Leg up for Bata: Stock hits 52-week high; analysts expect it to do better

The stock of footwear major – Bata India – surged about 18 per cent in the last three months and hit its 52-week high on Wednesday, outperforming the BSE FMCG index that rose 2.2 per cent. Factors such as improving earnings visibility have turned investors bullish. Bata’s better than expected December 2018 quarter (Q3) numbers, announced on Tuesday reinforced investor confidence about the company’s prospects. Thus, the stock, trading at 46 times FY20 estimated earnings, should see good upsides from the current levels, say analysts.

In Q3, net revenues grew by 15.5 per cent year-on-year to Rs 778.7 crore against expectations of Rs 743 crore. Importantly, Bata’s net profit surged by 51.4 per cent year-on-year to Rs 103.2 crore amid impressive margins. The reported net profit was around 35 per cent higher than estimates.

Bata witnessed its highest ever Ebidta (earnings before interest, tax, depreciation and amortisation) margin of 21 per cent in Q3; an expansion of 447 basis points year-on-year.

Besides benign raw material prices (fell 350 basis points as a percentage of revenues, year-on-year) and lower rent (84 basis point down), higher share of premium products in overall sales propelled Bata’s profitability in Q3. As per Sharekhan’s report in December 2018, revenue contribution of premium products went up to 32 per cent just before the end of Q3 from 30 per cent during April-September 2018. Bata’s efforts to improve premium product sales includes expansion of 50 new red-concept stores, launch of new collections in Hush Puppies, among others.

Also, festive season, consumer campaigns and slash in goods and services tax (GST) in July last year for the shoes priced above Rs 500 to Rs 1,000 per pair would have helped push premium products. As per analysts, around 50 per cent of Bata’s volumes comes from this segment. Overall volumes are likely to have risen by around 11-12 per cent in Q3, expect analysts.

The volume traction with major push to premium products would continue even going ahead. This would also be supported by the roll out of omni channel consumer technology in Q3 apart from above mentioned factors. Omni channel is a strategy to improve user experience across multiple retail formats. For instance, if products are not available in store, customers can pay at store and get home delivery within 48 hours.