Bata India: A comfortable fit

Better product mix and cost rationalisation measures aided expansion in operating profit margins.

The Bata India stock has performed well on the back of better-than-expected growth in profits for the fourth quarter ended December 2009, which the company announced in the last week of February. Over three sessions post results, its stock rose over 25 per cent from Rs 185 levels. It is currently ruling firm at Rs 249.15.

Even as the company’s topline grew 13 per cent year-on-year to Rs 288 crore for the December 2009 quarter, operating profits jumped 83.5 per cent to almost Rs 45 crore. The near 600-basis-points improvement in operating profit margins to 15.5 per cent was aided by better product mix, as well as cost rationalisation. While the company’s cost of goods sold (goods purchased and raw material) inched up by a per cent to Rs 125 crore, employee costs fell almost 11 per cent to Rs 41.3 crore, even as Bata wrote-off Rs 1.46 crore of expenses it incurred towards voluntary retirement scheme (VRS) during the quarter. This write-off is apart from the VRS expenses that the company has been amortising for some quarters now. Notably, the improvement in margins is likely to continue, although the pace is likely to be moderate. “The company’s strategy to provide latest styles and premium category products (like Marie Claire, Hush Puppies) at higher price points will drive gross margins in the coming years, too,” said analysts with Centrum Broking. They expect margins to improve by 150 basis points over two years.

 

For the year ending December 2009, however, the rise in topline was a tad lower at 10.8 per cent as compared to the December quarter. Although sales growth was partly aided by opening of a record 76 new stores (measuring about 200,000 sq ft) during the year, analysts suggest that the company also closed 50-60 existing stores that were proving to be a drain on financials. However, opening of new stores (and renovation of 40 existing stores) led to a visible rise in rentals and depreciation expenses. Nevertheless, the company posted a 67 per cent rise in profit before tax for the December quarter and 40 per cent rise for CY2009. However, the company’s tax outgo surged five-fold and three-fold during the December quarter and CY2009, respectively. Limited net profit grew 20 per cent during the December quarter, while it grew 11 per cent during CY2009.

Given its growth plans, Bata India should manage a healthy topline growth of 12-15 per cent, while focus on cost rationalisation and product mix should help deliver faster net profit growth of over 20 per cent during the current year. Centrum’s analysts value the company’s real estate business at Rs 42 per share. Adjusting for the same, at Rs 249.15, the stock trades at almost 16 times its CY2010 estimated core earnings per share (EPS) of Rs 13 and looks fairly priced. A further re-rating is possible if the company can sustain higher growth in sales and profits going ahead.