It is said that Cinderella is proof that a new pair of shoes can change your life.
I don’t know if that’s true or not. I do know, however, that if a company grows long
enough to proﬁtably sell 100 million pairs of footwear in a year, it will very likely
change its long-term shareholders lives for the better. Relaxo Footwear, a company in
which I own shares (so you should know I am very likely biased), crossed that milestone
Isn’t that amazing? Why did that happen? The nation needs to know.
So, I have divided the Relaxo project into 3 parts:
Business (Quality of the Business)
People (Quality of Management)
This document deals only with the ﬁrst part. At this time, I want you to completely
disregard the management and the valuation angles. We will discuss those later. For the
moment, I want you to try to answer a few questions by doing some investigative
analysis from the following sources (although you are free to use other sources)
There is an excel sheet in that dropbox folder with a lot of ﬁnancial data on the
In an earlier mail, I had asked all of you to read up the annual reports of the company
for the last 10 years. Those reports are also in the dropbox folder.
By breaking a single project into multiple “chunks” and assigning one chunk to one
group, instead of the earlier practice of asking one group to work on one project
exclusively, I intend to bring in a bit of collaborative effort. Your co-operation would
be appreciated. And learning will improve.
We will collect all the chunks and see where all of them lead us. Deadline: Wednesday
18 Sept Midnight
All the best,
P.S. One of my friends, Ravi Purohit, who is a value investor, and who has addressed
your seniors in the past, is collaborating with me on this project.
Questions on Relaxo’s Wealth Creation
How has the company’s stock done over the last 5 and 10 years in absolute
terms and as compared to the market?
How has the company’s market cap changed over the last 10 years
How has the company performed on Buffett’s earnings retention test?
How to use Buffett’s Earnings Retention Test
Add up proﬁts earned over the last 10 years.
Deduct dividends paid over the next 10 years
Result is total earnings retained over a 10 year period. Let’s call that ER
Compute increase in market cap over the last 10 years. Let’s call that Delta MC.
Compute Delta MC/ER.
What does this ﬁgure tell you? It tells you, that for every Rs 1 earned and
retained inside the ﬁrm, how much was the increase in market cap.
To do this more accurately one should remove the inﬂuence of base or end
period election effect. Buffett does that by calculating this ratio on a 5-year
rolling basis. For the moment, let’s just do this as described above.
Has this been a good business?
What has been the pre-tax return on average equity capital employed in the
business over the last 10 years? To calculate that for each year, divide proﬁt
before tax by average of beginning and ending net worth for that year.
How does that compare with AAA bond yield?
For the moment, we are assuming that the accounting earnings and true
economic earnings are the same. But this assumption may not be true.
Hint: The assumption is false. The true economic earnings are higher than
Can you ﬁgure out why and by how much? Two clues: look at the cash ﬂow
statement and on the quantum of money spent on sales and marketing.
Group 1 & 2
What’s the connection between the work done by Group 1 and Group 2?
Should there be a relationship between (1) high spread between return on
capital and AAA bond yields; and (2) Market rewarding such a business in such
a way that every rupee of earnings retained becomes much more than a rupee
in incremental market value?
Questions about Relaxo’s Past Growth and Business Volume Analysis
Analyse the past growth in the company’s revenue and PBT growth— over 5
and 10 years
How much of this growth occurred due to business volume growth? How much
occurred due to product mix and price changes? Quantify the numbers here.
For each of the last 10 years, list number of pairs of footwear sold by the
company along with net revenues and calculate average price per pair for each
year. What conclusions can you draw from this data?
What are the possible sources of volume growth in this company? Is there a
pattern here that you can relate to other industries? If so, what’s that pattern?
Did all this growth require any equity dilution? Did it require signiﬁcant debt?
What conclusions can you draw from this analysis?
What is net revenue per share of this company over the last 10 years?
What is the proﬁt after tax per pair of footwear sold by the company over the
last 10 years?
Analysis of Proﬁtability
For every year, compute the ROIC on a pre-tax basis and segregate it into
Margin and Turnover ratios (Du-Pont Analysis).
What conclusions, if any, can you draw from your analysis of margin?
What conclusions, if any, can you draw from your analysis of capital turnover
Hint: Think entry barriers. Think like a potential competitor who wants to take away
Relaxo’s market share.
Questions About Economies of Scale
What economies of scale are available to Relaxo which won’t be available to a
new entrant in the market? Hint: Study the various line items in the cost
structure in it P&L account and the company’s working capital cycle. See work
done by Group 4.
If you were a potential entrant in the branded footwear market in India,
wanting to compete with Relaxo, what challenges would you face in terms of
cost structure and terms with customers and suppliers?
Watch these videos:
▶ Main Pehenta Hoon - Salman Khan's New Relaxo Footwear AD !! YouTube
▶ Akshay Kumar Sparx TVC ft Shaun Wood ( Team Farang ) - YouTube
▶ Relaxo Flite (Katrina Kaif) - YouTube
Questions about Branding
Imagine you as a small and unbranded player competing with Relaxo. Why is
life getting tough for you? Is this a generalised pattern in other industries too?
Imagine you are a customer looking to buy a pair of footwear. Why would you
choose Relaxo over branded footwear? Why would you reject it?
How much money is the company spending on a per pair of footwear on
What models from psychology explain the apparent success of using brand
How would you value Relaxo’s brands?
Questions about future growth prospects
How big can Relaxo become over the next decade or two?
What are the various sources of growth for Relaxo? How sustainable is each
If that growth materialises, then would the company be able to ﬁnance it
without requiring equity dilution or signiﬁcant debt? Hint: Project a high growth
rate for a decade. Use capital turnover ratios to estimate balance sheet size
required to deliver that growth. Then compare that hypothetical balance sheet
size with the current size to determine how much balance sheet expansion will
be needed over the next decade. Then see if earnings would sufﬁce or the
company would need to ﬁll the gap with new equity capital injection and/or
Comparison with Bata
Compare and contrast the P&L accounts of both companies and relate the
differences to the different strategies followed by each company.
Which is a better strategy and why?
Why don’t you see Relaxo in a mall but you you see Bata over there?
Questions on Dividend Policy and Capital Structure Decisions
What percentage of earnings did the company pay out as dividends over each
of the last 10 years?
Should this company pay any dividend at all? Why or why not?
Is this company’s capital structure conservative? Use balance sheet and cash ﬂow
data to answer this question.
Questions on Sources of Competitive Advantages and Longevity of
What are the various sources of competitive advantages enjoyed by Relaxo
footwear? Hint: See questions posed to other groups.
Think about the sources of competitive advantages from two perspectives of: (1)
Customers; and (2) Competitors. Why would customers want to stay with
Relaxo or desert it? What would cause a competitor to enter or not enter into a
competitive war with Relaxo?
How long will the business of making and selling branded footwear last?