Bata Q3 show stellar, but rich valuations restrict scope for multiple re-rating


By Krishna Karwa


– Bata’s Q3 show was impressive
– Store additions and marketing drives will bolster revenue growth
– Margin accretion would depend on rent rationalisation and premium products
– Competition and high ad spends may impact earnings
– Valuations are heady, thus limiting upside


Bata India has proved its mettle in the third quarter ended December 31, 2018, on all fronts. Asset-light expansion, a revamped brand portfolio and healthy fundamentals make us bullish on the stock. However, the elevated valuations leave little on the table for a new investor.

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Q3 analysis
– Strong top-line growth was seen on account of improved retail coverage and onset of the festive season
– Operating leverage was attributable to approximately 10 percent same-store sales growth year-on-year (YoY), cost controls and an uptick in gross margins

– Profit after tax margins expanded sharply too, aided by a 28 percent YoY growth in other income

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Revenue drivers
– The management plans to open 100-200 new retail stores each fiscal year to augment its network of around 1,375 outlets (as on March 31, 2018)
– To attract more footfalls, store renovations will continue throughout the year. Additionally, experience centres and kiosks will be launched in a phased manner at the outlets
– Spends on promotional activities are anticipated to increase from Rs 40 crore in FY18 to Rs 80-90/100-150 crore by FY19/FY20-end, respectively. Celebrity-backed endorsements would gain momentum as well
– New offerings in select segments (women, youth collections, sports) are likely to be made available in new exclusive brand outlets. Visual merchandising initiatives would complement this move

– To strengthen its omnichannel, the company is investing heavily in developing its website and mobile application. Blogs and posts on social media will be equally pivotal in this regard

Margin drivers
– Stock management processes are being optimised
– The share of high-margin premium products is slated to increase gradually in due course (from 25-30 percent of sales in FY18)
– A major chunk of the capex for new stores will be undertaken by franchise partners
– Rent agreements are under negotiation at a few locations

– Most of the new outlets will be small or medium sized in nature to curtail overheads

– After a stellar Q3, the stock has set a 52-week high. It has been one of the best performers despite heavy market volatility in recent months
– At 39.7 times its FY21 projected earnings, the rich valuations comprehensively capture all the positives in the short to medium term horizon

– To command such superlative multiples, the company will have to deliver a combination of robust top-line growth and improved margins on a consistent basis (on an already high base). In our view, this could be tough to achieve in an industry where brand loyalty is waning

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