Bata: Taking the right steps

New store additions, continued investment in marketing and revival in discretionary demand should boost growth

 

Bata's June quarter results missed both sales and net profit expectations. That a weak economic environment would hurt discretionary spending was known and already factored in by the Street. However, the results were below market expectations.

Sales were Rs 622 crore, up 8.6 per cent over a year and net profit at Rs 59 crore was down 4.1 per cent; the Bloomberg consensus estimates were Rs 632 crore and Rs 68 crore, respectively.

Same-store sales (SSS) growth was four to five per cent, in line with the past two to three quarters, so the marginally lower than expected figure wasn't a concern. But, profits did disappoint. It was pulled down by one-offs such as Voluntary Retirement Scheme (VRS) expenses and marketing spend towards its upcoming collection, Spring Summer 2014 (to be launched mid-August).

However, even if one adjusts for the one-offs, the net profit would be Rs 63 crore (up 0.9 per cent), about seven per cent below estimates. A large part of the disappointment was due to the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin. These came in lower than the expectation of 15.6 per cent (down 120 basis points) due to higher employee costs (up 44 bps to 9.9 per cent of sales) and rental expenses (up 80 bps to 11.7 per cent). VRS added to employee costs and new store additions pushed rental expenses.

As a result, on a day when Sensex was down 0.94 per cent, Bata’s share price, which fell by 4.25 per cent intra-day, closed 1.74 per cent lower at Rs 1,231.35 on Wednesday. The company had announced its results post market hours on Tuesday. On Thursday, too, it fell by 1.8 per cent.

The bad news, though, ends there. Analysts remain enthused about Bata's continued investments — in marketing, new store additions and new collections. Apart from driving revenue, these would also bring operational efficiencies. Bata has doubled its capital expenditure in the first half of calendar year (CY) 2014 (to Rs 48 crore) over the first half of 2013.

Despite pressure on consumer spending, Bata has also maintained its plan to add 100 stores in 2014 (currently 1,400), which will aid revenue growth. Analysts, too, sound optimistic and believe the company's sales have bottomed out.

“Bata’s sales growth should recover from here, led by a pick-up in discretionary spending, and higher SSS growth driven by a new marketing campaign. We trim our CY14/CY15 earnings by 11-13 per cent but restate our ‘Buy’ (rating) on the stock,” says Gaurang Kakkad, analyst, Religare Capital Markets.

With the festive season starting this month, there are expectations of better sales growth in the second half of CY2014. An improvement in economic growth would further boost sales of discretionary items, benefiting companies like Bata. The gains in margins could be higher, led by better operating leverage.

“Bata’s revenue growth is expected to improve in the second half of 2014 to 12-12.5 per cent from 8.9 per cent in the first half. We expect a 19.5 per cent revenue growth over CY14-16. As more than half of Bata’s costs are fixed in nature, operating margin improvement is likely to be strong, driving net profit at a compounded annual growth rate of 30.9 per cent over CY14-16,” says Jignesh Kamani, analyst, Nirmal Bang Institutional Equities.

Of the eight analysts polled by Bloomberg since July, five have a ‘Buy’ and the rest have a ‘Hold’ rating on the stock. Their average target price of Rs 1,275, though, is close to the current market price, limiting significant upsides. The stock trades at 36.7 times the CY14 estimated earnings, the peak of its historical one-year forward price to earnings ratio. In this backdrop, investors with a long-term horizon could consider the stock on correction.