Bata India: Trailing in the online race

Stiff competition has hit the firm which has under-invested in brand building

Rising competition from domestic and global players, especially on the online retail platform, has impacted the performance of Bata India in recent times, making the Street cautious on the stock. Foreign brokerage Nomura recently downgraded the stock to a ‘sell’ rating from ‘buy’ and slashed its one-year target price by 36 per cent to Rs 425, indicating a 14 per cent downside from current levels. Slowing consumption demand, frequent mid-management changes, higher inventories (nine-month) and delayed implementation of the enterprise resource planning programme are other factors weighing on performance.

Lumpy quarterly revenue growth (year-on-year) has led to a fall in the adjusted (for one-offs) net profit for four straight quarters ending September. Thanks to the high distribution network of 1,200 stores, Bata's fixed costs have remained unchanged at 35 per cent of sales. As a result, operating profit margin has contracted from 15.6 per cent in calendar year 2013 to 13.6 per cent in FY15. This is likely to contract further over the next two years as it corrects the inventory in the system and steps up ad spending to build brand equity, estimate analysts.

At a time when online retailing is growing at a rapidly, Bata’s large distribution network (about 3.3 million square feet) is no longer an entry barrier. In recent interactions with analysts, the management indicated the company was going slow on store expansion. It would set up only 70-72 in FY16 against the earlier expectation 100 stores. The firm has under-invested in key brands such as Bata, Marie Claire, Power, Naughty Boy, North Star, among others, relative to peers and focused only on store expansion to grow. Licensed brands such as Hush Puppies, and Dr Scholls, however, have grown better and provided some support to overall sales. While a strong brand equity should help, an attractive pricing strategy also holds the key to Bata's successful online presence.

Bata’s management believes its e-commerce division has done exceptionally well and reached approximately 1,400 cities with shipments. It plans to launch 100 footwear designs exclusively for e-commerce. According to analysts at Nomura, these plans might not be sufficient to capture the online market potential.

Notwithstanding these pressures, the Bata scrip trades at 29 times FY17 estimated earnings slightly higher than its own historical average one-year forward price-to-earnings ratio of 28 times. In this backdrop, analysts remain cautious on the near-term prospects. Any improvement in same store sales growth and performance of its products on the online channel could act as key upside triggers for the stock. Successful implementation of the corrective measures will also be crucial.