Viewpoint

Bata India
Premiumisation gaining good traction

Bata India (Bata) reported steady operating performance in a challenging

Sector: Consumer Discretionary discretionary environment. Revenue grew by 6.5% y-o-y, driven by
Result Update premiumisation, product innovation and new store addition. The retail
business grew by 4.5% and the wholesale business witnessed healthy
Change growth of over 20%. SSSG came in at 2%, lower than the 5-6% SSSG
reported in some of the past few quarters. Operating profit on a comparable
View: Positive  basis grew by 8% y-o-y with comparable OPM expanding by 32 BPS to
21.3%. Bata has adopted the new tax rate in Q3FY2020 and, accordingly,
CMP: Rs. 1,833 this quarter witnessed a one-time deferred tax adjustment, which impacted
Upside potential: 18-20% á the company’s profitability. Contribution from the premium part of the
portfolio has increased to 50% and is growing at a much faster rate. The
á Upgrade  No change â Downgrade company’s consistent focus on product portfolio enhancement (more focus
on women’s footwear segment), consistent store expansion, improving
store fundamentals, premiumisation and higher investments behind the
Company details brand will help the company maintain its steady operating performance in
the near to medium term.
Market cap: Rs. 23,559 cr
Key positives
52-week high/low: Rs. 1897/1177 ŠŠ Revenue growth of 6.5% was almost in-line with our expectation, mainly
on account of 4.5% growth in the retail channel and 20%+ growth in the
NSE volume: distribution channel.
5.9 lakh
(No of shares) ŠŠ Comparable GPM and OPM expanded by 208 BPS and 30 BPS,
respectively, because of softening raw-material prices, premiumisation
BSE code: 500043 and operating efficiencies.
ŠŠ Contribution from premium end-products increased to 50%, which are
NSE code: BATAINDIA growing at a faster rate.
Sharekhan code: BATAINDIA Key negatives
ŠŠ SSSG stood at 2%, which was lower as compared to 5-6% SSSG in the
Free float: past few quarters.
6.0 cr
(No of shares) ŠŠ One-time tax deferred tax adjustment due to adoption of the new tax
regime impacted the company’s profitability.
Our Call
Shareholding (%)
Valuation – Maintain Positive view with 18-20% upside: We have marginally
Promoters 53.0 reduced our earnings estimates for FY2020 to factor in the slightly higher
effective tax rate as of 9MFY2020. We have broadly maintained our estimates
FII 11.7
for FY2021 and FY2022. Bata’s revamping strategies to rebrand itself and
focus on premiumisation to improve footfalls and gain higher traction will
augur well for the company to achieve double-digit earnings growth in the
DII 21.3 near term. We expect revenue and earnings to report a CAGR of 10.8% and
20.5%, respectively, over FY2019-FY2022. Bata has a strong balance sheet
Others 14.0 with negative working capital and fixed-asset turnover ratio continuously
improving due to better store fundamentals and strong return ratios. We
maintain our Positive view on the stock and expect 18-20% upside from current
Price chart levels.
2000
Key Risks
1800
Any slowdown in SSSG due to fall in demand/footfalls and heightened
1600
competition would threaten revenue growth.
1400
1200
1000
Valuation Rs cr
Feb-19

Feb-20
Jun-19

Oct-19

Particulars FY18 FY19 FY20E* FY21E* FY22E*

Revenues 2,636 2,928 3,176 3,571 3,978
OPM (%) 13.4 16.3 28.0 28.5 29.0
Price performance Adjusted PAT 224 330 379 487 577
% YoY growth 28.6 47.4 14.8 28.7 18.4
(%) 1m 3m 6m 12m
Adjusted EPS (Rs.) 17.4 25.6 29.5 37.9 44.9
Absolute 6.3 6.3 41.2 62.5 P/E (x) 105.4 71.5 62.2 48.3 40.8
P/B (x) 15.9 13.5 13.1 10.7 8.8
Relative to EV/EBIDTA (x) 56.8 41.6 25.7 22.5 20.1
10.6 7.0 31.2 47.0
Sensex RoNW (%) 15.9 20.4 21.3 24.4 23.7
Sharekhan Research, Bloomberg RoCE (%) 16.1 19.4 16.6 15.4 15.7
Source: Company; Sharekhan estimates *estimates include the effect of Ind AS 116

February 07, 2020 37

 Viewpoint
Revenue grew by 6.5%, efficiencies drive up margins: For Q3FY2020, Bata’s revenue grew by 6.5% y-o-y to
Rs. 829.6 crore, almost in-line with our expectation, driven by 4.5% growth in the retail channel (contributes
~85% to total revenue) and over 20% growth in the wholesale channel (contributes ~15% to total revenue).
SSSG stood at ~2% for the quarter, lower as compared to the past few quarters. GPM increased by 208
BPS y-o-y to 60.7%, largely on account of benign raw-material costs and improving product mix (higher
contribution from premium-end products). Implementation of Ind AS 116 drove up reported operating profit
and OPM significantly, which stood at 31.7%. However, on a comparable basis, OPM expanded by ~30 BPS
y-o-y to ~21.3% due to premiumisation and operating efficiencies. Comparable operating profit rose by 8.2%
y-o-y to Rs. 177 crore. Reported depreciation and finance costs were significantly up and net impact of Ind AS
116 on PBT stood at Rs. 3 crore. Comparable PBT grew by 11.4% y-o-y to Rs. 177.6 crore. Comparable reported
PAT grew by ~15.7% y-o-y to Rs. 119.4 crore in Q3FY2020 from Rs. 103.2 crore in Q3FY2019. However, there
was a one-time deferred tax adjustment of approximately Rs. 11 crore-12 crore as a result of shifting to the new
tax regime, excluding which reported PAT would have grown by ~27% to Rs. 131 crore.

Focus on premiumisation: Contribution from premium category products to Bata’s revenue has increased
to 50%. With exceptional growth in the working women vertical, Bata is working towards leveraging the
opportunity by focusing on women’s footwear category. In view of this, Bata opened its third Bata Woman
store in Mumbai during the quarter. According to management, standalone stores including Hush Puppies
and Power have been performing well. Hush Puppies store count now stands at 100, and the company also
opened its first Naturalizer store in Delhi. The company’s thrust is to improve customer experience and get
younger people in stores.

Bata plans around 500 stores in the next five years: Bata currently sells ~47 million pairs of footwear in India
through more than 1,400 retail stores, of which around 150 stores are franchised. The company has added 40
retail stores in H1FY2020. At the current store expansion pace, Bata is on track to achieve its target of adding
60-70 retail stores and ~50 franchisee stores in FY2020. The company is looking at tapping tier II, III and IV
cities by adding around 500 franchisee stores in the next five years, which will add to revenue growth. The
company has already identified 180 such markets in smaller cities pan-India to expand its presence beyond
metros. The company is renovating and relocating its stores to attain maximum operational benefits.

February 07, 2020 38

 Viewpoint
Result Snapshot (Standalone) Rs cr
Particulars Q3FY20 Q3FY19 Y-o-Y (%) Q2FY20 Q-o-Q (%)
Net Revenues 829.6 778.7 6.5 722.0 14.9
COGS 326.4 322.6 1.2 314.8 3.7
Employee expenses 97.5 83.1 17.4 89.0 9.5
Rent 13.0 97.0 -86.6 9.7 33.9
Other expenses 130.2 112.4 15.7 123.1 5.8
Total expenses 567.1 615.1 -7.8 536.6 5.7
Operating profit 262.6 163.6 60.5 185.4 41.7
Other Income 17.1 13.7 24.2 17.7 -3.9
EBITDA 279.7 177.4 57.7 203.1 37.7
Interest expenses 28.5 0.9 - 30.8 -7.4
Depreciation & Amortization 76.5 17.0 - 74.9 2.1
PBT 174.7 159.4 9.6 97.5 79.3
Tax 57.5 56.2 2.3 26.1 120.4
Reported PAT 117.2 103.2 13.6 71.4 64.2
Adj. EPS (Rs.) 9.1 8.0 13.6 5.6 64.2
BPS BPS
GPM (%) 60.7 58.6 208 56.4 426
OPM (%) 31.7 21.0 - 25.7 598
Source: Company; Sharekhan Research

Reported vs. Comparable (Standalone) Rs cr

Particulars Q3FY20 (Reported) Q3FY20 (Comparable) Impact of Ind AS 116
Net Revenue 829.6 829.6 0.0
Rent 13.0 98.2 -85.2
Other expenses 130.2 130.6 -0.4
Operating profit 262.6 177.0 85.6
Interest expenses 28.5 0.5 28.0
Depreciation & Amortization 76.5 16.0 60.5
PBT 174.7 177.6 -2.9
Adj. Net profit 117.2 119.4 -2.2
Adj. EPS (Rs.) 9.1 9.3 -0.2
GPM (%) 60.7 60.7 -
OPM (%) 31.7 21.3 -
Source: Company; Sharekhan Research

February 07, 2020 39

 Viewpoint
Outlook
Bata reported steady performance in 9MFY2020 with revenue and comparable operating profit growing by
8.2% and 13.1%, respectively, despite slowdown in the discretionary environment. Bata has been focusing
on increasing the contribution of premium products in its portfolio and improving its store fundamentals.
Hence, we expect Bata to report overall good growth in FY2020 and margin expansion to sustain driven by
premiumisation. We expect SSSG to sustain at mid-to-high single digits in the near term. Improving product
mix and operating efficiencies at store level would help the company to expand its OPM in the coming years.
We have considered the effect of change in accounting standards to Ind AS 116 and, thus, expect OPM at 28%
in FY2020. Thus, mid-to-high single-digit SSSG, store additions and improving contribution from premium
end-products would result in better operating performance for Bata in the coming years.

Valuation
We have marginally reduced our earnings estimates for FY2020 to factor in the slightly higher effective tax
rate as of 9MFY2020. We have broadly maintained our estimates for FY2021 and FY2022. Bata’s revamping
strategies to rebrand itself and focus on premiumisation to improve footfalls and gain higher traction will
augur well for the company to achieve double-digit earnings growth in the near term. We expect revenue and
earnings to report a CAGR of 10.8% and 20.5%, respectively, over FY2019-FY2022. Bata has a strong balance
sheet with negative working capital and fixed-asset turnover ratio continuously improving due to better store
fundamentals and strong return ratios. We maintain our Positive view on the stock and expect 18-20% upside
from current levels.

One-year forward P/E (x) band

1950.0
50x
1800.0
1650.0 45x

1500.0 40x
1350.0 35x
1200.0
1050.0
900.0
750.0
600.0
450.0
300.0
Aug-14

Aug-18
Apr-18
Jan-16

Jan-19
Jul-17
Sep-15

Sep-19

Feb-20
Nov-17
Jun-16
May-15

May-19
Dec-14
Mar-14

Mar-17
Oct-16

Source: Sharekhan Research

Peer Comparison
P/E (x) EV/EBIDTA (x) RoCE (%)
Particulars
FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E
Relaxo Footwears 104.6 76.7 61.4 56.8 42.9 35.3 23.8 28.5 29.3
Bata 71.5 62.2 48.3 41.6 25.7 22.5 19.4 16.6 15.4
Source: Company, Sharekhan estimates

February 07, 2020 40

 Viewpoint
About company
Bata is the largest retailer and manufacturer of footwear in India. The company has a retail network of over
1,400 stores, including 150 franchised stores, which sell total of ~47 million pairs of footwear. The retail channel
contributes ~85% to the company’s total revenue, whereas the balance 15% is contributed by multi-brand
outlets and the e-commerce channel. Bata currently has a 15% value market share in the organised footwear
market.

Investment theme
Bata has rebranded itself as a modern footwear player recently, which will help the company report double-
digit revenue growth. With the implementation of GST, there is a shift from unbranded to branded products,
which provides further scope for Bata in the Rs. 55,000 crore-60,000 crore footwear market in India, of which
~50% is unbranded. Consistent store expansion, investment behind the brand, mid to high single-digit SSSG
and premiumisation strategies would be key growth drivers for Bata in the near to medium term.

Key Risks
ŠŠ Slowdown in discretionary demand: Any slowdown in SSSG due to fall in demand/footfalls would affect
revenue growth.
ŠŠ Increased competition in highly penetrated categories: Heightened competition would act as a threat to
revenue growth.

Additional Data
Key management personnel
Ashwani Windlass Chairman
Rajeev Gopalakrishnan Managing Director
Sandeep Kataria Chief Executive Officer
Ram Kumar Gupta Chief Financial Officer
Arunito Ganguly Company Secretary
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Life Insurance Corp of India 3.1
2 Aditya Birla Sun Life Trustee Co 2.9
3 Aditya Birla Sun Life Asset Management 2.7
4 Kotak Mahindra Asset Management Co 2.2
5 FundRock Management Co SA 1.9
6 Tata Asset Management Ltd 1.5
7 DSP Investment Managers Pvt Ltd 0.9
8 IDFC Mutual Fund/India 0.9
9 Vanguard Group Inc 0.8
10 Robeco Luxembourg SA 0.8
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 07, 2020 41

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