Liberty Shoes Limited - Shoes Limited ... Sector Footwear Face Value Rs.10.00 ... LSL in the mid-price segment of footwear industry and fiscal benefits available to LSL`s

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  • Firstcall India Equity Advisors Pvt Ltd 1

    Liberty Shoes Limited

    BUY Target Price: Rs.118.00 CMP: Rs.98.00 Market Cap. : Rs.1669.92mn. Date: December 1

    st, 2009

    Key Ratios:

    Particulars FY09

    (12 m)

    FY10E

    (12 m)

    FY11E

    (12 m)

    OPM (%) 11 11 11

    NPM (%) 3 4 5

    ROE (%) 6 8 9

    ROCE (%) 9 9 9

    P/BV(x) 1.37 1.27 1.15

    P/E(x) 23.58 16.79 13.11

    EV/EBDITA(x) 6.36 6.87 6.75

    Debt-Equity ratio 0.81 0.79 0.76

    Key Data:

    Sector Footwear

    Face Value Rs.10.00

    52 wk. High/Low Rs.113.70/35.00

    Volume (2 wk. Avg.) 198588

    BSE Code 526596

    SYNOPSIS Liberty Shoes is the flagship company of the Liberty

    Group, a leading footwear company in India and one

    of the largest manufacturers of leather footwear in

    the world with a turnover exceeding U.S. $100

    million.

    The company is now focusing on the domestic

    market in a big way. Liberty Shoes is bullish about

    retail. It is now ramping up retail and distribution

    channel in India.

    Liberty launches Autumn-Winter 2009 Collection.

    Credit rating agency, ICRA has revised the rating

    assigned to the Rs.300 million Commercial

    Paper/Short Term Debt (STD) programme of Liberty

    Shoes (LSL) from A1 to A2+. The revised rating

    indicates above-average-credit quality in the short

    term1.

    Foot Mart Retail, the joint venture between

    Pantaloon Retail and Liberty Shoes, seems to be on

    shaky grounds due to a couple of operational issues.

    The JV did not take off as planned, and Future Group

    may pump in more funds and up its stake in the

    venture. While Liberty Shoes will continue to be a

    stakeholder in the business, the operational control

    could move to Future Group.

    Share Holding Pattern:

    V.S.R. Sastry

    Vice President

    Equity Research Desk

    91-22-25276077

    vsrsastry@firstcallindiaequity.com

    Dr. V.V.L.N. Sastry Ph.D.

    Chief Research Officer

    drsastry@firstcallindia.com

  • Firstcall India Equity Advisors Pvt Ltd 2

    Table of Content

    Content Page No.

    1. Investment Highlights 03

    2. Company Profile 06

    3. Company Products 07

    4. Peer Group Comparison 08

    5. Key Concerns 08

    6. Financials 09

    7. Charts & Graph 11

    8. Outlook and Conclusion 13

    9. Industry Overview 14

  • Firstcall India Equity Advisors Pvt Ltd 3

    Investment Highlights

    Result Updates (Q2FY10)

    For the second quarter, the top line of the company increased 20%YoY and stood at

    Rs.631.89mn against Rs.525.69mn of the same period of the last year. The bottom line of

    the company for the quarter stood at Rs.30.15mn from Rs.12.35mn of the corresponding

    period of the previous year i.e. an increase of 144%YoY.

    EPS of the company for the quarter stood at Rs.1.77 for equity share of Rs.10.00 each.

  • Firstcall India Equity Advisors Pvt Ltd 4

    Expenditure for the quarter stood at Rs.566.12mn, which is around 23% higher than the

    corresponding period of the previous year. Raw material cost of the company for the

    quarter accounts for 41% of the sales of the company and stood at Rs.257.43mn from

    Rs.194.10mn of the corresponding period of the previous year i.e., an increase of 33%YoY.

    Employee cost stood at Rs.68.02mn from Rs.53.40mn. and accounts for 11% of the

    revenue of the company for the quarter i.e., an increase of 27%YoY.

    OPM and NPM for the quarter stood at 10% and 5% respectively from 12% and 2%

    respectively of the same period of the last year.

  • Firstcall India Equity Advisors Pvt Ltd 5

    Ramping up distribution channel in India

    The company is now focusing on the domestic market in a big way. Liberty Shoes is

    bullish about retail. It is now ramping up retail and distribution channel in India.

    New Launches

    Liberty launches Autumn-Winter 2009 Collection

    ICRA revises `A1` to `A2+` rating to Liberty Shoes

    Credit rating agency, ICRA has revised the rating assigned to the Rs.300 million

    Commercial Paper/Short Term Debt (STD) programme of Liberty Shoes (LSL) from A1 to

    A2+. The revised rating indicates above-average-credit quality in the short term1.

    The rating revision takes into account continued pressure on operating margins of LSL

    which coupled with its high working intensity has affected its debt protection indicators.

    LSL`s operating margins have declined from around 15% in FY 2006 to around 12% in FY

    2008 and further to around 11% in the current year (for nine month period ending

    December 2008). The rating however draws comfort from the experienced management

    of the company with long track-record in the footwear industry, established position of

    LSL in the mid-price segment of footwear industry and fiscal benefits available to LSL`s

    production facilities in Roorkee and Ponta Sahib which enhances its competitiveness over

    the un-organized segment.

    Going forward, ICRA expects LSL`s revenue growth and profitability to remain under

    pressure because of the competitive nature of the industry on account of significant

    presence of un-organized sector and availability of cheap imported products. However,

    the debt protection metrics of the company are expected to remain adequate because of

    limited capital expenditure plans of the company and its low repayment obligations.

    Foot Mart's future uncertain

    Foot Mart Retail, the joint venture between Pantaloon Retail (Future Group) and Liberty

    Shoes, seems to be on shaky grounds due to a couple of operational issues. The JV did not

    take off as planned, and Future Group may pump in more funds and up its stake in the

    venture. While Liberty Shoes will continue to be a stakeholder in the business, the

    operational control could move to Future Group. Currently, Liberty Shoes has a 49% stake

    in the JV.

    The JV was signed in 2007 and the first value-for-money format, Shoe Factory outlet, was

  • Firstcall India Equity Advisors Pvt Ltd 6

    launched across the country. The size of the format was too large, which impacted the

    profitability of the business. Many such stores didnt get space in the best of malls, and

    the kind of locational advantage needed in the footwear business. Future Group is keen to

    restructure the business and launch smaller formats to improve business feasibility. Also,

    given the growing pressure on operational costs and thinning margins in organized retail,

    the group is keen to strengthen avenues where margins could be higher, especially in the

    fashion segment. The branded footwear retail chain was to give the partners a strong

    foothold in the retail business.

    The company had announced plans to rollout 100 stores in five years, with Shoe Factory

    being set up in shopping malls and as independent stores to market branded and

    unbranded footwear.

    The Indian footwear retail market may grow at over 20% during the next few years.

    Growing brand and fashion awareness and rising disposable income are expected to step

    up growth rates of the market.

    Company profile

    Liberty Shoes Ltd. is the only Indian company that is among the top 5 manufacturers of leather

    footwear in the world with a turnover exceeding U.S. $100 million.

    Produce more than 50,000 pairs of footwear a day covering virtually every age group and income

    category. Products are marketed across the globe through 150 distributors, 350 exclusive

    showrooms and over 6000 multi-brand outlets, and sold in thousands every day in more than 25

    countries including fashion-driven, quality-obsessed nations like France, Italy, and Germany.

    With 50 years of excellence, today Liberty produces footwear for the entire family and is a

    trusted name across the world. In the domestic market it is one of the most admired footwear

    brands and holds the largest market share for leather footwear.

    Subsidiaries

    Liberty Foot Fashion Middle East FZE

    Foot Mart Retail India Limited (joint venture of 49%)

    Associate Companies

  • Firstcall India Equity Advisors Pvt Ltd 7

    Liberty Retail Revolutions Limited

    Liberty White ware Limited

    Company prod