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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 1st

, 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

[email protected]

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

Chief Research Officer

[email protected]


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


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.


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.


• 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


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

profitability of the business. Many such stores didn’t 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


� Liberty Retail Revolutions Limited

� Liberty White ware Limited

Company products

Brands

FOR MEN

• Coolers

• Force 10

• Fortune

• Gliders

• Windsor

FOR WOMEN

• Force 10

• Gliders

• Senorita

• Tiptopp

FOR KIDS

• Footfun

• Force 10

• Gliders

• Prefect

SAFETY SHOES

• Freedom

• Warrior

• Workman


Peer Group Comparison

Name of the

company

CMP(Rs.)

(As on

December

1st

,2009)

Market Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

Liberty Shoes 98.00 1669.92 5.37 18.22 1.37 0.00

Bata India 181.00 11631.70 9.79 18.49 4.59 25.00

Mirza International 14.96 1386.90 2.04 7.33 1.17 10.00

Crew B.O.S 42.25 541.60 8.01 5.27 0.46 0.00

Key Concerns

• Fluctuations in exchange rates

• High competition from global players

• Adverse Govt. policies

• Recession in global economy


Financials

Results Update

12 months ended Profit and Loss A/C (Standalone):

Value(Rs. in million) FY08 FY09 FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 2478.51 2407.58 2552.03 2807.24

Other Income 25.72 0.37 0.41 0.45

Total Income 2504.23 2407.95 2552.44 2807.69

Expenditure -2149.95 -2145.52 -2280.24 -2498.44

Operating Profit 354.28 262.43 272.20 309.24

Interest -128.80 -126.87 -104.04 -109.25

Gross Profit 225.48 135.56 168.15 200.00

Depreciation -63.80 -65.37 -66.68 -70.01

Profit before Tax 161.68 70.19 101.48 129.99

Tax -6.45 0.62 -2.03 -2.60

Net Profit 155.23 70.81 99.45 127.39

Equity Capital 170.40 170.40 170.40 170.40

Reserves 977.79 1048.60 1148.05 1275.43

Face Value (Rs) 10.00 10.00 10.00 10.00

Total No. of Shares 17.04 17.04 17.04 17.04

EPS (Rs) 9.11 4.16 5.84 7.48


Quarterly ended Profit and Loss A/C (Standalone):

Value(Rs. in million) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec-09E

Description 3m 3m 3m 3m

Net Sales 668.28 598.13 631.89 695.08

Other Income 0.37 - - -

Total Income 668.65 598.13 631.89 695.08

Expenditure -600.01 -539.40 -566.12 -622.73

Operating Profit 68.64 58.73 65.77 72.35

Interest -28.31 -29.00 -21.80 -22.24

Gross Profit 40.33 29.73 43.97 50.11

Depreciation -16.06 -15.36 -16.55 -16.88

Profit before Tax 24.27 14.36 27.42 33.23

Tax -1.13 -0.34 2.73 -0.66

Net Profit 23.14 14.02 30.15 32.57

Equity Capital 170.40 170.40 170.40 170.40

Face Value (Rs) 10.00 10.00 10.00 10.00

Total No. of Shares 17.04 17.04 17.04 17.04

EPS (Rs) 1.36 0.82 1.77 1.91


Charts

• Net sales & PAT

• P/E Ratio (x)


• P/BV (X)

• EV/EBITDA(X)


Three Months Comparative Graph

Outlook and Conclusion

• At the market price of Rs.98.00, the stock is trading at 16.79 x and 13.11 x for FY10E and

FY11E respectively.

• On the basis of EV/EBDITA, the stock trades at 6.87 x for FY10E and 6.75 x for FY11E.

• Price to book value of the company is expected to be at 1.27 x for FY10E and 1.15 x for FY11E

respectively.

• EPS of the company is expected to be at Rs.5.84 and Rs.7.48 for the earnings of FY10E and

FY11E respectively.

• 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.”

BSE SENSEX 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.

• 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.

• Liberty Shoes, one of the five largest footwear manufacturers in the world, is looking for

acquisitions in the domestic and overseas markets.

• Liberty Retail Revolutions (LRRL), a 100% retail subsidiary of Liberty Shoes (LSL), raised Rs 97.5

million to expand its existing retail network and also to meet its long term working capital

requirements.

• We recommend ‘BUY’ this stock with a target price of Rs.118.00 for long term perspective.

Industry Overview

Footwear Industry

The Footwear Industry is a significant segment of the Leather Industry in India. India ranks second

among the footwear producing countries next to China. The industry is labour intensive and is

concentrated in the small and cottage industry sectors. While leather shoes and uppers are

concentrated in large scale units, the sandals and chapels are produced in the household and

cottage sector. India produces more of gents. Footwear while the world’s major production is in

ladies footwear. In the case of chapels and sandals, use of non-leather material is prevalent in the

domestic market. The major production centers India are Chennai, Ranipet, and Ambur in Tamil

Nadu, Mumbai in Maharashtra, Kanpur, Jalandhar, Agra and Delhi.

According to industry reports, the Indian footwear industry was said to be worth $1.48 billion in

2008. The country produces over two billion pairs of different categories of footwear and nearly

95 percent of its production goes to meet its own domestic demand. The export is targeted to

reach $3.43 billion in 2008-09, and is expected to reach $4.53 billion by 2010-11. India exports

footwear to around 30 countries.


Retail Industry

Retail Sector is the most booming sector in the Indian economy. Some of the biggest players of

the world are going to enter the industry soon. It is on the threshold of bringing the next big

revolution after the IT sector. The sector contributes 10% of the GDP, and is estimated to show

20% annual growth rate by the end of the decade as against the current growth rate of 8.5%.

Led by the rising purchasing power, changing consumption patterns, increased access to

information and communication technology and improving infrastructure, the rural retail market

is estimated to cross US$ 45.32 billion mark by 2010 and US$ 60.43 billion by 2015. As per the

National Council of Applied Economic Research (NCAER) reports, there are 720 million consumers

across 6, 27,000 villages in rural India. India's rural markets offer a sea of opportunity for the

retail sector. The urban-retail split in consumer spending stands at 9:11, with rural India

accounting for 55 per cent of private retail consumption. Rural India accounted for almost half of

the Indian retail market, which was worth about US$ 273.64 billion in September 2008. With

most of the retail markets getting saturated in tier-I and tier-II cities, the next phase of growth is

likely to be seen in the rural markets.

____________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other sources

believed to be reliable but we do not represent that it is accurate or complete and it should

not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any

inadvertent error in the information contained in this report. This document is provide for

assistance only and is not intended to be and must not alone be taken as the basis for an

investment decision.


Firstcall India Equity Research: Email – [email protected]

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