Bata likely to see volume-led growth amid GST cuts, higher footfalls

Lower input costs, higher share of premium products to improve profitability

Footwear major Bata India is expected to see higher volume growth going ahead, driven by the cut in goods and services tax (GST) as well as higher footfalls. For Footwear priced up to Rs 1,000 a pair, the government had cut GST from 18 per cent to 5 per cent. 

From the end of July this year, when the cuts were announced, the stock has gained about 18 per cent, outperforming peer index BSE FMCG that clocked gains of 1.5 per cent, in the process. 

Analysts had upgraded the stock as they had expected the company to report better numbers starting from the December quarter.

Bata is a major beneficiary of the GST cut, given that it gets a major chunk of revenues for products priced below Rs 1,000. 

“With about 50 per cent of Bata's volumes coming from products priced in the range of Rs 500-1,000, the GST cuts should improve the overall volume growth,” says Zececa Doshi, analyst at Sharekhan. 

 

Incremental revenue growth is also expected from higher footfalls at stores.

Volume growth is supported by a high profile marketing campaign, e-commerce segment (3-4 per cent of total sales) and store expansion. 

“The 50 new international design ‘Red Angela’ stores has helped yield positive results by way of footfalls and customers,” say analysts at Angel Broking.

While the marketing campaign adds to operating expenses, sale of more profitable premium products, lower inflation (mainly rubber), cost efficiency should improve Bata’s operating profit margin. 

Analysts estimate around 160 basis point year-on-year expansion in earnings before interest, tax, depreciation and amortisation (EBITDA) in FY19, as well as a further 100 basis points in FY20.

Yet, cheaper imported footwear, despite the rise in import duty, could weigh on volumes in the lower segment (up to Rs 500). 

However, analysts believe that the impact of the same on the company may be lower as customers are now moving towards higher quality products rather than cheaper imports.

In this backdrop, any sharp fall in the stock, which is trading at around 38 times its FY20 estimated earnings, provides good entry for long-term investors.