Demand recovery expected to continue – Bata India

Demand recovery expected to continue – Bata India

Update on the Indian Equity Market:

On Wednesday, Indian benchmarks declined for the second consecutive session with NIFTY closing at 18,017 (-0.2%). Among the sectoral indices, OIL & GAS (+0.8%), AUTO (+0.5%), and PHARMA (+0.2%) were the only gainers. PSU BANK (-2.4%), METAL (-1.8%), and REALTY (-1.4%) led the laggards. Among the stocks, UPL (+3.4%), BHARTIARTL (+3.3%), and M&M (+3.0%) led the gainers, while HINDALCO (-3.4%), INDUSINDBK (-3.3%), and TATASTEEL (-2.9%) led the laggards.

Excerpts of an interview with Mr. Gunjan Shah, CEO, Bata India (Bata) with CNBC-TV18 on 8th  November 2021:

  • Bata had a tough time the last 18 months due to the 2 lockdowns. With things opening up, the company is seeing some recovery.
  • In 2QFY22, the company has seen a MoM recovery. He believes that with more stores opening up, recovery is sustainable in the medium term in terms of consumer demand perspective.
  • The immediate priority is getting the company back to pre-pandemic performance levels. Going forward, the portfolio is in line with consumer demand, towards casuals and sneakers. The company is seeing initial progress in this direction but there is a long way to go in that segment.
  • To leverage the Bata brand equity, it is looking for a franchise model in tier 3-5 towns or through multi-brand outlets. The distribution expansion is one of the big areas they are working on.
  • They are also focusing on the digital footprint. The current omnichannel strategy contributed in teens to the revenue in 2QFY22 and the company wants to increase it.
  • The company has taken significant steps towards cost reduction during the pandemic. Some of these are expected to sustain. With business coming back to normal, the quantum of cost savings may not be similar as seen during the pandemic months.
  • Sneakers are used not just for sports but also for other occasions. There is a longer-term trend that consumers will prefer to the extent the comfortable footwear usage once lockdowns are lifted.
  • Casual ranges such as Power, North Star are seeing 40% growth in demand, and the company wants to improve that further. Bata has expanded its merchandise, in casual footwear and launched open footwear.
  • It is ensuring customers connect with the Bata merchandise. For this, they have piloted a big initiative, Sneaker Studio which ensures the entire sneaker range is displayed in a cohesive form in the stores. While this initiative is currently rolled out in major metros, the Company is expanding it in the next 12 months.
  • To conserve cash, Bata had reduced its ad spend during the pandemic period. With the demand recovery, it has started investing in ad campaigns.
  • The company will witness the highest ever addition in franchise stores in FY22. It sees strong penetration potential in Tier 3-5 towns, championed through the franchise model.
  • The next stage of expansion is planned through multi-brand outlets. The company’s coverage has increased from 450 towns to over 900 towns in the last 2 years. It plans to add another 500 towns in FY23 and expects a 20% contribution to the topline from multi-brand outlets.
  • Raw material inflation is witnessed especially in synthetics and plastics. About 25-30% of the portfolio has a significant amount of synthetics and plastics which go into it, where there is significant pricing pressure.
  • It is also focusing on the premiumization story, where realizations are better.

 

Asset Multiplier Comments

  • With Bata’s revenue recovery rate reaching 85% of pre-Covid levels in 2QFY22, we are confident of the company’s performance. We think Bata’s new strategies and focus on cost reduction, omni channel, change in product mix (higher proportion of casual footwear) and calibrated expansion of retail network through asset light franchisee route would aid in providing thrust to revenue growth.
  • We expect the company to benefit from market share gains on account of store expansion in lower-tier cities where the unorganized segment is dominant and who would face pressure on passing on RM inflation through price hikes.
  • We believe a strong balance sheet with healthy cash on books and efficient working capital should support Bata through these testing times.

Consensus Estimate (Source: market screener and investing.com websites)

  •  The closing price of Bata India was ₹ 2,182/- as of 10-November-21. It traded at 182x/ 61x/ 50x the consensus EPS estimate of ₹ 12/ 36/ 44 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,808/- implies a PE multiple of 41x on FY24E EPS of ₹ 44/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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