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Dear Students,
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
last year.
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RelaxoCinderella
Isn’t that amazing? Why did that happen? The nation needs to know.
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)
https://www.dropbox.com/sh/qgwaha2ygw1tgrm/b9XDTQQGRc
http://www.relaxofootwear.com
http://www.bata.in
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RelaxoCinderella
There is an excel sheet in that dropbox folder with a lot of financial data on the
company.
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
Sanjay Bakshi
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.
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Group 1
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Group 2
Note
1. For the moment, we are assuming that the accounting earnings and true
economic earnings are the same. But this assumption may not be true.
2. Hint: The assumption is false. The true economic earnings are higher than
reported earnings.
3. 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.
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Group 1 & 2
Questions
1. What’s the connection between the work done by Group 1 and Group 2?
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?
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Group 3
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Group 4
Analysis of Profitability
1. For every year, compute the ROIC on a pre-tax basis and segregate it into
Margin and Turnover ratios (Du-Pont Analysis).
2. What conclusions, if any, can you draw from your analysis of margin?
3. What conclusions, if any, can you draw from your analysis of capital turnover
ratios?
Hint: Think entry barriers. Think like a potential competitor who wants to take away
Relaxo’s market share.
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Group 5
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Group 6
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Group 7
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Group 8
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Group 9
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Group 10
Ends
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