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Valuation report of Relaxo Footwear Ltd.

Submitted By: Prajay Kumar PGPMX, 2011-13, IIM Indore Mo: +91 88792 11223 E-Mai: px11prajayk@iimidr.ac.in

Executive Summary About The Company Board of Directors Shareholding Pattern Commitment to Quality Certifications & Affiliations Quality Policy Operations & Products Manufacturing Units Expansion Programme Key Financial Highlights Historical Data Sheet WACC Calculation Assumptions

Page Number
2 3 3 4 4 4 4 4-5 5 5 6 7 8 9-11

Executive Summary Relaxo Footwear has a long and eventful odyssey, one that began as a humble dream in 1976. The company has grown exponentially over the years. The current production capacity of the company is approx. 3 lacs pairs of footwear per day i.e around 90 million pairs per year. The company has a strong manpower base of approx. 7000 people and has10 manufacturing units. Focused on value reengineering & cost rationalization, Relaxo has responded well to competitive market scenario and time of change. The companys annual turnover has grown 2.3 times in the last 3 years to Rs. 686 lacs in 2010-11. Relaxo Footwear leverages its enormous and strategically spread-out, pan-India distribution network to respond to the demands of its customers on time. Relaxo Footwear has its reach in more than 40,000 Multi-brand shops across the country and 127 exclusive company operated retail outlets. The company also serves large retail chain stores as their trusted OE manufacturers and suppliers and exporting to more than10 countries. The companys growth in sales (%), EBIDTA to sales (%), EPS, Book Value per share and ROCE stands at (23.90, 17.46), (10.52, 10.05), (22.26, 5.10), (112.17, 42.76), (18.62, 15.87) respectively for the financial years (2010-11, 2009-10). The figures well justifies the bright future prospects for the company, the strengths of a good management and a strong value proposition. To prepare the valuation report last three years financial report has been analyzed (2010-11, 2009-10, 2008-09) and the data has been placed in the Mc Kinsey valuation sheet for arriving at final result and valuation summary. Please refer the attached sheet for valuation report.

About The Company A journey of a thousand miles begins with a single step. Such is the story behind the creation and flourishing of Relaxo Footwear, the company that has established itself as one of the most stalwart, quality conscious and avant-garde footwear companies in the Indian economy today. Headquartered in New Delhi, India, it maintains a fine combination of comfort, style, and workmanship and is embarking upon appreciable growth plans for the future. The company began as a small enterprise in the year 1976 and was officially incorporated in 1984 and further went into public listing in 1995. According to the 2008 Business Survey, it has now emerged as the second largest footwear producer in India. Relaxo Footwear commenced its journey with the manufacture of Hawaii slippers. It has now grown into a large-scale entrepreneurship catering to the basic needs of the quintessential Indian citizen. From a modest sale figure of Rs. 1 million in 1977 to more than Rs. 5000 million last year; the company has experienced a record-breaking growth since inception. Today, the company manufactures over 3 lakh pairs of footwear per day, which approximately adds up to over 10 million pairs per year. Each pair is given thorough attention by the dedicated and skilled employees working at the 10 state-of-the-art manufacturing units in Northern India. Thus, it is no small wonder that the annual turnover has multiplied 2.4 times in the last 3 years from Rs. 305 crore in 2007-08 to a whopping Rs. 550 crore in 2009-10 and 686 crore in 2010-11. Board of Directors The composition of the present Board of Directors of the Company is in line with Clause 49 of the Listing Agreement. It has One Managing Director, Two Whole-Time Directors and Three Non-Executive Independent Directors. Category Promoter and Executive Directors Name of Directors Mr. Ramesh Kumar Dua, Managing Director Mr. Mukand Lal Dua, Whole Time Director Mr. Nikhil Dua, Whole Time Director Independent and Non-Executive Directors Mr. S.K. Sapra Mr. Vivek Kumar Mr. Pankaj Shrimali

Shareholding Pattern
Indian promoters Foreign promoters Acting person Other promoters MFs/UTI Banks/FIs FIIs Public corporate bodies Indian public NRIs/OCBs Others No of shares

75.00 1.25 16.55 7.05 0.15 12001200

75.00 1.07 15.89 7.92 0.13 12001200

Commitment to Quality From the time of inception, Relaxo has consistently lived by and upheld its quality assurance, rigidly adhering to the statutes of Quality Par Excellence and Absolute Customer Satisfaction. Quality control managers monitor every stage of manufacturing process, right from pre-production to shop floors. Shaping and designing undergo the same stringent checks as the final products. Some of the quality tests that our products are subjected to are:

Random Testing Batch Testing Tactical Wear Testing

Certifications & Affiliations Relaxo have the following certifications and affiliations to our credit:

ISO 9001:2000 Certification BIS/SATRA Manufacturing Standards CLE (Council for Leather Export)

Quality Policy Relaxo is committed to consistent value added quality footwear and service to satisfy our customer through continual improvement and innovation. Operations & Products Relaxo Footwear has a plethora of diverse operations in its portfolio, most of which may be classified into three main divisions: Whole Sale Operations Retail Operations Export Operations

Products comprise a wide range of quality footwear in the following brands: 1. Hawaii Slippers: Hawaii is the most popular brand in the Relaxo portfolio. It comes in diverse shades and styles and its comfort value makes it a favourite among all age groups. With an output of 300000 pairs a day, Relaxo is one of the largest manufacturer of Hawaii in India. 2. Flite: Flite is Relaxo's most exclusive brand. Its unique fashionable and light quality is ensured by its manufacturing process, involving cutting-edge EVA technology. Available in an array of colours and designs, it is among the popular products in the casual footwear industry. 3. Sparx: Sparx is a range of sports shoes and sandals that embodies the spirit of today's youth. Available in awe-inspiring colours and designs, it reflects verve and dynamism as an iconic youth brand and is symbolic of a wholehearted zest for life. 4. Schoolmate: Schoolmate is a range of school shoes for boys and girls and is an expression of Relaxo's faith and commitment towards the young leaders of tomorrow. Made with special care to pamper thousands of tiny feet, each pair bears the mark of superb workmanship and adaptable design. Manufacturing Units Across the years since its inception, Relaxo has steadily established its production facilities across the length and breadth of Northern India. Each state-of-the-art unit is equipped with futuristic infrastructure powered by cutting-edge technology and progressive machinery. At present, there are 10 actively functioning facilities at the following locations:

S No. Factory 1 2 3 4 5 6 7 8 9 10 RFL I RFL II RFL III RFL IV RFL V RFL VI & VI B RFL VII Nu Wave Shoes Patel Oil Mills Marvel Polymers

Location Bahadurgarh Bahadurgarh Bhiwadi Bahadurgarh Haridwar Bahadurgarh Bahadurgarh Delhi Delhi Delhi

Products Manufactured Hawaii, Spark Hawaii Hawaii Hawaii Flite Sparx Shoes & Sandals Flite, Schoolmate, Casualz, Sparx DIP Canvas Schoolmate, Casualz Canvas, Hawaii Bahamas, Sparx Fabricated

Sparx Shoes & Sandals

Expansion Programme Company is setting up a New Plant for High Fashionable Footwear with state of art PU technology with additional features of longevity,skid resistance, light weight etc. It will cater to Fashion conscious Upper Strata of Society under Flite brand.

Key Financial Highlights Particulars (in lacs) No of Pairs Sold (in lacs) Sales Total Income EBIDTA Interest Depreciation Tax Net Profit Equity Share Capital Net Worth Gross Fixed Assets Net Fixed Assets Total Assets Growth in Sales (%) EBIDTA to Sales (%) EPS in INR Book Value per share in INR ROCE (%) 2010-11 865.74 68601.03 69213.2 7219.96 1566.85 2095.48 886.32 2671.31 600.06 13462.27 35408.09 26960.68 34242.62 23.9 10.52 22.26 112.17 18.62 2009-10 842.97 55369.99 55781.93 8029.27 1105.69 1545.7 1608.66 3769.22 600.06 10992.69 29222.05 22841.06 27525.64 35.89 14.5 31.41 91.6 33.79 2008-09 684.5 40746.35 41004.86 4371.82 926.78 1047.01 974.8 1423.23 600.06 7396.46 21271.4 15907.69 19187.68 33.31 10.73 11.86 61.63 23.73

Historical Data Sheet In the valuation sheet, the items mentioned in the left hand side have been equaled to the respective values as mentioned on the right hand side fetched from the financial reports of the company. The details are as mentioned. Other Operating Revenues = Increase/(Decrease) in stock + Other Income Costs of Goods Sold = Personal expenses and Material & Manufacturing Expenses Special Items = Bank Charges & Cash Discounts Income Taxes = MAT Credit- Provision for Taxation-Fringe Benefit Tax-Current Tax-Deferred Tax-For earlier Years Extraord. Items = Extraordinary items+ balance bought forward from previous year+ Prior period adjustments Common dividends= Proposed Final Dividend on Equity Shares+ Tax on Proposed Final Dividend+ Interim Dividend on Equity Shares+ Tax on Interim Dividend Foreign Exchange Rate Changes = Transaction in foreign currency are accounted for at the exchange rates prevailing on the date of the transaction. Monetary current assets and liabilities at the yearend are translated at the rate prevailing on last day of financial year. The difference thereon and also the exchange difference on settlement of foreign currency transactions during the year are recognized as income or expenses in Profit & Loss Account. Non-monetary items are carried at historical cost. Derivative transactions are considered as off balance sheet items and cash flows arising thereon are recognized in the books of account on principle of Prudence as prescribed in the Accounting Standard ( AS-1) issued by the Institute of Chartered Accountants of India. So, its not applicable. Operating Cash = Cash & Bank Balances Excess marketable securities = Loans & Advances Accounts Receivable = Sundry Debtors Net Property Plant and Equip = Gross Block- Depreciation+ Capital work in progress Accounts Payable = Provisions Long Term Debt = Secured Loan + Unsecured Loan Total Common Equity= SHARE CAPITAL+ Reserves and Surplus Capital Expenditure = Capital expenditure on Research and Development is capitalized under various fixed assets. Revenue expenses are charged to Profit and Loss Account, when incurred. So, its not applicable for our calculation.

WACC Calculation CELL REF. 87 88

P Rf

Q 8.44

R Taken as one year T-Bill Rate Since 1990 till date, Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on average stocks have paid 1.5% dividend annually. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits. Compared to most other forms of investments, investing in equity shares offers the highest rate of return, if invested over a longer duration. Source Reutors 14,689.52 26846.684 1,105.69 7.53% 0.0769252

E(Rm) 89 90 91 92 93 94 95 Beta Total Debt Market Value Interest Rate Ks WACC

18.5 0.34 10,838.09 3300.33 926.78 8.55% 11.8604 0.02834122

18,551.44 33477.347 1,566.85 8.45% 0.0766156

Ks= Q87+ (Q88-Q87)*Q89 WACC = (((Q91*$Q$94)/(Q90+Q91)+(Q90*Q93)/(Q90+Q91)))/100 For our calculation we have considered a WACC of 10% for all coming years.

Assumptions Operating Revenue: % Growth Given the Companies goodwill and growth trend, we may consider a YOY growth of 20% in operating revenues. There is a lot of opportunity for the company to expand in indian as well as overseas. Other Revenue: % Growth Other revenues consists of Export Incentive, Interests on deposits, Scarp Sale, & Miscellaneous Receipts. Every Year, there is a considerable amount of miscellaneous receipts viz. Year 2010- Rs. 257.99 Lacs, Year 2009- Rs. 229.00 Lcs, Year 2008- Rs.111.12 Lacs. So, the same isshoing a inflated growth trend and may not continue in future. However given the trend & considering other factors included in other revnues, a moderate growth of 15% is considered for valuation purpose. COGS: % Revenue The industry average on COGS comes out to be around 75%, Considering the company as it grows, will be able to decrease its operating expenses through efficient processes and machinery, e are considering a decrease of 2% YOY starting with 75% in 2012. SGA: % Revenue Though the SGA is showing a growth trend, yet considering the future prospect and growth of company we will consider this as 10% flat YOY, expecting it to be fetched from operational effeciency and efficient management. Operating Cash: % Revenue Given the trend, we are considering a 0.5% operating cash justifiable for the company over the next years. Inventories: % Revenue The average for 3 years comes out to be 13%, however basis the industry trend, we are taking a 15% revenue to Inventory ratio for our valuation purpose. Accounts Receivables: % Revenues The average for 3 years comes out to be 4%, however basis the industry trend and future growth prospect of company, we are taking a 5% revenue to accounts receivable ratio for our valuation purpose. Accounts Payable: % Revenues Though this ratio is well under the control of company, yet given the trend and we will consider a 0.5% flat figure for the captioned calculation.

Other Current Assets: % Revenues The average of 3 years .002% flat YOY is being considered for valuation purpose. Net PPE as % revenues Expecting the operational effeciency and economies of scale to be fetched with the growth of company, we presume this ratio should go down YOY by 2% for next 5 years starting with 40% in 2012. Depreciation: % Net PPE b/f Considering the average of previous years and growth prospect of company, we are taking a 10% depreciation YOY. Investments Assuming the company will act conservative on this front and ill add just 1 lacs per annum further for next five years in its investments and will be focused on its core activity over the years. Bank charges & Cash discounts Since we are assuming a growth of 25% YOY, cash discount contributing to most of this figure is expected to grow in the same proportion. Extraordinary items 25% growth, since this item also includes the balance brought forard from previous year. Short Term Debt It is assumed to be increased by 15% YOY. Dividends: % earnings Company will continue to give a 5% dividend on its PAT. Tax Rate We assume a flat tax rate of 30% for the coming years. Deferred Tax liability Given the trend, we consider this as 500 flat for coming years with an increase of 100 each year. Key Driver Forecast As mentioned in the excel sheet. Interest Rate on Short Term Debt 8.44%. The proportion of short term debt is assumed to be increased by 15% YOY.

Interest Rate on Long Term Debt 9.00%. Goodwill Goodwill has not been accounted for in the books of Relaxo Footwear till year 2010-11, however for forecasting the goodwill of Relaxo is assumed to be summation of expenses of advertising & publicity done for the last three years. The value of expense on A&P done before 3 years is amortized on current year. For the calculation purpose, its assumed that the company has spent Rs. 3000 Lacs in 2012 and keeps on increasing this figure by Rs. 200 Lacs every year.