Bata stock walks steady on healthy retail growth, strong brand equity

Street backs premium valuation given firm's earnings potential

Despite weak top line growth in the March quarter (Q4), the stock of Bata India has gained close to 5 per cent over the last one month, outpacing a 3 per cent rise in the BSE FMCG index. 

What enthused the Street was the expectation of healthy retail growth in the coming quarters and the improving earnings outlook.
 

Like its peers, Bata India, too, witnessed slowing consumption demand in Q4 with deceleration in retail growth to about 11 per cent (18 per cent in Q3). 

However, the Street believes that the company, driven by the retail segment that accounts for 85 per cent of revenues, should post double-digit growth in coming quarters. 
 

Brand equity and a strong position in the organised footwear market continue to be key growth levers for the firm. 

In the near term, what could push top line growth are institutional orders, as well as growth from the e-commerce segment. 

In Q4, the dearth of institutional orders from state governments and a cap by e-commerce channels on sourcing from a particular supplier had also pulled down the overall year-on-year revenue growth to 7 per cent, compared to a double-digit rise in the September and December 2018 quarters. 

Girish Pai of Nirmal Bang Institutional Equities believes that advertising spends could push up footfalls and premiumisation, thereby driving growth at a mid-teen rate.

In addition to revenue growth, a pick-up in retail growth and focus on premium brands should also improve margins. 

The retail business fetches 55-60 per cent gross margin, while the same for institutional orders ranges in the low teens. 

Bata’s gross profit margin expanded sharply by 121 basis points year-on-year to 57.1 per cent in Q4, despite slower top line growth. 

Its Ebitda (earnings before interest, tax, depreciation and amortisation) margin increased by 89 basis points year-on-year to 13.9 per cent.

Brokerages believe that the stock deserves premium valuation (trading at 42 times its FY21 estimated earnings), given the growth and earnings potential.