Better operational show, margin gains ahead for Bata

Despite GST boost and opportunities in footwear segment, high valuations will cap upsides in near term

The Bata stock declined four per cent in two days after the company posted lower-than-expected revenue in the September quarter (Q2). While the coming quarters are expected to be better, the high valuation has meant many brokerages are cautious about buying the stock at current prices.
 

Revenue grew 0.5 per cent to Rs 589 crore in Q2, against expectation of Rs 630 crore. On a sequential basis, it fell 20 per cent, on account of lower sales (down 12 per cent) to the wholesale channel due to the goods and services tax (GST). The management expects sales to recover, with overall same-store-sales (SSS) growth pegged at six per cent.

While revenue was sub-par, operating profit increased 13 per cent over a year to Rs 64.5 crore, better than estimates, with operating profit margin improving 120 basis points (bps) to 11 per cent, on the back of lower raw material costs. There was a 50-bps fall in raw material costs as a percentage of sales, which came in at 44.9 per cent. The savings, however, were offset, to an extent, due to an increase in other expenses and higher employee costs. Net profit jumped 24 per cent over a year to Rs 43 crore but was boosted by higher other income and lower interest and depreciation expenses.

In addition to the results, the near-term trigger has been the revision in GST rates for footwear, from 28 per cent to 18 per cent, which will benefit companies such as Bata and Relaxo.

Analysts at Axis Capital expect the company’s sales to grow 12 per cent annually during FY17-20, led by a focus on the franchisee model, improving product offering and increasing appeal to women and youth. What could be a worry is that competitors such as Mirza International (Red Tape brand) are also looking at entering the women’s footwear segment from the March 2018 quarter. Nevertheless, for Bata, analysts expect margins to move up further to 14 per cent by FY20, as operating leverage kicks in, on the back of consistent growth and premium offerings. For FY18, the management expects margin at 12 per cent.

Despite expected increase in revenue and margin, analysts believe the stock, up 77 per cent over the past year, is trading at an expensive 39 times its FY19 earnings estimate. They believe it should be at 32-35 times the earnings.