Why is Relaxo Footwear falling/rising?

Extended Period of Underperformance

Relaxo Footwears has consistently lagged behind the Sensex and broader market indices over multiple time horizons. Over the past week, the stock has fallen by 4.17%, while the Sensex gained 0.79%. This negative trend extends to the monthly and yearly periods, with the stock declining 7.36% and 35.74% respectively, in stark contrast to the Sensex’s positive returns of 0.95% and 10.47% over the same durations. The underperformance is even more pronounced over the longer term, with a three-year decline of 54.49% against a 39.39% gain in the Sensex, and a five-year drop of 44.59% compared to a 94.23% rise in the benchmark. This sustained divergence highlights structural challenges facing the company and dampens investor confidence.

Weak Financial Performance and Valuation Concerns

Recent quarterly results have been underwhelming, with net sales and profit before depreciation, interest, and taxes (PBDIT) hitting their lowest levels at ₹628.54 crores and ₹81.16 crores respectively. Additionally, cash and cash equivalents stood at a modest ₹25.22 crores in the half-year period, signalling limited liquidity buffers. Operating profit has contracted at an annualised rate of 4.33% over the last five years, underscoring the company’s struggle to generate sustainable growth.

Despite these challenges, Relaxo Footwears trades at a premium valuation, with a price-to-book ratio of 4.8 and a return on equity (ROE) of just 8.3%. This expensive valuation relative to peers, combined with declining profits—down 3.7% over the past year—raises questions about the stock’s attractiveness. Investors appear reluctant to pay a premium for a company with flat recent results and limited growth prospects.

Technical Indicators and Investor Participation

From a technical standpoint, Relaxo Footwears is trading below all major moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages. This downward momentum signals bearish sentiment among traders. Furthermore, investor participation has waned, with delivery volumes on 20 Nov falling by nearly 30% compared to the five-day average. Although liquidity remains adequate for moderate trade sizes, the declining volume suggests reduced enthusiasm among market participants, which may exacerbate price weakness.

Capital Structure and Shareholding

On a positive note, the company maintains a very low average debt-to-equity ratio of 0.01 times, indicating minimal leverage and a conservative capital structure. Promoters remain the majority shareholders, which can provide stability in ownership. However, these factors have not been sufficient to offset the negative sentiment driven by weak earnings and valuation concerns.

Conclusion: Why Relaxo Footwears Is Falling

The decline in Relaxo Footwears’ share price as of 21-Nov is primarily attributable to its prolonged underperformance relative to market benchmarks, disappointing financial results, and an expensive valuation that does not reflect the company’s growth prospects. The stock’s inability to generate consistent profit growth, coupled with flat recent quarterly results and shrinking investor participation, has weighed heavily on sentiment. While the company’s low debt and promoter backing offer some reassurance, these positives have not been enough to counterbalance the negative factors. Investors appear to be favouring other opportunities with stronger momentum and more attractive valuations in the footwear and broader consumer sectors.

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