The Compass : Revealing Numbers

The Bata India scrip's current high valuation relative to the market is hard to justify, considering its performance on both, the volume and margins front. Its much-trumpeted turnaround story has lost steam pretty fast, a fact borne out by the first-quarter results, with sales growth of a mere 0.7 per cent compared with Q1 1999. Sales grew over 10 per cent in 1998, falling to 4 per cent last year.

One clue to the lacklustre sales performance is provided in the company's directors' report, which points to "a disappointing retail sector slowdown in the last few months of the year".

 

The report claims that this slowdown had been substantially averted by the introduction of new economical products.

That smug conclusion has been disproved by the figures. But clearly, downtrading has become a feature of the shoe

market too. Operating margins improved during 1999 to 8.73

per cent from 8.01 per cent in 1998.

The disaggregated figures for sales and purchases give the reason. The outsourcing effort was only marginally higher during the year, but the difference between the sales and purchase prices improved for both rubber/canvas shoes and leather footwear. In the plastic shoes category, however, profit margins thinned.

The overall effect was an improvement in margins. The higher margin leather shoes category saw a dip in volumes, made up by an increase in the sales of rubber/ canvas footwear. Plastic footwear saw a substantial reduction in sales volumes. But that positive feature was offset by high closing stocks of plastic footwear.

The production of rubber and canvas footwear, where the margins in percentage terms are the highest, also helped boost overall profitability.

Among the countervailing trends were an increase in the prices of leather and rubber. While closing stocks were higher, most of that was due to an increase in raw material stocks, rather than of finished goods. Finished goods closing stocks went up from 17.7 per cent of sales to 18.5 per cent of sales. More worrying was the increase in receivables, which increased from 6.5 per cent of sales to 7.9 per cent. But Bata's Achilles' heel continues to be its staff. The company has been plagued by labour problems.

More importantly, its staff costs as a proportion of total expenditure was 22.3 per cent in 1999. That's a slight decline from the 22.9 per cent in 1998. However, leaving interest and depreciation out of expenditure, we find staff cost, as a percentage of expenditure, actually increased a bit during 1999. The same goes for the first quarter of 2000.

There are two things which Bata has to do to effect a turnaround.

One is to dramatically increase adspend and find a new positioning which reflects the strengths of its brand.

Lowering advertising expenditure, as it did in 1999, is not going to help. The other is to prune its workforce through a massive VRS programme.

Both these strategies will require spending money, which will hit the bottomline in the short run, but is the only way for the company to grow.

Glenmark Pharma

Glenmark Pharmaceuticals is projecting a sales growth of 35 per cent in 2000-01 which is positive, considering that the pharmaceutical industry in general has been growing at relatively lower rates. The company has been growing at above industry rates, and its 1999-00 results have seen it achieve what it projected during its public issue made in December 1999.

The company clocked sales of Rs 138.03 crore against a projected figure of Rs 136.5 crore in 1999-00 and a net profit of Rs 21.96 crore against a projected Rs 16 crore. Thus, sales have increased by 39 per cent in the current which makes the 35 per cent growth target look achievable. On the cards are new product launches (four to six) which should contribute to top line growth.

The company is merging its wholly owned subsidiary Glenmark Exports, which takes care of overseas markets, with itself. The move makes sense as this company pays out a substantial portion of its profits as dividend, Rs 7.2 crore on which it will have to pay a 20 per cent dividend tax. The merger will thus not only let the export turnover reflect directly in Glenmark but reduce tax outflows.

On the profitability front, operating profit margin has improved marginally to 13.77 per cent from 13.56 per cent in the previous year. Thus, Glenmark's focus will be on increasing its margins from these levels, aided by higher contribution from exports and products from its new facilities.

Exports have increased by 56 per cent to Rs 12.13 crore, higher compared to the 33 per cent crore in 1998-99. The R&D drug facility will be ready by July 2000 while the US FDA soft gel capsules plant will be completed in October 2000. These projects will start contributing from the second half of 2000-01 onwards.