Bata India: Motilal Oswal upgrade to 'buy' with target implying 16% upside

Motilal Oswal | July 20, 2012, midnight

-       New designs to aid sales growth: Bata's revenues have declined ~10-15% in November - sales were severely affected in the first week of demonetization, but somewhat improved thereafter. Bata rolled out some company-level schemes in the second week of demonetization, the response to which has been in line with management expectations. Ladies footwear witnessed healthy traction in sales, aided by new designs and wedding season demand. Bata also launched some wedding-specific designs to boost sales. 1HFY17 SSG growth has been ~3%, but revenue growth has been flattish due to unfavorable product mix. Usage of plastic money has increased in rural areas (from ~15% to ~40%) and nationally (from ~50% to ~80%).

-       Focus on women footwear and ad spends to drive growth: Bata intends to capitalize on healthy trend in it’s women & kids footwear by launching new designs at regular intervals. The company has created separate area for Bubblegummers (children shoes) in some stores to increase visibility. It also intends to increase rural penetration via the wholesale route. Other brands (HushPuppies, Footin, etc.) contribute ~16% to revenues, and K-stores (~450) have also witnessed increase in commission levels. Bata plans to once again focus on ad spends (~1% of revenues in FY16) to highlight its new launches without impacting margins. It has hired an expert to strategize its ad campaigns/strategy.

-       Revisiting store expansion strategy: Due to dampening retail sentiment, new store openings have declined across the industry. Rental costs too have come down, which has provided negotiation power to Bata. In line with this, it negotiated lower rentals for 130 stores (out of total ~1,200 stores) that were due for renewal. The current uncertain situation has forced Bata to revisit its store expansion strategy (it now intends to open 70-75 stores annually - opened 65 stores and closed 30-35 smaller stores till November).

-       Increasing focus on e-commerce:Although a late entrant in e-commerce, Bata has been gradually working on its online strategy. It sells through its own website, and has also tied up with leading partners like Amazon and Flipkart. Bata has also been closely working with these channels to understand buying patterns of online consumers. Unlike other players, it has maintained discounting discipline and offers only ~10-15% discounts. Additionally, it has launched a whole new series of designs exclusively for the e-commerce channel. The company now offers 400 new products v/s 130-150 last year. These initiatives are likely to increase its online sales contribution from 3% currently to high-single-digits in FY18.

-       Valuation and view:
Factoring in the impact of demonetization, we cut revenue estimates by 10%/6% and PAT estimates by 15%/6% for FY17/FY18. We expect revenue CAGR of 16% and PAT CAGR of 26% over FY16-18E. Led by focused approach and aggression-led strategy, we value Bata at 34x (up from 30x) and upgrade our rating to Buy (16% upside).

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