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Table of Contents
1. INTRODUCTION ..................................................................................................... 3
1.1 COMPANY INFORMATION ........................................................................................................... 3 1.2 INDUSTRY OVERVIEW ................................................................................................................ 4
2. THE BATA TURN AROUND - HOW SUSTAINABLE IS IT?? ................................................ 7
2.1 BETTER PRODUCT MIX AND MANUFACTURING EFFICIENCIES HAVE IMPROVED MARGINS............................... 7 2.2 STORE REVAMP AND EXPANSION ................................................................................................. 8 2.3 GROWTH IN CHIC RANGE
2.4 2.5 2.6 2.7 2.8 2.9
11 CHASING FOOTFALLS .............................................................................................................. 12 PRICING STRATEGY ................................................................................................................. 13 COST CONTROL TO IMPROVE EFFICIENCY...................................................................................... FINANCIAL TURNAROUND ........................................................................................................ 14 15 JOINT VENTURE COMPANY FORMED BY BATA INDIA LIMITED ............................................................. 16 FULLY FUNDED FOR THE NEXT LEVEL OF GROWTH: .........................................................................
3. CONCLUSION ....................................................................................................... 18
BATA INDIA PVT. LTD. 1. INTRODUCTION
The 77-year -old company is the biggest organized footwear retailer in the country with a market share of 7 per cent of the total Rs 15,712 cror e footwear retail market. More importantly, with 1,200 outlets across the country, Bata is shedding its old- format, drab-looking stores and designs for a new international look and feel. Under P M Sinha, the erstwhile chief of Pepsi Foods in India who took over as chairman in 2004, the subsidiary of Bata Shoe Organization has modeled its business strategy as an FMCG player, rather than a conventional footwear manufacturer. And this move seems to have paid off. Since 2005, sales have grown 42 per cent and profitability has gone up six times. Going ahead, analysts expect Bata¶s attempt to exploit the under-penetrated women and kids footwear segments, besides new product lines to drive the company¶s revenues. 1.1 COMPANY INFORMATION: Share Holding Pattern:
BATA INDIA LTD. SHARE HOLDING PATTERN 10.00 No. Of Shares % Holding Share Holding Pattern as on : 31 Dec 2009 30 Sep 2009 30 Jun 2009 Face Value 10.00 10.00 No. Of Shares % No. Of Shares % Holding Holding PROMOTER'S HOLDING
Foreign Promoters 32785000 51.02 32785000 51.02 32785000 51.02 Sub Total 32785000 51.02 32785000 51.02 32785000 51.02 NON PROMOTER'S HOLDING Institutional Investors Mutual Funds and UTI 5624363 8.75 4087621 6.36 3426338 5.33 Banks Fin. Inst. and Insurance 4295315 6.68 4945365 7.70 4945365 7.70 6641098 10.33 6772512 10.54 7187890 11.18 FII's Sub Total 16560776 25.77 15805498 24.59 15559593 24.21 OTHER INVESTORS Private Corporate Bodies 1594595 2.48 1995529 3.11 1806819 2.81 Directors/Employees 25208 0.04 25208 0.04 25208 0.04 Sub Total 1619803 2.52 2020737 3.14 1832027 2.85 13298191 20.69 13652535 21.24 14087150 21.92 General Public GRAND TOTAL 64263770 100 64263770 100 64263770 100
BATA INDIA LTD. Product Name Year Month Sales PRODUCT REPORT UOM Sales Quantity Value (Crores) Product Mix
Leather Footwear 2008 12 18189 Pairs 645.42 63.72 Rubber / Canvas Footwear 2008 12 19017 Pairs 236.02 23.3 Plastic Footwear 2008 12 10288 Pairs 102.94 10.16 2008 12 0 23.32 2.3 Accessories, Garment & Others Scrap 2008 12 0 3.35 0.33 Other Services 2008 12 0 1.27 0.12 Other Fiscal Benefits 2008 12 0 0.49 0.04
Product Name Year/Month Sales Quantity Chemicals Other Materials 0812 0 Not Leather Rubber Textiles Raw Hides Reported 0812 5,642 KVT 38.63 20.32 0812 2,021 Kgs 23.00 12.10 0812 4,622 Sq Metres 14.03 7.38 0812 1,457 Kgs 8.48 4.46 0812 5,065 Kgs 54.92 28.90 50.93 26.80 UOM Sales Value (Crores) Product Mix
1.2 INDUSTRY OVERVIEW: Due to low entry barr iers and low-cost manufacturers, the domestic footwear market has largely been dominated by the unorganized sector. According to RNCOS, a New Delhi-based industry resear ch firm, in 2008, the organized footwear retail market constituted around 11 per cent of the organized retail mar ket. But things have been changing, for the good. Aided by rising brand awareness and fashion consciousness, the organized footwear retail segment grew at over 34 per cent between 2004 and 2007 to touch Rs 6,100 crore. In the same per iod, the unorganized footwear segment grew by around 2 percent; In fact, the organized market¶s volumes are expected to rise to 2.1 billion pairs by the end of 2012, at a growth rate of 8 per cent over 2007-2012. By target segment, men¶s footwear accounts for the largest share at 54 per cent, followed by kids¶ and women¶s footwear at 32 per cent and 14 per cent, respectively. However, analysts estimate that this composition will get skewed towards children¶s and women¶s footwear in the near future. By the end of 2012, the two segments will account for about half of the Indian
footwear retail market in volume ter ms, against 46 per cent in 2008. RNCOS estimates that between 2009 and 2012, men¶s footwear will grow at a slower pace of 5.2 per cent as the market is reaching saturation (in terms of penetration). The growth will be mainly due to the replacement market and not because of an increase in population. Mostly numbers of competitors are stable, especially because of high entry barrier s. This adds to the rivalry among existing firm. Manufacturers watch each other carefully and make appropriate countermove to match the competitors move. Leading competitor of BIL are Lakhani shoes, liberty shoes, action shoes, woodland, paragon and r elaxo in organized segment.
Year ended Net Sales (Rs. Cr.) Bata India Mar 2009 989.96 9.45 Lakhani India Mar 2009 237.2 1.83 Liberty shoes Mar 2009 241.69 4.41 Mirza tanners Mar 2009 361.03 0.58 Relaxo footwears Mar 2009 407.46 11.86
Footwear industry is labor intensive and concentrated in small and cottage industr y area. Availability of human resour ce is one of important strength of Bata India limited. Below table will tell why this is strengthLabor cost in leading footwear producing countries Country India Pakistan Thailand Vietna m China Romania Indonesia Brazil Portugal Hong Kong Taiwan Korea Rs./hr. 8.254 8.254 20.63 24.76 24.76 28.88 28.88 61.90 218.73 222.85 243.4 297.1
Source- SATRA Technology Centre
Bata has large pool of permanent employees on payr oll that is 6800 as on 2010. BIL emphasis on training and skill assessment program and created a large pool of trained employees.
Company has 8 trade unions and biggest and oldest plant at batanagar witnessed industrial unr est in 1992 when there was a strike from January 3 to May 25, 2002. Strike was resolved through tripart ite settlement for a term of 3 year. During the year 2002-04, company entered into agreement with its eight trade unions wher ein the dearness allowance was capped. Let¶s have a look on major strikes in BI LRETAIL Date Event/all India Bata Event/all India Bata shop (managers union) shop (employee union) July 31, 2002 Strike Strike 1 September 28, 2002 Strike Strike 1 October 2, 2002 Strike Strike 1 July 31, 2004 Strike Strike 1 FACTORY Southca n - Peenya Industrial Area, Banga lore Date Event Lockout 117 219 662 Duration (in days) duration
March 8, 2000 to July 3, 2000
July 3, 2000 to February 7, 2001 Strike February 8, 2001 to September 30, 2001 Go slow 234 October 1, 2001 to January 7, 2002 Lockout 99 January 7, 2002 to October 12, 2003 Strike FARIDABAD Date May 11,2000 July 31, 2002 Event Strike Strike MOKAMEHGHAT Date July 31, 2002 Strike Event
Duration (in days) 1 1
Duration(in days) 1
Hence BIL has good trained manpower who ar e working at low daily wage, BIL is providing all facility to improve their performance, still company is facing problem of lockout, go slow and strike in retail, production unit. There is something which has not been addressed till now or it can be communication gap between top level and worker.
2. The Bata Turn Around- How sustainable Is It??
When Thomas Bata handpicked old loyalist Marcelo Villagran in 2005 from Bata's thriving subsidiary in Chile to steer Bata India, the shoe major was scuffed and worn out. The balance sheet was splattered with red ink, shareholder s were disgruntled, workers were unhappy and India Shining was no longer thronging the outlets of the country's largest shoemaker But even then, Mr Bata highlighted the immense opportunities the country and its market offered for the brand. It was, perhaps, this underlying optimism and simplicity that had helped Villagran, who took the helm as Managing Director in Februar y 2005, to steer it through one of the most dramatic turnarounds of the decade and into its longest profit making streak this decade. Recalling that fight back, from a loss of Rs 62.5 cror e to a profit of Rs 12.5 crore the next year, Bata India Chairman Pr iya Mohan Sinha, a former head honcho of Pepsi and dir ector of Hindustan Unilever says: "What we achieved in 2005 was nothing shor t of remarkable. I've worked with Hindustan Unilever and Pepsi before this, but the experience of reviving a sick company like Bata was thrilling.
2.1 Better product mix and manufacturing efficiencies have improved margins:
Source: Centrum Research
Marcelo Villagran, managing director and CEO of Bata India, agrees. Currently, 40 per cent of revenues come from men¶s wear, but in the coming years the purchasing power of women will change that. Today, ladies wear contributes 25 per cent to the company¶s top line, and children¶s wear, sportswear, canvas and others account for the rest. According to Pranshu Mittal, analyst at Centrum, 90 per cent of purchases take place in the unorganized mar ket largely due to the dressing habits of women, who pr ioritize style over comfor t and durability. Hence, there is a huge potential for or ganized retailers to expand in the ladies footwear. Sensing the changing market dynamics and consumer preferences, Bata has embarked on an aggressive retail expansion. With over 1,200 stores nationwide and 70 new stores planned this year, and with profits growing in a wor ld- wide recession (Rs 10.33 crore for the fir st quarter of 2009 and Rs 18.34 crore in the second quarter ), brand Bata is now basking in its hard ear ned retail glor y. The turnaround was not so much from the point of marketing but was more closely linked to sales, quality and manufacturing capacity.
2.2 Store Revamp a nd Expansion
Although discretionar y spending could trail as the economy trudges back on track, Bata is using the opportunity to expand and consolidate its presence. The company, which has a 15 per cent share of the organized retail market, has adopted a two-pronged expansion strategy. Even as it is opening new large-format stores, it is consolidating existing operations by shutting down cash-drain stores. Villagran explains the rationale: ³We want to change the concept of footwear shopping with large-format stores. And so we plan to open 60 stores in a year. I n the last three years, we opened 200 stores and expect to r eplicate the number in the coming three years. Simultaneously, we are closing all 600 sq ft stores because we cannot offer the var iety we want to. Also these stor es could turn unviable in future.´ Incidentally, the south is the biggest market for Bata, which has about 300 stores in the region, and it will continue to remain so. ³Most of our expansion will be in the southern belt which has some of the country¶s biggest cities,´ says Villagran. Even as the company continues to expand its r etail network, it has managed to reduce rentals per store by 16 per cent through renegotiations.
Layout of old stores:
Layout of New stores:
2.3 Growth in chic range
Ladies and kids footwear categories are expected to grow at a faster rate
Source: Images Retail, Centrum Research
In the year 2009, Bata has already opened 65 stores with a minimum size of 3,000 sq ft. Of the 1,200 stores, 200 are large- format outlets and will sport a new look with extended timings. Some stores are being operated by former employees on management franchise contr acts, while others are run by pr ivate owners. The management believes the stores will become a one- stop for all its brands whether Hush Puppies, Dr Scholl¶s (licensed from Wolverine Worldwide and Dr Scholl¶ s), School Mate, Bubble Gummers, Sandak, Marie Clarie, Haute Couture, Evalite, Ambassador, North Star, Power, or Weinbrenner. Bata is also growing the chain of its premium brand, Hush Puppies, through exclusive outlets. At present it has six such stores. Though the company also retails Reebok brands, Villagran rules out similar third-party brand alliances. Addition in stores and growth in total sales:
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2.4 Chasing footfalls
India has among the lowest per capita footwear consumption at 1.34 pairs a person and an average footwear price of Rs 96. But that will change as consumers demand value offer ings in basic consumer goods and ramp up discretionary spend. Keeping this in view, Bata is looking at a better product mix and introducing premium products Footwear per capita consumption expected to rise at 3.3 % CAGR over CY07- 10
Increasing penetration of organized footwear retailing:
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2.5 Pricing Stra tegy
Average sales price for Bata has increased over the years
Source: Bata Annual Report, Centrum Research
The company has successfully managed to phase out its low-cost variants (Bata sold its µHawai¶ brand to a Brazilian fir m for Rs 3.90 crore in 2008) and increased its average sales price by 15.7 per cent, even as sales grew 7.2 per cent over CY04-CY07. The average selling pr ice has gone up from Rs 51 in 2004 to Rs 270 currently. Though Bata has a presence in leather, r ubber and plastic footwear, the company plans to focus on leather as it is a high value and better mar gin product. The proportion of leather is estimated to increase to 67 per cent by next year from 63 per cent in 2008. The introduction of high-end variants across categories will see the average sale price of footwear increase 11 per cent over CY08-10 to Rs 301. To ensure that the average consumer spend stays high, Bata has been churning designs all through the year. More importantly, Maheshwari of RNCOS says that since ladies are highly fashion conscious, the design collection has to be contemporary. Villagran under stands that. ³We will introduce 700 designs ever y six months across all brands,´ says the 66- year-old. Besides its premium men¶s footwear brand, Hush Puppies, Bata is also wooing ladies with its Marie Clair e brand, which has a price range of Rs 599 to Rs 1,599. To back up this strategy, the company has set up an in-house design team and has roped in Rani Mukherjee as a brand ambassador. While retail accounts for 80 per cent of Bata India¶s sales, the company is also looking at exploiting the high-margin institutional business, particularly safety shoes for industrial use and the defence forces. As Bata¶s retail strategy entails high design chur n, low production volumes of a particular design results in higher manpower and overhead costs. In order to reduce the higher costs resulting from low volumes, and to utilize existing capacities, the company will concentrate on manufacturing
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bulk shoe- line and industrial footwear, feels Mittal. Bata has already sought enlistment as a supplier to the armed for ces, which require 12 million pairs of boots ever y year. That would be a big break, as only unorganized players have been suppliers to the armed for ces thus far. The company has set up a dedicated team, headed by a former army man, to pursue this segment
2.6 Cost control to improve efficiency
Bata being an eight decade old company was car rying its own legacy cost structure. Its old manufacturing processes and plants, high manpower and overheads costs are reasons for its high costs structure. During the restructuring exercise implemented dur ing CY04-07, the company successfully achieved efficiency in its manufactur ing processes, high manpower and overhead costs. This resulted in its gross margins improving by 13.8 percentage point (ppt) during this per iod. Process rationalization and controlling manpower and raw material costs primar ily contributed to this improvement. Bata¶s tur naround from a loss-making unit has not been easy. The company, which was prone to labour wr angles, managed to cut its workforce by offering VRS in the last four years. Thus, staff cost as a percentage of sales fell to 16 per cent in the current year (in the third quarter ended September 2009) from 26.7 per cent five years ago. Despite the addition of marketing personnel in the retail r amp-up, Bata¶s staff strength is expected to increase at a relatively slower pace. Staff costs in absolute terms increased 12 per cent to Rs 42 cr ore in the third quarter on account of the retail expansion, but declined as a percentage of sales by 59 bps y-o-y to 16 per cent. The company has also been outsourcing manufacturing. The proportion of third-party footwear purchases increased fr om 38 per cent in 2004 to 46 per cent in 2007. This proportion is estimated to increase further to 55 per cent by next year. Analysts think that this will enable the company to focus on marketing and limit its manufacturing only to select, highly profitable, footwear. It is not surprising that these initiatives have improved the company¶s operating profit margin to 9.8 per cent in the third quarter, although lower than the 11 per cent seen in the second quarter, which was the highest margin in the last five years. However it is believed the company will maintain its margins at 11 per cent driven by a better product mix and continued savings from cost cutting. Importantly, going forward, Bata will finance its expansion through internal accruals and not through debt. ³We surely want to grow, but not at the expense of the bottom line,´ explains Villagran. Analysts estimate net pr ofit to grow by 10 per cent and 30 per cent in CY09 and CY10, respectively. Importantly, Suman Memani, analyst with Religare Hichens Har rison, feels profitability will also get a boost when the burden of VRS amortization cost ends by March 2010. ³Till date the hit to cash flows, post 2004, was Rs 42 cror e. This year alone they have taken a hit on the Profit & Loss by Rs 5 crore,´ says Memani. Once the burden is off, the return on equity is expected to
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impr ove from 20 per cent in 2008 to 24 per cent by 2011, aided by superior net profit margins and asset turnover. Analysts also expect Bata to maintain its healthy payout ratio at around 30 per cent over the next three years. During the past decade, though the company skipped dividends between 2001 and 2006 owing to poor results, in the subsequent two years it paid 20 per cent and 25 per cent respectively. Apart from the free cash flows, the Street believes that the company will also see inflows from its real estate business.
2.7 Financial Turnaround
Top line growth is expected to be robust In Rs cr FY08 Sales 987.7 Change (% ) 13.8 Ebitda 93.9 Change (% ) 48.8 Net profit 59 Change (% ) 45.4 EPS (Rs) 9.1 Book value (Rs) 46.2 ROE (%) 21.2 P/E (x)* 19.5 Source: Bloomberg; *at Rs 179 The retail expansion and the push in the industr ial segment will kick up volumes. Fuelled by new stores, remodelling of old stores and addition of industr ial shoes, revenues will gr ow 16 per cent over the next two years. More importantly, efforts on the front-end are being supplemented by back-end engineering, primar ily through cost controls. Improvement in margins and return ratios: FY09E FY10E 1,101.60 1,268.70 11.5 15.1 112.6 144.8 19.9 28.5 65 84.9 10.1 30.5 10.1 13.2 57.9 68 20.5 22.8 17.8 13.6
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During the re-structuring exercise implemented during CY04-07, the company achieved efficiency in its high manufacturing processes, high manpower and over head costs. I mprovement in process rationalization in form of r aw material cost and cost reduction in manpower cost resulted in 13.8 Percentage Point improvement in gross margin during the period. Bata had its own legacy cost str ucture, given that it is an eight decade old company. Increased pr oportion of high margin business and continued savings from on-going cost reduction exercise would help EBITDA margin to impr ove by 200bps to 10.8% dur ing CY08E- 10E. This along with reduction in inter est cost would help the company¶s PAT to grow at a CAGR of 24.0% during CY08E10E. ROE is expected to improve from20.1% in CY08E to 23.6% inCY10Eonthe back of superior net profit margins and asset tur nover.
2.8 Joint Venture Company formed by Bata India Limited
River bank Holdings Private Limited (³Riverbank´) River bank is a joint venture company between the Company and Calcutta Metropolitan Group Limited (³CMGL´) pursuant an Agreement dated January 14, 2005. River bank was incorporated on February 18, 2005. Riverbank was incorporated for the purpose of implementing the project of developing an Integrated Modern Township on a part of the surplus land situated at the Batanagar premises of the Company. The main objects of River bank ar e, inter alia, to undertake a Project relating to construction and development of an integrated moder n township in Batanagar as well as any sub-projects including pr ovision of var ious Infr astructure Services, Social Facilities and other services and amenities r elating to the said Project, all in details set out in the Agreement dated January 14, 2005 between the Company and CMGL, and generally to carry out the intent and purpose of the said Agreement. Chesterton Meghraj ( International
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Property Consultants) has submitted a report titled ³Best Use option Study for Batanagar Redevelopment) dated September 11, 2004. Riverbank has appointed Hellmuth, Obata + Kassabaum Inc. (µHOK´) for preparing the master plan for the project. Larsen & Toubro Limited (Engineering Design Research and Consultancy, the design arm of the ECC Division) has also been appointed by Riverbank for undertaking the utility and services planning for the project. The project is currently in the preliminary stages of planning and River bank shall have to seek and obtain approvals from appropriate authorities as and when necessary. Of the 309 acres at Batanagar in Kolkata, 262 acres have been transferred to River bank Developers, a special purpose entity, to build an integrated township. Phase I of the project, which has 10 buildings, is near ly completed. Though Villagr an refused to divulge financial details about the project, market sources say that the management is looking to sell 15 million sq ft at an average price of Rs 2,000 a sq ft. That would mean cash flows of Rs 3,000 crore, though this will happen over phases. Analysts believe that the sur plus cash could to be used either for a higher dividend payout and/or equity buyback. But going by chairman Sinha¶s comments at the 75th AGM, it is unlikely that there will be any surprise. ³We need the cash to expand and grow the business. A higher dividend or issue of bonus shares is not possible unless we grow the business,´ Sinha had told shareholders.
2.9 Fully funded for the next level of growth:
Bata India is expected to generate sufficient internal accruals from its existing business to finance its expansion plan including requirement for additional working capital and to maintain dividend payout. Strong internal cash flows would help Bata in maintaining its gr owth trajectory without depending on external financing (equity as well as debt). Fund requirement v/s fund generation:
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Apart from financing its expansion plans, the company would be able to reduce its existing debt. 3. CONCLUSION The debt equity of the company is expected to reduce to 0.1x in CY10E from 0.21x in CY07. Acknowledging the sustained turnaround, the stock hit a high of Rs 292 in ear ly 2008, but came off in the wake of the financial tsunami later in the year. Given that the company has managed to keep its top line gr owing in trying times, the stock has more than doubled from its December 2008 lows to Rs 184 (December 4). Currently, Fidelity¶s India Focus Fund holds 9 per cent and Life insurance Corporation holds 8 per cent in the company. The challenge for Bata now will be to live up to the growth expectations. Incremental sales have to come in as the company is consolidating its existing outlets to make way for big format stores. So while existing customers are coming to the new outlets, the challenge is to report higher footfalls in the coming quarters. That will be a tough task, though not an impossible one. No one can beat Bata in its reach, but where it lacks is brand recognition. Bata has never been seen as an aspirational brand, so the company needs to aggressively pitch itself against other brands and that will take time. Jagdeep Kapoor, chairman and managing dir ector of Samsika marketing consultancy, is of the opinion ³The beauty of the brand is that it is seen as tr ustworthy, but it needs to connect with the youth. That would mean that the mother brand, Bata, has to look more trendy and youthful. Mere advertising and celebr ity endorsements won¶t work unless it creates an overwhelming brand pull,´ says Mr. Kapoor. Notwithstanding the shortcomings, analysts feel Bata is a good play on the India consumption story. Besides, the stock looks attractive at a PE of 14x its CY10 earnings. There¶s one reason for caution though. Bata has the potential to be a high growth stock if it effectively caters to the aspirational expectations of buyer s, but the risk is that it could end up as a moderate growth company like any another FMCG player.
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