Equity Research

Equity Research Report Consumer Durables Date: November 07, 2019

Bata India Ltd

Investor’s Rationale

Strong & consistent performance: Bata posted healthy revenue growth of 10.6% YoY to Rs 882.1 crore driven by same store sales growth of 6.5%. Consumer centric initiatives such as enhanced focus on categories like women & youth, refurbishing and redesigning existing store models and higher ad-spends have resulted into better performance. Gross profit continued to witness improvement, with gross margins expanding 140 bps YoY to 54.7%. Retail sales (~90% of revenue) grew by 9% YoY in value while non-Retail grew by 21% YoY. The non-Retail portion includes an institutional order from the West Bengal government. Excluding that order non-Retail would have grown by 12% YoY. On the retail side, revenue growth was price-led as volume grew by 2%-3%.

Margin expansion propels earning growth: Perpetual efforts towards premiumization of product portfolio have resulted into better margins. The management is aiming to enhance the share of premium products by ~ 500 bps in the next two to three years (from current ~50%). A lot of the margin expansion that has come in recent times has been through volume discounts on raw material and finished goods.

Image overhaul to suit changing preference of clients: Bata has constantly undertaken efforts towards transforming its brand image from a mass brand to a premium brand through launch of new trendy collections, investing in marketing spends and redesigning existing store models. To overhaul the image of Bata India among the millennial customers, the company has been innovating on new products. The company indicates that new designs are brought out every Friday into the stores. The company has a 40 member design team that takes inputs from all over the world and adapts it to the Indian market and consumer.

Valuation: Its strong balance sheet and revenue projections based on its dynamic product introduction are set to cement its position in the domestic markets as there lies a huge potential of untapped domestic share that the company aims to target. We value Bata India Ltd at 57x FY22E EPS, with a target price of Rs 2100 representing a potential upside of 21.7% from CMP.

Promoters, 52.96%

FII/FPI, 12.31%

DII, 23.04%

Others, 11.69%

BSE Code: 500043 NSE: BATAINDIA Reuters Code: BATA.NS Bloomberg Code: BATA:IN

Shareholding pattern as on 30th June 2019

1 yr. Price Chart of Stock and BSE

FY19 FY20E FY21E FY22E

Revenue (Rs.Cr) 2,931.1 3,282.8 3,726.0 4,229.0 EBITDA (Rs. cr) 487.8 549.9 631.6 716.8 Adj. profit (Rs.Cr) 329.0 368.5 422.3 473.4 Adj. EPS (Rs.) 25.6 28.7 32.9 36.8 P/E (x) 69.4 61.9 54.0 48.2 P/BV (x) 13.1 11.1 9.5 8.1 EV/EBITDA (x) 53.9 39.5 34.8 30.2 ROE (%) 15.0 20.5 19.4 19.0 ROCE (%) 23.9 30.6 29.1 28.4

Analyst Recommendation: BUY

Rs 1725

Rs 2100

CMP:

2 Year Target -

Face Value 5.0

Market Cap (Rs cr) 21,875

52 week high/low 1814/833

Beta 1.08

Shares O/S (Cr) 12.85

Book Value per Share (Rs) 135.6

Sensex 40,653

Nifty 12,016

02004006008001,0001,2001,4001,6001,8002,000

05,000

10,00015,00020,00025,00030,00035,00040,00045,000

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24-0

9-20

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24-1

0-20

19

Sensex (Rebased) Bata

Equity Research

Strong financials continue to dominate

Bata India, the nation’s leading footwear manufacturer and retailer, reported Rs 882.1 crore in Net Sales and 1,555 million in profit before tax for the first quarter (Q1FY20) of the current financial year, clocking an increase of 11% and 22% respectively over the corresponding quarter of the previous year. The growth is attributed to successful execution of “Sweeping Angela Off Her Feet” strategy. This involves innovative campaigns which have helped to sustain profitable growth across categories and mindful upgradation of stores to provide world class shopping experience to our loyal customers while keeping costs under control. Retail channel continued to grow at a steady pace and supported by double digit growth in E- Commerce & Non-retail channel as well. Going ahead we expect the revenues to grow at a CAGR 9.6% of from Rs 2,634 crore in FY19 to Rs 4,229 crore in FY22.

Branding & addition of stores

During 1QFY20, 33 COCO stores were added on a gross basis while 10 were closed. About 20 franchisee stores were added in the quarter, taking up the total franchisee number to ~160. Bata India Ltd aims to increase COCO store number by a net of 50-70 stores. While on the franchising side, the intent is to take the number up to 200 by the end of FY20. Besides COCO stores and franchisee stores some of the old stores are being renovated. All new stores, renovated stores and relocated stores are given the uniform ‘red-label’ look as the company looks forward to overhaul its image to attract the new age customers.

Strengthening third party business

Online sales account for 5% of turnover of Bata India currently. It was indicated that this segment grew ~60%-70% in FY19 (both from its web store as well as through partner stores) and the company is again aiming at a growth of 60%-70% in FY20E too with an overall objective to scale it to 15% in five years. The company offers around 500 SKUs online. It also stated that the entire online range was exclusive (and hence avoids channel conflict). The footwear sold through its own online outlet does not discount and whenever the shoes get discounted by third party website it was indicated that the hit due to discounting is typically not taken by Bata.

Opportunities in E- commerce space

After dairy and biscuits, salty snacks are the next big category for Britannia to cash on, in terms of the size of opportunity. Recently, the company did a test launch of the baked salty snacks in Tamil Nadu at a price point of Rs 5. It aims to extend it to pan India in a phased manner. They will shortly commission a plant in the West for the snacks portfolio and will add a few more units in West and South both in future.

As operations expand, return ratios to stabilize

Bata India Ltd has witnessed staggering growth in the past 4 years which amplified the return ratios. We expect the company’s return ratios – ROCE and ROE to stabilize in the range of 27.2% and 18.1% respectively as it enters into the maturity stage of the business cycle.

Little scope for margin expansion

A lot of the margin expansion that has come in recent times has been through volume discounts on raw material and finished goods. A further cut by 2%-3% even from the current level can fuel another 100bps-120bps of gross margin expansion even beyond June 2019, ceteris paribus. Since its largest vendor provides for significant chunk of its supplies, the scope for margin improvement looks timid.

Equity Research

Major Highlights for the quarter Q1FY20

Revenue from operations for the Year ended 30th June 2019 of Rs. 882.75 crore has increased by 11% over the corresponding period last year. Revenues from the retail channel (90% of sales) grew 13% whereas revenues from non-retail channel (10% sales) declined 4% YoY in FY19.

In addition to the launch of new collections, Bata continued to shore up its investment in marketing spends with advertisement expense increasing 65.3% YoY to Rs 66.1 crore. As a percentage to sales, ad spends are now at 2.3% in FY19 (1.5% in FY18 and 0.9% in FY17)

In FY19, Bata opened 71 new Bata stores, 51 Franchisee stores and refurbished 47 stores across India. It also relocated 14 stores and closed 28 stores. As on FY19, total number of stores were at 1415 with retail space of 3.07 million sq ft.

Online business continued to witness robust traction with Bata selling more than 1.5 million pairs (vs. 8.9 lakh pairs sold in FY18) and achieved revenue of | 120 crore (4% of sales), up 35% YoY.

Hush Puppies continues to be the biggest brand in the premium footwear space with increasing market share on a YoY basis. Currently, the brand has 90+ COCO stores, which would cross 100 mark by the end of 2019

Return ratios to come down with growing business

Higher growth with expansion into newer categories may lead to a toll on return ratios. We expect the ROCE and ROE of the company to taper down from 30.6% and 20.5% in FY 19 to 27.2% and 18.1% in FY22 respectively.

Revenue growth to be steady

23.8630.59 29.09 28.39

27.19

14.95

20.46 19.44 18.95 18.11

0.05.0

10.015.020.025.030.035.0

FY18 FY19 FY20E FY21E FY22E

ROCE (%) ROE (%)

2,634.2 2,931.1

3,282.8 3,726.0

4,229.0

6.5%

11.3%12.0%

13.5%13.5%

0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%

-

1,000

2,000

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4,000

5,000

FY18 FY19 FY20E FY21E FY22E

Revenue (Rs. Crores) Growth YoY (%)

Equity Research

Net profit to surge going ahead

Outlook and Valuation

We have a BUY rating on Bata India Ltd, given its strong balance sheet and revenue projections based on its dynamic product introduction are set to cement its position in the domestic markets as there lies a huge potential of untapped domestic share that the company aims to target. We value Bata India Ltd at 57x FY22E EPS, with a target price of Rs 2100 representing a potential upside of 21.7% from CMP.

Bata India Ltd - Company Overview

Bata India is the largest retailer and leading manufacturer of footwear in India and is a part of the Bata Shoe Organization. The Company went public in 1973 when it changed its name to Bata India Limited. Today, Bata India has established itself as India’s largest footwear retailer. Its retail network of over 1375 stores gives it a reach / coverage that no other footwear company can match. The stores are present in good locations and can be found in all the metros, mini-metros and towns. Bata’s smart looking new stores supported by a range of better-quality products are aimed at offering a superior shopping experience to its customers. The Company also operates a large non retail distribution network through its urban wholesale division and caters to millions of customers through over 30,000 dealers.

Bata India Limited product portfolio

Casual Shoes

Formal Shoes

Bag-packs and Handbags

Accessories

Diversified product portfolio with revenues spread across each vertical

Source: Company, In-house research

Key Risks

Changing Style and consumer taste Return ratio growth is slowing down Falling margins

220.5 329.0 368.5

422.3 473.4

8.4%11.2%

11.2%11.3% 11.2%

0.0%

5.0%

10.0%

15.0%

-

200

400

600

FY18 FY19 FY20E FY21E FY22E

Net Profit (Rs. Crores) Net Profit margin (%)

85.30%

9.80%

4.80% 0.10%

Biscuits Dairy Bread Gifting

Equity Research

Balance sheet (Consolidated) Profit & Loss Account (Consolidated)

(Rs crore) FY19 FY20E FY21E FY22E

Liabilities

Paid up capital 64 64 64 64

Reserves and Surplus 1678 1984 2344 2756

Net worth 1742 2048 2409 2820

Minority interest 0 0 0 0

Total Debt 0 0 0 0

Other non- current liabilities 103 128 160 200

Total Liabilities 1844 2176 2569 3020

Assets

Total fixed assets 317 361 356 405

Capital WIP 17 20 22 33

Goodwill

-

-

-

-

Investments 0 0 0 0

Net Current assets 1,211

1,465

1,800

2,049

Deferred tax assets (Net) 110 123 138 154

Other non- current assets

190

207

253

379

Total Assets 1844 2176 2569 3020

(Rs crore) FY19 FY20E FY21E FY22E

Total operating Income

2931 3283 3726 4229

Raw Material cost 1287 1467 1658 1882

Employee cost 331 361 410 465

Other operating expenses

825 904 1027 1165

EBITDA 488 550 632 717

Depreciation 64 76 85 101

EBIT 424 474 547 616

Interest cost 14 17 21 25

Other Income 68 77 86 95

Profit before tax 478 534 612 686

Tax 149 166 190 213

Profit after tax 329 368 422 473

Minority Interests 0 0 0 0

P/L from Associates 0 0 0 0

Adjusted PAT 329 368 422 473

Equity Research

Cash Flow (Consolidated) Key Ratios & Valuations (Consolidated)

Y.E March (Rs crore)

FY19 FY20E FY21E FY22E

Pretax profit 478 534 612 686

Depreciation

Chg in Working Capital

64 1

76

-106

85

-163

101

-209

Others 18 17 21 25

Tax paid -149 -166 -190 -213

Cash flow from operating activities

411 355 365 390

Capital expenditure -85 -123 -82 -161

Chg in investments -1 -2 -2 -17

Other investing cashflow 0 0 0 0 Cash flow from investing activities -86 -124 -84 -178

Equity raised/(repaid) 0 0 0 0

Debt raised/(repaid) 0 0 0 0

Dividend paid 0 0 0 0

Other financing activities -76 -79 -83 -87 Cash flow from financing activities

-76 -79 -83 -87

Net chg in cash 249 152 199 126

Y.E. March FY19 FY20E FY21E FY22E

Growth (%)

Net Sales 11.3 12.0 13.5 13.5

EBITDA 34.8 12.7 14.9 13.5

Net profit 49.2 12.0 14.6 12.1

Margin (%)

EBITDA 19.0 19.1 19.3 19.2

NPM 11.2 11.2 11.3 11.2

Return Ratios (%)

RoE 15.0 20.5 19.4 19.0

RoCE 23.9 30.6 29.1 28.4

Per share data (Rs.)

EPS 25.6 28.7 32.9 36.8

DPS 6.3

7.5

9.0

11.0

Valuation(x)

P/E 69.4 61.9 54.0 48.2

EV/EBITDA 53.9 39.5 34.8 30.2

EV/Net Sales 8.4 7.5 6.6 5.8

P/B 13.1 11.1 9.5 8.1

Turnover Ratios (x)

Net Sales/GFA 5.1 4.8 4.8 4.6

Sales/Total Assets 1.6 1.5 1.4 1.4

Equity Research

* To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell.

Member: BSE, NSE, MCX, MCX-SX, CDSL

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Tel: 91-22-67378001 Fax: 91-22-22646410

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Email: research@mjpdirect.com Website: www.mjpdirect.com

Registration Number: SEBI- INZ000218338

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Large Cap. Return Mid/Small Cap. Return Buy More than equal to 10% Buy More than equal to 15% Hold Between 10% & -5% Accumulate* Upside between 10% & 15% Reduce Less than -5% Hold Between 0% & 10%

Reduce/sell Less than 0%