Mass segment slowdown to keep Bata India's stock under pressure

The Bata India stock has been the top loser among larger listed players in the footwear segment, falling 12 per cent over the past three months.

The company’s muted performance in the first half of FY24 continued in the December quarter. Given the sluggish performance in the previous three quarters, the brokerages have trimmed their earnings estimates for FY24 and FY25 by 14 to 21 per cent.

The footwear major's revenues were flat in the October-December quarter (Q3 FY24) as compared to the year-ago period on the back of the single-digit volume fall.
 

This was on the back of a slowdown in the mass product category and headwinds for discretionary spending.
 

What offset the volume growth was the increase in average selling prices which was driven by premiumisation as the company has stopped taking price hikes for six quarters now. 
 

Same-store sales also remained flat year-on-year (Y-o-Y). 
 

The premiumisation efforts seem to be working with the share of the same in the overall portfolio improving to 34 per cent as 

compared to 30 per cent a couple of years earlier.
 

Even as the overall portfolio was struggling, its premium brands have posted robust growth year-on-year (Y-o-Y) in the December quarter led by Red Label (up 387 per cent), Floatz (65 per cent), Comfit (22 per cent) and Hush Puppies (7 per cent). 
 

While the gross profits rose by just 3 per cent, gross margins expanded by 130 basis points Y-o-Y to 56.1 per cent in Q3.

This was led by lower raw material prices and an improved product mix. However, its operating profit was down 12 per cent.

The operating profit margins fell on the back of higher spending on marketing, technology enhancement, and negative operating leverage.
 

The trend of higher investments is expected to continue in the near term. 
 

In the long term, the company is eyeing double-digit growth led by premiumisation, casual segment, and expansion through the franchisee route.
 

The company continues to expand its store network aggressively and has added 54 stores during the third quarter including own stores, franchises, and shop-in-shop (SIS).
 

It has also renovated 36 stores in the quarter. Excluding SIS, the store count stood at 1,835 with a presence across 1,518 cities/towns.
 

Bata posted a muted show in 9MFY2024 as footwear demand stayed subdued while higher spending towards marketing and technology enhancement hit margins. Near-term prospects are weak as the mass category continues to remain under pressure,” says Sharekhan Research.
 

Given the near-term growth headwinds and premium valuations, the brokerage has maintained a hold rating with a reduced price target of Rs 1,555 a piece. 
 

Following the miss on revenue growth and margins in the quarter, Nuvama Research has downgraded the stock and given it a ‘reduce’ rating.
 

Analysts led by Nihal Mahesh Jham of the brokerage have factored in the elevated expenses and muted top line growth, which has led to a sharp cut in their FY24 and FY25 earnings estimates by 21 per cent and 17 per cent, respectively.
 

The brokerage has also cut the target price to earnings multiple from 40 times to 35 times with a new target price of Rs 1,234. 
 

While Kotak Securities has also reduced its estimates following the Q3 results, they have maintained an ‘add’ rating with a target price of Rs 1,585.
 

This target price is at 45 times FY26 earnings on the expectations of a gradual pickup in demand, given the long-term opportunity in the sector.