters FII 0.00 DIIs 0.07 Stock Data Nifty 8,586 Sensex 28, week high/low 351/148 Maket Cap (Rs. bn) 4.4 Price performance (%) 1M 3M 6M 1Y Absolute Relative to Sensex Relative Performance Source:-Bloomberg Sector: FOOTWEAR 6 th April, 2015 BSE Sensex Liberty Shoes Ltd. 49% Exhibit 1: Financial summary (Rs mn) Year end: March FY13 FY14 FY15E FY16E FY17E FY18E Net sales 3,620 4,839 5,550 6,510 7,635 8,716 Growth (%) Operating margin (%) PAT Adjusted PAT EPS (Rs) P/E(x) ROE (%) ROCE (%) Debt/equity (x) Akanksha Tripathi akanksha.tripathi@bobcaps.in

2 The Indian Footwear Industry Emerging Indian footwear industry is a fastest growing market driven by fashion awareness increase in organized retailing, fast urbanization, and increase in disposable income of the middle-class, increasing working women and youth population. India is the second largest global producer of footwear after China, accounting for 13% of global Footwear production of 16 bn pairs. The Indian Footwear Industry is highly fragmented. There are nearly 4,000 units engaged in manufacturing footwear in India. The industry is dominated by small scale units contributing nearly 55% of total production. There is a shift in trend of unorganized market to organized market with the increase in urban population, changing lifestyle, rising brand consciousness and transformation in the buying potential of the Indian customer specifically in the youth. It has transformed from being a highly unorganized market to an emerging organized retail Industry. Exhibit 2: Indian footwear Market composition Unorganized, 55% Organized, 45% Source: Industry, BOBCAPSe Exhibit 3: Indian footwear market segment Kids, 15% Men, 55% Women, 30% Source: Industry, BOBCAPS Footwear Global Scenario and India s share The global import of Footwear (both leather footwear as well as non-leather footwear) has increased from US$ bn in 2007 to US$ bn in 2011, growing at a CAGR of 6.13%. Exhibit 4: Growing share of India in total global footwear industry- (in MN US $) Global import of Footwear India's export of Footwear & Uppers % Share of India 1.82% 1.72% 1.92% 1.91% 2.01% Source: Industry, BOBCAPS Equity research 2

3 USD Mn (Wholly owned subsidiary of Bank of Baroda) Exhibit 5: Growing Indian market share globally 2.1% 2.0% 1.9% 1.8% 1.7% 1.6% 1.5% Source: Industry,BOBCAPS Footwear exports has increased from US$ mn in to US$ mn in Exhibit 6: India s Footwear Export Growth over the last Four Decades 2,500 2,000 2,056 1,500 1, Source: Industry, BOBCAPS Equity research 3

4 No in mns (Wholly owned subsidiary of Bank of Baroda) Investment rationale Changing lifestyle and increasing purchasing power: Current Indian population is approx. 1.28bn, and the size of domestic footwear industry in India is approx. Rs.340 mn. Indian footwear market has not even covered half of the population yet and the footwear Industry has grown at a CAGR of around 15% during we expect Indian industry to grow at same pase. Key driver of volume growth are 1) Increasing work force, and rising disposable income of the urban middle-class consumers, 3) increase in the no. of working women and purchasing power, 4) upsurge in middle class population in non-metro cities, 5) change in consumption habits like separate formal and casual wear, moving towards organized retailing and 6) desire for branded footwear as the Indian consumer has become more conscious and demanding in their choice and preference 7) increasing per capita consumption in India (currently the per capita consumption of footwear is 1 as compared to 4-6 in neighbouring Asian Countries and 6-8 in the developed European markets.) Exhibit 7: Revenue contribution from different regions Others, 20% North, 45% South, 35% Source: Company, BOBCAPS Deep penetration to fuel growth: Company is planning to open about 100 stores each year. 60 new stores would be franchise-owned, while 40 stores would be company-owned. In FY 14, northern India had contributed around 45% of the sales while around 35% of the total domestic sales were contributed by Southern India, sales in southern regions have shown good potential. They are planning to expand especially in tier II, tier III cities and southern region which includes Kerala, Telangna, Andhra Pradesh, and Kerala and also in Gujarat where the potential for growth is significant. We expect that the volume would grow at 15% CAGR over FY14-18E. Exhibit 8: Volume to grow at 15% CAGR over FY14-18E FY13 FY14 FY15E FY16E FY17E FY18E Equity research 4

5 Reduction in royalty payment and reduction in excise duty: Big positive: Liberty has benefited from reduction in excise duty as 33% of the revenue comes from leather footwear with MRP above Rs.1,000. (In the current Budget excise duty has been reduced from 12% to 6% for the shoes above Rs.1,000 made out of leather.) Hence, there is a huge saving in terms of excise duty for the company. Liberty pays nearly 2% of its revenues as royalty to its group companies for using the Liberty brand. The company hopes some reduction in royalty payment due to restructuring of two of its group companies i.e. Liberty Enterprises and Liberty Group Marketing division (restructured during FY15). We believe that the consolidation will not only help reduce outflow of royalty fee and improve bottom line but will also smoothen the path for independent growth of business. Decreasing raw material prices: The sharp decline in crude oil prices has also added to the strong leap in Liberty Shoes. A lot of raw materials used to make leather footwear are derived from crude oil. The price of these raw materials have come down and fall in the raw material cost has offset the increase in labour cost and led to improvement in margins. Wide range of product to strengthen brand equity: Liberty has touched the lives of over 6 cr. customers led by strong brand equity and the wide range of products. Liberty is famous as a family footwear brand and caters to all age groups with the understanding of consumer needs and lifestyle. It has over 5000 styles, with new variations every season. Today, even the youth in smaller towns are gradually turning towards lifestyle and allied products. We expect that the new designs and wide range of products would help the company to constantly increase its customer base while meeting the changing lifestyle needs of its customers. Exhibit 9: Target Segments Brand For Price Range (In Rs.) Coolers, Fortune, Warriors, Windsor Senorita Tiptop Gliders, Force 10 Footfun Perfect Source: Company, BOBCAPS Men Women Men/Women Kids ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Global presence and new associations: Liberty is the first Indian brand to have a Liberty retail outlet in Europe way back in Liberty manufactures under its own name and also for some leading global brands across the world. This expands its footprint across 75 countries globally. Recently Liberty has entered with the US-based multinational Disney for launching a new brand into under the latter's Avenger animation series. With a top brand and the long-term association with a popular name like Disney. Liberty is likely would penetrate deeper the global markets. Exhibit 10: Revenue mix of the company Export, 9% Domestic, 91% Equity research 5

6 Rs.mn % Rs.mn % Rs mn (Wholly owned subsidiary of Bank of Baroda) Financial performance Exhibit 11: Revenue is likely to grow at 15.8% CAGR over FY14-18E 10,000 Driven by strong volume growth, aggressive retail expansion and shifting trend from unorganized to organized retailing 8,000 6,000 4,000 2,000 - FY13 FY14 FY15E FY16E FY17E FY18E EBITDA to grow at 18.8% CAGR with ~90 bps expansion over FY14-18E: EBITDA grew at 17.27% CAGR in FY10-14 and we expect it to grow at 18.82% CAGR over FY14-18E. This is mainly led by increasing volume growth, decreasing in raw materials price, restructuring of group companies and reduction in excise duty. We believe, EBITDA to reach Rs 817 mn in FY18 with expansion of ~90 bps over FY14-18E. Exhibit 12: Improving EBITDA margin FY13 FY14 FY15E FY16E FY17E FY18E EBITDA EBITDA Margin (%) Exhibit 13: PAT to grow at 28.3% CAGR over FY14-18E FY13 FY14 FY15E FY16E FY17E FY18E PAT PAT Margin (%) Equity research 6

7 % x (Wholly owned subsidiary of Bank of Baroda) We expect that, with the strong volume growth and earnings growth, the company can expand its retail outlets through internal accruals. Exhibit 14: Decreasing Debt/Equity Ratio FY13 FY14 FY15E FY16E FY17E FY18E We expect that the ROE and ROCE of the company is likely to reach at 17.6x from 9.8x and 14.6x from 11.1x respectively. This indicates the optimum efficiency of operations and would help the company to get better returns going forwards. Exhibit 15: Rising ROE & ROCE FY13 FY14 FY15E FY16E FY17E FY18E ROE ROCE Equity research 7

8 Key Risk Upswing in raw material prices: A lot of raw materials used by the footwear industry are derived from crude oil. In the case of a surge in crude oil prices, company s cost-effectiveness might get vulnerable. Globally Competitive Business Environment: Company operates in a globally competitive business environment. With ever increasing competition from the local players as well as global giants in the Footwear Industry with deep pockets, maintaining the existing market share and leadership position in organized retail footwear industry is a major challenge. Labour Price: Footwear industry is a labour intensive industry. If wages go up, the company's margins are hit. Minimum wages go up by 10-15% per year. Labour costs are around 10% of the maximum retail selling price. Equity research 8

9 Apr-11 Jul-11 Oct-11 Jan-12 May-12 Aug-12 Nov-12 Mar-13 Jun-13 Sep-13 Dec-13 Apr-14 Jul-14 Oct-14 Jan-15 x (Wholly owned subsidiary of Bank of Baroda) Valuation We believe that Liberty Shoes, supported by numerous growth triggers, is a good investment option. We expect the revenue/ebitda to grow at 15%/18.8% CAGR over FY14-FY18E respectively due to significant volume growth and strengthening of the distribution networks, pan India. The company is turning towards a strong growth path and we believe that it would be one of the forefront company in emerging footwear market. LSL gave impressive performance in FY14 as compared to past years as the revenue grew by 34% and PAT grew by 146%. At CMP of Rs 261, the stock is trading at around 23x FY15E PE. We value the Company at P/E of 20x to arrive at our price target of Rs.388 (49% upside). Exhibit 16: Peer Comparison Key financials & margins Sales PAT EBITDA Margin EPS (RS) (Rs mn) FY15E FY16E FY17E FY15E FY16E FY17E BATA INDIA LIBERTY SHOES RELAXO FOOTWEARS Source: Bloomberg, BOBCAPSe Exhibit 17: Peer Comparison Key valuation matrix BATA INDIA LIBERTY SHOES RELAXO FOOTWEARS Source: Bloomberg, BOBCAPSe Price Mkt.cap P/E (X) ROE(%) (RS) (Rs mn) FY15E FY16E FY17E FY15E FY16E FY17E Exhibit 18: PE Chart 40 Avg of last 5 yrs = 20x 30 Current PE = 23x Forward PE Averageg PE Source- Bloomberg Equity research 9

10 Company Profile Liberty Shoes Ltd (LSL), incorporated in 1986, is the second largest footwear company in India. Currently manufacturing 50,000 pairs a day. They have 400 exclusive showrooms across India and have a presence in more than 25 countries, including France, Italy and Germany. Worldwide it has a distribution network of 150 distributors and more than 6000 multi-brand outlets. Manufacturing plants are located at Karnal (Haryana), Dehradun and Roorke (Uttarakhand) and Poanta Sahib (Himachal Pradesh). Exhibit 19: Journey 1954* A small shop manufacturing 4 pairs a day. 1964* Brand Liberty was born. Got 1st export order 2014* Moving with a vision to be a Rs.1, 000 Crore Company 1982* Liberty brought world class products to domestic market. 2010* Revolutionized their supply chain for excellent manufacturing strength. 2003* with a consumer centric strategy, Liberty started serving customers 1995* With 10 sub brands serving all kinds of consumers. Source: Company, BOBCAPS Exhibit 20: Share holding pattern Others, 35.0% DII, 0.1% Promoter, 64.9% FII, 0.0% Source: Company, BOBCAPS Equity research 10

11 Exhibit 21: Liberty s top brands Source: Company, BOBCAPS Exhibit 22: Management details Adesh Kumar Gupta Adarsh Gupta Shammi Bansal Sunil Bansal Vivek Bansal Adeesh Kumar Gupta Satish Kumar Goel Raghubar Dayal Source: Company, BOBCAPS CEO & Executive Director Executive Director Executive Director Executive Director Independent Director Executive Director Non-Executive Director Independent Director Equity research 11

12 Exhibit 23: Income Statement Y/E Mar (Rsmn) FY13 FY14 F Y15E FY16E FY17E FY18E Net sales 3,620 4,839 5,550 6,510 7,635 8,716 Growth (%) COGS 1,796 2,532 2,934 3,441 4,036 4,608 Staff Cost ,055 R&D Cost (79) SG&A Cost 1,142 1,316 1,466 1,687 1,956 2,233 EBITDA Growth (%) (2.3) Depreciation EBIT Other income Interest paid Extraordinary/Exceptional items (4) (2) PBT Tax (1) Minority interest PAT Non-recurring items Adjusted PAT Growth (%) (28) Exhibit 24: Balance Sheet Y/E Mar (Rsmn) FY13 FY14 F Y15E FY16E FY17E FY18E Cash & Bank balances Other Current assets 2,263 2,625 2,510 2,918 3,305 3,765 Investments Net fixed assets 1, , Goodwill Other non-current assets Total assets 3,516 3,690 3,621 3,988 4,364 4,790 Current liabilities 931 1, ,111 Borrowings 1,149 1,149 1,361 1,441 1,441 1,441 Other non-current liabilities Current/Non-current liabilities 2,148 2,308 2,225 2,444 2,613 2,781 Share capital Reserves & surplus 1,197 1,212 1,226 1,373 1,581 1,838 Shareholders' funds 1,367 1,382 1,397 1,544 1,751 2,009 Minority Interest Total liabilities 3,516 3,690 3,621 3,988 4,364 4,790 Equity research 12

13 Exhibit 25: Ratio analysis Y/E Mar FY13 FY14 F Y15E FY16E FY17E FY18E Per share data (Rs) EPS CEPS DPS BV Profitability ratios (%) Gross margins Operating margins Net margins Valuation ratios (x) PE P/BV EV/EBITDA EV/Sales RoE RoCE Exhibit 26: Cash Flow Statement Y/E Mar (Rs mn) FY13 FY14 F Y15E FY16E FY17E FY18E Profit after tax Depreciation Chg in working capital (16) (198) (180) (268) (219) (291) Total tax paid 1 (5) Net Extra-ordinary income Cash flow from operations Capital expenditure (81) (75) (150) (140) (140) (140) Change in investments Acquisition of Goodwill (94) Cash flow from investments (175) 19 (150) (140) (140) (140) Free cash flow (36) 44 (54) (68) Issue of shares Net inc/dec in debt Dividend (incl. tax) - (30) (33) (43) (60) (75) Other financing activities (4) (88) (100) 0 (0) 1 Net Extra-ordinary income (4) (2) Cash flow from financing 86 (118) (60) (74) Inc/(Dec) in Cash & Bank bal. 46 (75) 24 (31) Equity research 13

14 Sales and Dealing Team Purvesh Shelatkar Senior Vice President & Head Equity Anil Pawar Senior Manager Dealing Sachin Sambare Manager Dealing /33 Ashwin Patil Executive Dealing Research Vaishali Parkar Kumar Analyst Agri & Auto Padmaja Ambekar Analyst Akanksha Tripathi Analyst Rishabh Mehta - Associate rishabh.mehta@bobcaps.in UTI Tower, 3rd Floor, South Wing, Bandra-Kurla Complex, Bandra (E), Mumbai India. Ph.: Fax: Research@bobcaps.in Web: Disclaimer BUY. We expect the stock to deliver >15% absolute returns. HOLD. We expect the stock to deliver 5-15% absolute returns. SELL. We expect the stock to deliver <5% absolute returns. Not Rated (NR). We have no investment opinion on the stock. The BoB Capital Markets research team hereby certifies that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. 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