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Liberty Shoes Equity Research

HomeCompanyLiberty Shoes Equity Research

Date of Research – 19 January 2016

Price – Rs. 172.90

About the Company

Establishes in 1954, Liberty Shoes Limited (“Liberty” or the “Company”) is one of the leading manufacturers in the leather footwear industry in India.

Apart from being the leader in the foot wear industry, Liberty provides various foot wear, shoe care and lifestyle accessories-ranging from backpacks, socks, belts, wallets, travel bags, and handbags for women. The Company o­ffers a diverse product portfolio. The range of products appeals to men, women and kids of all ages

Liberty’s brands include Coolers, Footfun, Force 10, Fortune, Gliders, Prefect, Senorita, TipTop, Warrior and Windsor.

The Company currently serves customers in more than 25 countries, which includes major international fashion destinations like France, Italy and Germany, through its worldwide distribution network of 150 distributors, 400 exclusive showrooms and more than 6,000 multi-brand outlets.

Liberty operates in three interfaces, namely, Liberty Revolutions, Liberty Exclusive Showroom and Liberty Factory Price Outlet.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 339.11 483.90 525.69 454.17  497.39
Expenses 311.75 442.89 482.10 411.21  458.03
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 27.36 41.01 43.58 42.95  39.36
Depreciation 8.05 11.07 12.42 13.50  13.59
Finance Costs 12.30 16.08 16.07 16.39  15.82
Other income 0.24 0.35 0.49 0.34  0.47
Exceptional items 0.20 0.20 0.71 1.18  0.42
PBT 7.05 14.02 14.86 12.23  10.01
Tax (0.12) 0.76 (2.06) 2.18  3.62
PAT (before Minority Interest and share of Associates) 7.17 13.27 16.92 10.05  6.39
Profit/ (loss) attributable to Minority Interest – 
Share of profit / (loss) of Associates – 
Consolidated Profit / (Loss) for the year 16.92 10.05  6.39

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 8.07 8.48 8.29 9.46  7.91
Net Profit Margin Ratio 2.11 2.74 3.22 2.21  1.28

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 17.04 17.04 17.04 17.04 17.04 
Share application money pending allotment – 
Reserves & Surplus 114.74 119.70 121.19 128.58 138.86 
Net worth (shareholders funds) 131.78 136.74 138.23 145.62 155.90 
Minority Interest – 
Long term borrowings 7.88 10.46 12.09 11.36 7.76 
Current liabilities 182.69 194.47 208.88 240.53 219.26
Other long term liabilities and provisions 4.70 4.78 5.17 6.04 6.22 
Deferred Tax Liabilities 5.05 5.10 4.63 2.07 1.46 
Total Liabilities 332.10 351.55 369.00 405.62 390.61 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 102.79 101.44 99.39 97.68 99.37 
Noncurrent Investments – 
Current assets 199.90 223.14 253.58 287.34 269.75 
Long term advances and other noncurrent assets 29.41 17.81 16.02 20.60 21.49 
Goodwill on consolidation (net) 9.15 – 
Total assets 332.10 351.55 369.00 405.62 390.61 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 21.01 18.59 27.28 27.76 26.24 
ROE / RONW 5.79 5.24 9.60 11.62 6.45 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 339.11 483.90 525.69 454.17  497.39
Growth (%) 1.81 % 42.70 % 8.64 % (13.61 %)  9.52 % 
PAT (Rs. Cr.) 7.17 13.27 16.92 10.05  6.39  
Growth (%) (6.03 %) 85.06 % 27.54 % (40.57 %)  (36.42 %) 
Earnings Per Share – Basic (Rs. ) 4.21 7.79 9.93 5.90  3.75 
Earning Per Share – Diluted (Rs. ) 4.21 7.79 9.93 5.90  3.75 
Price to Earnings 20.02 38.26 20.23 24.07  47.73 

Dividend History

The Company has maintained a dividend yield of 0.25 % over the last 5 financial years. The Company has declared dividends only for FY 2014 and FY 2015. 

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Liberty’s average current ratio over the last 5 financial years has been 1.12 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Liberty’s average long term debt to equity ratio over the last 5 financial years has been 0.07 times which indicates that the Company operates with very low level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Liberty’s average interest coverage ratio over the last 5 financial years has been 2.59 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Liberty reported a promoter holding of 61.74 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 0.08 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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