Term Paper

Financial Statement Analysis & Valuation

Course Code: FIN4201
Valuation of BATA Bangladesh

Submitted To
Sharmin Sultana Sumi
Lecturer
Department of Business Administration in Finance and Banking
Bangladesh University of Professionals

Submitted By
Jannatul Wara
Roll: 2022151042
Section: B
Batch-2020
Department of Business Administration in Finance and Banking
Bangladesh University of Professionals
Letter of Transmittal

20th October, 2023

Sharmi Sultana Sumi
Lecturer
Department of Business Administration in Finance & Banking
Bangladesh University of Professionals

Subject: Submission of Term Paper on the course “Financial Statement Analysis and
Valuation”

Sir,

I'd like to draw your attention to the fact that I’m presenting the final research paper based on
“Valuation of BATA Bangladesh”

I hope that my research paper is detailed and informative. And, I express my utmost gratitude
for giving me the opportunity to conduct this research.

Yours sincerely,
Jannatul Wara

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Table of Content

Company Overview: Bata Bangladesh...................................................................................4

Bangladeshi Footwear Industry Overview............................................................................ 5
Revenue Drivers....................................................................................................................... 6
Cost sources...............................................................................................................................8
Major Risks of the Business.................................................................................................... 9
Investment Positives............................................................................................................... 11
Investment Negatives..............................................................................................................11
Management Quality Assessment......................................................................................... 12
Reporting Quality Assessment.............................................................................................. 12
Ratio Analysis......................................................................................................................... 13
Interpretation of Ratios.......................................................................................................14
Rationale Behind Valuation Model Selection.......................................................................16
FCFE valuation.................................................................................................................. 16
Relative Valuation.............................................................................................................. 17
Valuation................................................................................................................................. 18
FCFE valuation.................................................................................................................. 18
Relative valuation...............................................................................................................19

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Company Overview: Bata Bangladesh
Bata Bangladesh is a prominent subsidiary of Bata Shoe Organization, one of the world's
largest and most renowned footwear manufacturers and retailers. Established in 1962, Bata
Bangladesh has since become a leading player in the country's footwear industry, providing a
wide range of shoes for individuals of all ages and demographics. With a rich heritage
spanning several decades, the company has evolved to cater to the diverse fashion and
comfort needs of the Bangladeshi population.

Legacy and Global Presence: Bata, a globally recognized brand, has been serving customers
for over 125 years. The brand's rich heritage and global reputation for quality and
affordability are echoed through Bata Bangladesh.

Extensive Product Portfolio: Bata Bangladesh offers an extensive range of footwear,

including shoes for men, women, and children, catering to various styles, preferences, and
occasions. They also provide an assortment of accessories and leather goods.

Retail Network: Bata has a widespread retail network across Bangladesh, with numerous
standalone stores, outlets in shopping malls, and franchises. This widespread presence
ensures that Bata products are easily accessible to customers throughout the country.

Quality and Innovation: Bata places a strong emphasis on product quality and innovation.
The company consistently invests in research and development to create comfortable,
durable, and stylish footwear.

Commitment to Sustainability: Bata Bangladesh is committed to sustainable business

practices, incorporating eco-friendly initiatives and responsible sourcing in their operations.

Community Engagement: The company actively engages in community and social

initiatives, promoting education and health, and supporting various local development
projects.

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Customer-Centric Approach: Bata places the utmost importance on customer satisfaction,
offering a personalized shopping experience and excellent customer service.

Bata Bangladesh continues to be a trusted name in the footwear industry, serving the diverse
needs of the Bangladeshi population with a wide range of affordable, stylish, and comfortable
footwear options. With a focus on quality, sustainability, and community engagement, the
company remains a significant player in the country's retail landscape.

Bata Bangladesh is a prominent player in the footwear industry in Bangladesh. To provide an

industry overview, let's explore the footwear industry in the context of Bangladeshi
industries:

Bangladeshi Footwear Industry Overview

1. Historical Significance:
The footwear industry in Bangladesh has a long history dating back to the British colonial
period. It has evolved significantly over the years and has now become a major contributor to
the country's economy.

2. Market Size and Growth:

The Bangladeshi footwear industry has experienced substantial growth in recent decades. It
encompasses a wide range of products, including shoes, sandals, leather goods, and sports
footwear. The industry has demonstrated consistent growth, driven by both domestic and
international demand.

3. Export Orientation:
One of the defining features of the Bangladeshi footwear industry is its strong focus on
exports. Many renowned global brands, including Bata, source their products from
Bangladesh due to its cost-effective and skilled labor force. The industry plays a crucial role
in the country's export earnings.

4. Labor-Intensive Industry:

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The footwear industry in Bangladesh is highly labor-intensive, with millions of workers
engaged in various stages of production, from leather processing to final assembly. This
labor-intensive approach has been a significant factor in the industry's competitiveness.

5. Leather Production:
Bangladesh is also known for its leather production, particularly in the city of Dhaka. The
country exports both raw and processed leather to various global markets, contributing to the
overall value chain of the footwear industry.

6. International Competitiveness:
Bangladesh is recognized for its cost-competitive production of footwear and leather
products. The availability of skilled labor, favorable trade policies, and low production costs
have contributed to its competitiveness in the global market.

7. Challenges and Opportunities:

While the Bangladeshi footwear industry has seen remarkable growth, it faces challenges
such as environmental concerns, improving workplace conditions, and maintaining ethical
manufacturing standards. On the flip side, these challenges also present opportunities for
industry players to invest in sustainability and meet the growing demand for eco-friendly
products.

Revenue Drivers
Footwear Sales: The primary source of revenue for Bata Bangladesh is the sale of footwear.
This includes a wide range of products such as formal shoes, casual shoes, sports shoes, and
sandals. The volume and pricing of these sales play a significant role in driving revenue.

Brand Strength: Bata is a well-established and trusted brand in Bangladesh. The strength of
the Bata brand can influence customer loyalty and their willingness to pay premium prices,
which in turn affects revenue.

Product Mix: Bata offers various product lines, including men's, women's, and children's
footwear. The product mix and the demand for specific product categories impact revenue
diversification and profitability.

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Retail Presence: The number and location of Bata retail stores in Bangladesh are critical
revenue drivers. A strong retail presence increases the accessibility of products to customers.

E-commerce Sales: In recent years, e-commerce sales have become increasingly important
for retailers. Bata Bangladesh's online sales and digital presence, including its website and
mobile app, contribute to revenue.

International Operations: If Bata Bangladesh exports its products to other countries,

international sales and expansion can significantly impact revenue. This may involve
analyzing the performance of export markets.

Price Points and Margins: The pricing strategy and profit margins on products sold are
fundamental to revenue. Higher-margin products and efficient pricing strategies can boost
revenue and profitability.

Consumer Trends and Preferences: Understanding changing consumer preferences and

market trends is crucial. Adapting product offerings to align with these trends can drive sales.

Marketing and Advertising Efforts: The effectiveness of marketing and advertising

campaigns can influence brand visibility and customer acquisition, thus impacting revenue.

Competitive Landscape: The competitive environment in the footwear industry in

Bangladesh, including the presence of local and international competitors, can affect Bata's
market share and pricing strategies.

Economic Conditions: Economic conditions in Bangladesh, such as GDP growth, inflation

rates, and consumer purchasing power, can have a direct impact on consumer spending on
footwear.

Supply Chain Efficiency: Efficient supply chain management can reduce operational costs
and positively affect profitability and, indirectly, revenue.

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Operational Efficiency: Operational efficiency in terms of inventory management,
manufacturing processes, and cost control can impact the overall financial health of the
company, which in turn affects revenue.

Regulatory Environment: Compliance with local regulations and tariffs can affect the cost
structure and pricing strategies, ultimately influencing revenue.

Cost sources
Cost of Goods Sold (COGS): This includes expenses related to the production of shoes,
such as materials, labor, manufacturing overhead, and transportation costs.

Operating Expenses: These are the day-to-day costs of running the business, which may
include rent, utilities, salaries and wages, advertising, and administrative expenses.

Raw Material Costs: The cost of sourcing and purchasing raw materials like leather, rubber,
and fabric for shoe production.

Labor Costs: This encompasses wages and benefits for employees involved in
manufacturing, sales, and administrative roles.

Distribution and Transportation Costs: Expenses associated with distributing products to

retail stores, including transportation, warehousing, and logistics.

Marketing and Advertising Expenses: Costs related to marketing campaigns, advertising,

and brand promotion.

Rental and Lease Costs: Expenses for renting or leasing retail space, offices, and
manufacturing facilities.

Depreciation and Amortization: The allocation of costs related to the depreciation of assets
like manufacturing equipment and office infrastructure.

Interest Expenses: The cost of debt, including interest on loans or bonds.

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Taxes: Corporate income taxes, sales taxes, and other tax liabilities.

Inventory Costs: The expenses associated with storing and managing inventory, which
includes warehousing and potential obsolescence costs.

Research and Development (R&D) Expenses: Costs associated with developing new shoe
designs and improving existing products.

Legal and Regulatory Compliance Costs: Expenses for ensuring the company complies
with local and international regulations.

Insurance Costs: The expenses related to insurance coverage for various risks, including
product liability and property insurance.

Exchange Rate Fluctuations: If Bata Bangladesh imports or exports materials or products,

currency exchange rate fluctuations can impact costs.

Supply Chain Disruptions: Costs related to supply chain disruptions, such as delays in
material delivery or disruptions caused by geopolitical factors.

Environmental and Sustainability Initiatives: Expenses associated with sustainability and

environmental compliance efforts, which may become increasingly important for the
valuation of a company.

Quality Control Costs: Expenses associated with maintaining product quality and safety
standards.

Major Risks of the Business

Market Risk: Changes in consumer preferences and market conditions can significantly
affect Bata Bangladesh's sales and profitability. Factors such as economic downturns, fashion
trends, and competition from other footwear brands pose a significant market risk.

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Supply Chain Disruptions: Any disruption in the supply chain, such as issues with raw
material sourcing, transportation, or manufacturing, can lead to production delays and
increased costs, impacting the company's bottom line.

Foreign Exchange Risk: Bata Bangladesh may be exposed to foreign exchange risk if it
imports raw materials or products from abroad. Exchange rate fluctuations can affect the cost
of goods and profit margins.

Regulatory and Compliance Risks: Changes in government regulations, including labor

laws, environmental regulations, and trade policies, can impact Bata Bangladesh's operations
and compliance costs.

Competition: The footwear industry is highly competitive. New entrants, changing consumer
preferences, and the presence of established competitors can erode market share and
profitability.

Brand Reputation: Negative publicity, product recalls, or quality issues can damage the
Bata brand's reputation, resulting in loss of customers and revenue.

Labor and Workforce Risks: Labor strikes, issues related to labor laws, or difficulties in
finding skilled workers can disrupt production and increase operational costs.

Economic and Political Instability: Bata Bangladesh is exposed to risks associated with
economic downturns and political instability in the country. These factors can impact
consumer spending, production, and distribution.

Seasonal Variability: The footwear industry often experiences seasonality, with sales
peaking during certain times of the year. A decline in demand during off-seasons can affect
cash flow and profitability.

Technology and Innovation: Bata must continuously invest in research and development to
stay competitive. Failure to adapt to technological changes and evolving consumer
preferences can pose a significant risk.

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Credit and Financial Risks: Bata Bangladesh may face credit risk if customers or suppliers
default on payments. Additionally, financial risks like high debt levels or cash flow issues can
affect the company's financial stability.

Investment Positives
Established Brand: Bata is a well-known and trusted brand with a long history of operations
in Bangladesh. Its strong brand recognition can be an asset for investors.

Retail Footprint: Bata has an extensive retail network in Bangladesh, with a presence in
urban and rural areas. This broad reach offers substantial market coverage and growth
potential.

Diverse Product Portfolio: Bata offers a wide range of footwear products for various age
groups and purposes, catering to different consumer segments and preferences.

Global Backing: Being part of the global Bata group provides access to resources, expertise,
and global trends, which can be beneficial for product innovation and marketing strategies.

Stable Economy: Bangladesh's growing economy and population provide a stable and
potentially expanding market for retail businesses.

Investment Negatives
Competitive Market: The footwear retail market in Bangladesh is highly competitive, with
numerous local and international brands. This competition can exert pressure on profit
margins.

Regulatory Challenges: The retail industry in Bangladesh can be subject to various

regulations and bureaucratic red tape, which can pose challenges for investors.

Supply Chain Risks: Managing a complex supply chain for footwear production can be
vulnerable to disruptions, including material sourcing, transportation, and labor issues.

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Changing Consumer Preferences: Consumer tastes and preferences can change rapidly,
necessitating continuous adaptation in product offerings, which can be costly and uncertain.

Exchange Rate Fluctuations: Bata Bangladesh may be exposed to exchange rate risks,
especially if it imports materials or products. Currency fluctuations can impact costs and
pricing.

Environmental and Labor Concerns: Increasing environmental and labor standards

expectations may require investments in sustainability and labor practices to remain
competitive.

Economic Fluctuations: Economic downturns can lead to reduced consumer spending on

non-essential items like footwear, affecting sales and profitability.

Management Quality Assessment

Bata Bangladesh has demonstrated strong management quality through its ability to adapt and
thrive in the competitive footwear market. The company's leadership team has shown a
commitment to strategic planning, operational efficiency, and innovation. Their focus on
quality control and adherence to global standards in product manufacturing has contributed to
a strong brand reputation. Bata Bangladesh's management has also emphasized corporate
social responsibility, engaging in various community and sustainability initiatives.
Additionally, their effective supply chain management and distribution networks have
allowed the company to maintain a prominent position in the market. Overall, Bata
Bangladesh's management quality reflects a well-rounded approach that balances business
growth, customer satisfaction, and responsible corporate practices.

Reporting Quality Assessment

Bata Bangladesh's financial reporting and disclosure practices are generally of high quality,
reflecting transparency and adherence to accounting standards. The company consistently
provides comprehensive annual and quarterly financial statements and disclosures that offer
stakeholders a clear view of its financial performance. Key strengths of Bata Bangladesh's
reporting quality include:

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Compliance with Accounting Standards: The company adheres to relevant accounting
standards and regulatory requirements, ensuring the accuracy and reliability of its financial
statements.

Timely Reporting: Bata Bangladesh demonstrates a commitment to providing financial

information in a timely manner, both for quarterly and annual reporting. This punctuality aids
investors and analysts in making informed decisions.

Comprehensive Financial Statements: The company's financial statements are

comprehensive and include balance sheets, income statements, and cash flow statements.
These reports provide a holistic view of the company's financial health.

Segment Reporting: Bata Bangladesh provides segmental information, which helps

stakeholders understand the performance of different product lines and geographic segments.
This transparency aids in assessing the company's diversified business operations.

Audited Financials: The financial statements are audited by reputable auditing firms,
ensuring an independent and unbiased assessment of the company's financial position.

Disclosure of Risks: Bata Bangladesh appropriately discloses financial and non-financial

risks in its reports, helping investors and analysts understand the potential challenges that
may affect the business.

Sustainability Reporting: The company demonstrates a commitment to sustainability and

corporate social responsibility by providing information on its environmental and social
initiatives, aligning with global reporting trends.

Ratio Analysis

2020 2021 2022

Liquidity ratio-

Current Ratio 2.017391969 1.899441102 1.598612007

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 Profitability Ratios-

Gross Profit Margin 0.1162241888 0.2769528728 0.362962963

Return on Assets
(ROA) -0.1997286705 -0.01055900621 0.05487152034

Return on Equity
(ROE) -0.3585926928 -0.01969872538 0.1188405797

Efficiency Ratios-

Inventory Turnover
Ratio 1.432807269 1.960420315 2.156276833

Debt and Solvency

Ratios-

Debt to Equity Ratio 0.2947225981 0.3079374276 0.3269565217

Interest Coverage Ratio 5.864705882 1.1375 6.109090909

Market Ratios

(P/E) Ratio 22.86 26.18 30.68

Quick Ratio 0.4398054835 0.4585715189 0.5510992546

Interpretation of Ratios
Liquidity Ratios
1. Current Ratio
Interpretation: The current ratio measures the company's ability to cover its short-term
liabilities with its short-term assets. A higher ratio is generally better, but a significant drop
from 2020 to 2022 may indicate potential liquidity issues.

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Profitability Ratios:
1. Gross Profit Margin
Interpretation: The gross profit margin represents the percentage of sales revenue that
remains after deducting the cost of goods sold. The increasing trend suggests improved
profitability.

2. Return on Assets (ROA)

Interpretation: ROA indicates how efficiently the company is using its assets to generate
profits. The positive trend shows improved asset utilisation.

3. Return on Equity (ROE)

Interpretation: ROE measures the return on shareholders' equity. The positive shift from
negative to positive values indicates increased profitability in relation to shareholder
investments.

Efficiency Ratios
1.Inventory Turnover Ratio
Interpretation: This ratio assesses how quickly inventory is sold. The increasing trend
suggests better inventory management.

Debt and Solvency Ratios

1. Debt to Equity Ratio
Interpretation: This ratio compares the company's debt to its equity. The increasing trend
indicates a higher reliance on debt for financing.

2. Interest Coverage Ratio

Interpretation: It measures the company's ability to cover interest expenses with its
earnings. The low value in 2021 suggests potential challenges in meeting interest obligations.

Market Ratios
1. Price/Earnings (P/E) Ratio:
Interpretation: The P/E ratio represents the market's assessment of the company's future
earnings potential. An increasing P/E ratio may indicate growing confidence in the company.

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2. Quick Ratio:
Interpretation: The quick ratio assesses the company's ability to cover short-term liabilities
with its most liquid assets. The increasing trend indicates improved liquidity.

Rationale Behind Valuation Model Selection

FCFE valuation
Cash Flow Focus: FCFE valuation focuses on the cash flows available to equity
shareholders after accounting for debt and other obligations. Bata Bangladesh's shareholders
are primarily interested in assessing the potential return on their equity investments, making
FCFE a suitable model.

Suitable for Growth Companies: Bata Bangladesh may be in a growth phase, and FCFE is
particularly useful for valuing companies with changing capital structures and varying growth
rates. It allows for flexibility in modeling future growth and reinvestment.

Reflects Economic Reality: FCFE takes into account the actual cash generated by the
company, considering both operating and financial decisions. It reflects the true economic
reality of the business.

Incorporates Dividend Payments: If Bata Bangladesh pays dividends or is expected to do

so in the future, FCFE accounts for these distributions to shareholders. This is relevant for
investors seeking income from their investments.

Adjusted for Capital Structure Changes: FCFE allows for adjustments in capital structure
over time, including changes in debt levels or equity issuance, providing a dynamic
perspective on value.

Reflects Ownership Interests: FCFE directly represents the interests of equity shareholders,
aligning with their desire to assess the value of their ownership stake in Bata Bangladesh.

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Valuation Flexibility: FCFE valuation offers the flexibility to consider different growth
scenarios and capital allocation decisions, making it well-suited for a company like Bata
Bangladesh, which may have evolving strategic plans.

Relative Valuation
Comparable Analysis: Bata Bangladesh operates in a well-defined industry with other
footwear retailers. Using a relative valuation model allows us to compare Bata's valuation
metrics to its peers, providing insights into how the market values the company in relation to
its competitors.

Industry-Specific Metrics: The footwear industry has unique operating characteristics and
growth patterns. Relative valuation models enable us to account for these industry-specific
factors and assess Bata's performance in the context of its sector.

Market Sentiment: Relative valuation takes into account market sentiment and investor
perceptions, which can be especially relevant for a consumer-focused company like Bata
Bangladesh, where brand perception and market sentiment play a significant role in
valuation.

Earnings and Revenue Trends: Relative valuation models consider the company's earnings
and revenue relative to its peers. This approach helps gauge Bata's financial performance
compared to others in the industry, offering insights into growth prospects and profitability.

Comparable Risk Assessment: By comparing Bata's valuation multiples to its peers, we can
assess relative risk factors. If Bata's valuation is significantly higher or lower than its peers, it
can indicate market perceptions of risk or growth potential.

Investor Confidence: The use of relative valuation models may provide investors with a
clear benchmark for assessing Bata Bangladesh's value, enhancing investor confidence and
decision-making.

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 Valuation

FCFE valuation

Particulars 2023 2024 2025 2026 2027

Cashflow from
opeartions
3,153.55 3,425.77 3,733.29 4,383.94 5,204.60

Less: Capex

(176.77) (198.92) (203.54) (226.07) (242.35)

Add: Net
cashflow from
debts

Free Cash
Flow of Equity 213,127.0
2,976.78 3,226.85 3,529.76 4,157.88 4,962.25 9

RRR/CoE 7.96

PV of FCFE 2757 2768 2805 3061 3384 145344

Total PV 160120.85

Share value 5083.20

Table 1- FCFE model

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Relative valuation

Particula 2018 2019 2020 2021 2022 Median Relative

rs value

P/B 3.22 1.91 2.60 3.83 3.78 3.22 814.66

P/E 15.36 19.28 22.86 26.18 30.68 22.86 114.30

P/S 1.60 1.11 1.89 1.71 3.2 1.60 51.31

Average 326.76

Table 2- Relative model

Comments-
In this scenario, the intrinsic value (5083.20) is significantly higher than the current share
price (985). This suggests that the stock may be undervalued based on the FCFE model. The
stock's intrinsic value is much higher than its market price, indicating a potential buying
opportunity.

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