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Value Investing

Case 1: Relaxo

Case 1: Relaxo (by Ravi Purohit, CIO of Securities Investment Management Pvt Ltd) 


This is a case study from 2013 when Mr Purohit’s firm was still invested in Relaxo and its future potential was being analysed. 



  • In 2013, Relaxo’s strategy was to use iconic brand ambassadors with the likes of Mr Salman Khan, Mr Akshay Kumar and Ms Katrina Kaif. 
  • Very high Advertisement and Sales Promotion expenses, almost to the tune of ₹144cr when pre-tax profit was a mere  ₹67cr
  • Pre-tax Return on Equity (RoE) was 35% in 2012 vis a vis 14% 10 years back. 
  • Company pays low dividends 
  • Average realisation per pair was RS 100 (or less than $2). A US company, Havaianas sold high end flip flops for $90. 
  • In the FY 2013, the company sold 100 million pairs of footwear having grown from 64 million in 2008. Profit per pair was a meagre ₹4.48 having grown from ₹1.64 in 2008. 



1. This case study helps us understand branding and heavy advertising in a big way. The sole objective of heavy advertisement and marketing campaigning should not be visibility. That’s the preliminary objective to get the brand to enter a consumer’s Awareness Set. However, the final and most important objective is culminating that awareness into purchase and hence, profitability for the company. The lesson learnt here is that it is not sufficient to heavily advertise just so that the consumers know about the brand but the marketing pull should be so massive that the consumers actually purchase the brand’s products and continue purchasing in future as well. 


2. One should not look at any line item on a standalone basis. A high advertisement expense with relatively low profits does not mean that the expense is not justified. There is a lot of subjectivity involved in accounting. In Relaxo’s case, it would have been better to have capitalised the advertisement expense and then amortized the same over a given number of years.


One should capitalise an expense when the benefits of that expense is of an enduring nature, in the sense that it leads to long-term benefits. To prevent  accountants to inflate profits by this accounting gimmick, one must perform two tests for an expense which is being capitalised. It should be checked that the RoE (Return on Equity) before the treatment is high and secondly, the company is gaining and not just maintaining market share. Any expense incurred to maintain market share is of a defensive nature as not incurring that expense will lead to a loss. That means, spending that money won’t take you forward in your growth trajectory but will only enable you to stay where you are. 


3. The company should have a vision in mind of where it wants to go. Havaianas was Relaxo’s goal and that’s where it was heading. This helps the investors understand the opportunity of growth of a company. 


4. Low dividends doesn’t mean that the company is unreliable. What needs to be checked is whether the company is generating money and if it is, then what is it doing with that retained money? If the company is able to reinvest that money into the business to generate greater profits, why should one complain about low dividends? 


5. A company with a moat has a reliable and investment-worthy business. Having explained the concept of moat before, we see that Relaxo’s moat has its cost advantage, high volumes and production efficiency. Selling a pair of slippers for less than ₹100 and making a profit of just ₹5 per pair was not a replicable business model. A competitor would need significant investment to achieve this level of economies of scale and also, they would have to sustain negative margins for a long time if they wish to take market share from Relaxo. Negative margins would be on account of heavy branding expenses, low price of footwear, high raw material cost on account of being a new player, et cetera. 


6. The company’s cost advantage enabled it to price its footwear really low but didn’t ensure high margins. However, sometimes low margins work in your favour because not only does it keep competitors away (due to lack of attractiveness of such a business model) but also leads to a sustainable business model where customers’ loyalty to the brand keeps on growing (can be corroborated by company’s turnover ratios). 


7. When investing for the long term, one must ensure that a business is good today and will be good tomorrow as well. In simpler words, the business should not become obsolete. Relaxo’s business model is of an enduring nature and not prone to rapid change either. In Buffett’s words, “A moat that must be continuously rebuilt will eventually be no moat at all

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