Bata India: Running on the right track

Focus on women's segment and store expansion expected to improve firm's growth metrics

On a day the market was trading lower, Bata India surged nearly seven per cent after the company delivered better-than-expected results for the June quarter (Q1). The results, declared after market hours on Wednesday, saw it beat operating profit and net profit expectations. Revenues were broadly in line with analysts' estimates. While the top line at Rs 736 crore was up 10 per cent year-on-year (y-o-y), the increase in the operating and net profit was much higher at 16 per cent and 20 per cent, respectively. New store additions and strong same-store sales growth of 10 per cent helped revenues and higher gross margins, which were up 221 basis points y-o-y on account of value-added products, while change in product mix improved profitability.

Nomura’s Manish Jain said there definitely seemed to be a recovery, which was setting in as far as growth momentum was concerned. The company, which added 100 new retail stores and 23 franchise outlets across India in FY17, intends to add 50 new stores in FY18, mostly in Tier-II and Tier-III markets. In addition, Bata also plans to open 100 company-owned and operated stores to improve its presence in malls and high street locations. Bata is pushing sales through the online format with the internet medium helping it achieve sales of Rs 69 crore from a volume of 630,000 pairs in FY17.

The key focus area in the current financial year is the women’s segment. The company is looking at launching trendier styles to tap this segment and in the process increase the share of business from 26 per cent currently to 35 per cent, over the next couple of years. Men’s footwear accounts for about half the sales, while the rest (excluding women) comprises children’s footwear and accessories.

The other trigger for Bata is the implementation of the goods and services tax (GST), as higher compliance cost for a sector, 60 per cent of which is dominated by unorganised players, should help it gain market share. 

Given the focus on women- and youth-centric designs and aggressive retail expansion, analysts at ICICI Securities have upped their revenue growth and net profit estimates, especially as these moves start paying off in the latter half of FY18 and in FY19. 

Jain says the launch of the new collection, the focus on the women’s range and recalibration of store sizes are all right strategies, which should enable Bata to turn around in the medium- to long-term. 

The company's stock is trading at 28.6 times its FY19 earnings estimates. The sharp surge on Thursday and with target prices at around Rs 650, there is marginal upside from current levels. Await a correction to buy the stock.