Bata India (BATIND) 470

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1 Result Update Rating matrix Rating : Buy Target : 588 Target Period : 12 months Potential Upside : 25% What s changed? Target Unchanged from 683 to 588 EPS FY16E Unchanged EPS FY17E Unchanged from to Rating Unchanged Quarterly performance Q2FY16 Q3FY15 YoY (%) Q1FY16 QoQ (%) Revenue EBITDA (23.2) EBITDA (%) bps bps PAT Key financials ( crore) CY13 FY15* FY16E FY17E Net Sales 2,065 2,694 2,513 3,011 EBITDA Net Profit EPS ( ) Valuation summary CY13 FY15* FY16E FY17E P/E Target P/E EV to EBITDA Price to book RONW (%) ROCE (%) Stock data Particular Amount Market Capitalisation ( Crore) 6,067.0 Debt (FY15P) ( Crore) Cash (FY15P) ( Crore) EV ( Crore) 5, week H/L / Equity Capital ( Crore) 64.3 Face Value ( ) 5 Price performance 1M 3M 6M 12M Bata India Liberty Shoes Relaxo Footwear Research Analysts Bharat Chhoda bharat.chhoda@icicisecurities.com Nirav Savai nirav.savai@icicisecurities.com Disappointing performance November 6, 2015 Bata India (BATIND) 470 Bata India s (Bata) Q2FY16 revenues grew 5% YoY to crore (Idirect estimate: crore) EBITDA for the quarter declined 23% YoY to crore on account of a 310 bps YoY dip in operating margin to 8.5%. The operating margin declined owing to higher rental and higher proportion of traded goods as a percentage of sales PAT for the quarter was at crore, posting growth of 38.8% YoY (Idirect estimate: 39.8 crore). PAT was mainly driven by exceptional income of crore. Excluding this, PAT posted degrowth of 42% YoY Going exclusive with focus on premium brands & accessories Bata has been focusing on scaling up and opening new EBOs of its flagship premium brands like Hush Puppies, Naturalizer and Marie Clarie. In the current quarter, it has also announced its tieup with US footwear brand Caterpillar in India.The total number of Hush Puppy stores in India as on Q1FY16 was at 103 of which 63 were exclusive stores. To augment its reach, it plans to launch power brand EBOs, which offer economical price range of sports footwear catering to the youth. By FY17, Bata plans to open 20 power EBOs with average size of 1000 sq ft. Presence in digital marketplace to reduce threat of deep discounting Bata has relaunched its website which aspires to be a onestop solution for all occasions. The company intends to create a separate segment exclusively for online sales, which will help it in competing with deep discounts offered by ecommerce online players. Apart from this, it has also created a strong presence across all top etailers. As per the management, the products sold online would be unavailable in its retail outlets. It plans to sell over 10 lakh pairs online in FY16 compared to 2 lakh pairs in the previous 15 month financial year. Enhanced product portfolio & Bata Club to gain customer satisfaction For long term sustainable growth, Bata has been focusing on expanding its product range and offerings through introduction of new brands across segments. Also, it intends to leverage its brands with extension of product line by introducing new products like Sun glasses, scarfs, hand bags, purses and other accessories. Even in the event of enhancing customer experience, it is focusing on its customer loyalty programme, Bata Club, which aims at constant customer engagement. Rationalisation of new large format store additions Over the last seven years, revenues have grown at a CAGR of 15.4%. Going forward, we expect the company to maintain the growth rate and report revenue CAGR of 18.2% in FY1517E. In 15MFY15 Bata has opened 159 stores. In our channel check, we found that due to subdued consumer sentiments and aggressive discounting by etailers, Bata has decided to go slow in opening new large format stores. Revenue growth getting back on track; maintain BUY Though FY15 was a subdued year for Bata, we believe the worst is over and the performance should improve from here on. We expect revenue growth to revive owing to better demand, supply side concerns receding and aggressive store addition. We expect Bata to continue to command a better multiple than its peers not only because of its size but also owing to better financial health. Hence, we maintain our BUY rating on the stock with a target price of 588 (based on 30.0x FY17E EPS of 19.6). ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY16 Q2FY16E Q3FY15 YoY (%) Q1FY16 QoQ (%) Comments Revenue Revenue growth during the quarter was in line with our estimates, driven by aggressive store opening Other Operating Income Raw Material Expense Gross Margin (%) bps bps Gross margin declined 113 bps YoY, due to higher purchase of traded goods as a percentage of sales Employee Expense Rental Expenses Rentals continue to remain high on the back of store additions Other Expenses EBITDA EBITDA Margin (%) bps bps Depreciation Interest Other Income PBT Tax Outgo PAT Operating margin dipped 306 bps YoY owing to a higher raw material and rental as a percentage of sales Exceptional income includes 60.8 crore of sale of trademark Sparx, which was offset by crore of expenditure incurred on setback behind implementation of ERP Owing to exceptional income, PAT increased 40%. PAT excluding exceptional income declined 42% YoY Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 2, , , , Revenue growth likely to improve, going forward, backed by an improvement in product mix and store expansion EBITDA EBITDA Margin (%) bps bps We expect the margin to decline in FY16E, FY17E due to higher share of purchase of traded goods & higher rental cost as a percentage of sales PAT Consequently, PAT growth is expected to decline in FY17E EPS ( ) *FY15P is for a period of 15 months ICICI Securities Ltd Retail Equity Research Page 2

3 Exhibit 1: Volumes trend Company Analysis Future revenues to be driven by premium product mix Over the last seven years (CY06CY13), Bata s revenues have grown at 17.6% CAGR. This growth came on the back of an improving product mix, which aided the company to report realisation growth of 10.2% during the period. Bata faced supply chain problems in FY15 (15 months), particularly during October 2014March 2015, owing to teething problems related with its new SAP system installed at ~1274 stores. The company faced connectivity issues at many stores. Hence, these stores did not have the required quantum of supplies, thereby negatively impacting revenue growth. With most supply chain issues sorted out in Q1FY16, we expect revenue growth to revive and expect 18% CAGR in FY1517E. Exhibit 2: Average realisations trend pieces in crore / piece CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16E FY17E CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16E FY17E ; FY15P is for 15 months ; FY15P is for 15 months During CY0713, Bata s volumes increased from 4.4 crore pieces to 5.4 crore pieces while the realisation improved significantly from 197/piece to 368/piece. Accordingly, revenues increased from crore to 2065 crore in CY13. We expect revenues to further increase to 3,011 crore by FY17E. Volumes are likely to increase to 6.4 crore pieces with an average realisation of 457/piece. Exhibit 3: Revenue to grow at CAGR of 18% during FY15P17E crore 3,500 3,000 2,500 2,000 1,500 1, ,092 1,258 1,543 1,842 2,065 2,694 2,513 3, CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16E FY17E ; FY15P is for 15 months ICICI Securities Ltd Retail Equity Research Page 3

4 Revamp of stores, structural changes for better tomorrow Despite being one of the oldest footwear brands in India, Bata has suffered due to an unfavourable impression of a perception drag and has been unable to connect with the youth. This was due to a number of factors like (a) crowded store formats; (b) subdued store staff, (c) lack of presence in the media, etc. However, the company started taking corrective action. We are optimistic about Bata s future. After Marcelo Villagran took over the company s operations in 2005 he brought about many changes in the company that have led to a turnaround. Revamp of existing stores... As part of the restructuring plan spelled out by Mr Villagran, Bata opened 718 stores, closed down 524 and remodelled 296 stores during CY0512. The new stores opened were decided in a phased manner and designed according to the target audience that it catered to. The company now categorises stores as i) metro, ii) metro & mini metro and iii) smaller towns. Based on this classification, it decides the store layout, product profile and location based on that. While stores in metros are airconditioned and stock more premium and fashion brands, the metro and minimetro stores are non airconditioned and stock products catering to the aspirational upper middle class consumers. Similarly, in small towns, the stores are nonairconditioned. These stores stock economy and midrange products meant for mass markets. Bata had opened its largest ever store (20,000 sq ft) in Thane. This enabled it to showcase its entire range of shoes and accessories. The company intends to add two to three such stores in metros. Change in store format, operating metrics... The erstwhile Bata stores had a very congested layout and the display of all SKUs was at times either impossible or inaccessible. However, with the revamping of stores, the company has now improved the design and layout to make more products visible and available for touch and feel to the consumer. The company has also extended the store timing by two hours (from the earlier 10 am 7 pm to 10 am 9 pm). Bata has also decided to keep stores open on Sundays. This led to higher footfalls and, therefore, improved inventory turnover. Exhibit 4: Bata s inventory days Inventory days CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 4

5 Reducing employee count... In CY0512, the company reduced the headcount from 9,631 to 5,162. The employee cost as a percentage of sales has come down from 21.1% in CY07 to 10.3% in CY13. With the change of management, the company emphasised on changing the attitude of the store staff to improve the customer experience. Employees who were unwilling to work longer hours or change their attitude were sacked. Exhibit 5: Employee cost as percentage of sales (%) CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16E FY17E Increases outsourcing to help save costs As part of Mr Villagran s strategy, the company started to outsource labour intensive products to the cost effective Chinese and Malaysian markets. Over the years, the share of finished goods purchase has increased from 25.3% in CY07 to 34.3% in FY15. Likely launch of brand specific stores After the success of the Hush Puppies stores, the company plans to launch more brand specific stores, going forward. This helps customers to delink the brand from the Bata group and, thereby, overcome the drag of a mass market brand. On the back of these changes, we remain hopeful of a pickup in Bata s sales. This will also help to enhance the brand image of the company and, thereby, remove the perception drag on the company s impression. ICICI Securities Ltd Retail Equity Research Page 5

6 Well trained staff with new product offerings to drive same store growth Bata is in the process of constantly upgrading the quality of its staff by its training program. Its focus is on reinventing itself by expanding its product offerings with introduction of new innovative stylish products. Bata has a strong competitive advantage of having one of the largest distribution networks in terms of number of stores. The company has been realigning its retail presence by opening new large format stores & renovating the existing old stores to foster contemporary appeal. Also, it has been constantly closing down and relocating its mediocre performing unviable stores thereby improving overall sales and profitability. Exhibit 6: Bata s strong distribution network CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 No of stores 1, , , Rev per store (in lakh) , FY15 is for 15 months Focus to remain on large stores... Over the last three to four years, the company has clearly focused on closing down stores of ~1,000 sq ft and has been adding stores averaging ~ 3,000 sq ft. Large format stores help the company to better display their entire range of products and also enhance the customer experience. In FY13 it had opened 95 large format stores across India with majority of the stores above 3000 sq. ft. Near term margin pressure to prevail; margin to expand from FY17E Bata s operating margin has gradually expanded from 7.9% in CY07 to 16.2% in CY13. This has been achieved on the back of (a) price hikes; (b) higher share of leather footwear and (c) lower staff costs due to improved staff efficiency. Operating margins have been under pressure in CY15 due to higher rental & supply chain issues leading to lower revenue growth and resulting in negative operating leverage. In H1FY16, the EBITDA margin was at 11.23%, which was mainly due to higher share of purchases of traded goods & higher rental cost as a percentage of sales. We expect margins to stabilise in FY17 owing to a) investments behind newly opened large format stores to start delivering better returns, b) promotional offers & discount schemes to boost online & offline sales and c) introduction of new product lines has resulted in a increase of purchase of traded goods as a percentage of sales. Exhibit 7: EBITDA margins to expand on back of improved product mix, controlled costs ( crore) (%) CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16E FY17E EBITDA EBITDA Margin ICICI Securities Ltd Retail Equity Research Page 6

7 Enhanced operational performance + PAT growth = return ratio expansion We expect PAT to increase from crore annualised in FY15 (15 months) to crore in FY17E, translating to a CAGR of 16.6%. With a topline CAGR of 19% and an operating margin expansion over two years. Simultaneously, return ratios are likely to pick up, going forward. We expect return on capital employed to increase from 41% in FY15 to 46% in FY17E. Exhibit 8: PAT margin to expand Exhibit 9: and return ratios to improve crore CY07 CY08 CY09 CY CY11* CY12 CY13 FY15 FY16E FY17E (%) % CY07 CY08 CY09 CY10 CY11* CY12 CY13 FY15 FY16E FY17 PAT PAT Margin RoE RoCE Note: PAT margin for CY11 has been adjusted for the exceptional income relating to gain on investment in the real estate business Note: RoE for CY11 has been adjusted for the exceptional income relating to gain on investment in the real estate business; FY15 is for 15 months Dividend payout to improve on back of increased cash flows Exhibit 10: Dividend payout (%) CY07 CY08 CY09 CY10 CY11* CY12 CY13 FY15 FY16E FY17E Note: Dividend Payout for CY11 has been adjusted for the exceptional income relating to gain on investment in the real estate business We expect Bata to improve the dividend payout, going forward, considering increased cash flow generation. The company s cash from operations has gone up from 47.0 crore in CY07 to 116 crore in FY15. Considering that no major capacity expansion is planned, we expect the company to increase dividend payouts, going forward. ICICI Securities Ltd Retail Equity Research Page 7

8 Valuation Though FY15 was a subdued year for Bata, we believe the worst is over and the performance should improve from here on. We expect revenue growth to revive owing better demand, supply side concerns receding and aggressive store addition. We expect Bata to continue to command a better multiple than its peers not only because of its size but also owing to the better financial health. Hence, we maintain our BUY rating on the stock with a target price of 588 (based on 30.0x FY17E EPS of 19.6). Exhibit 11: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) CY FY15* FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 8

9 Company snapshot Target Price Jan10 Apr10 Jul10 Oct10 Jan11 Apr11 Jul11 Oct11 Jan12 Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 Apr14 Jul14 Oct14 Jan15 Apr15 Jul15 Oct15 Jan16 Apr16 Jul16 Oct16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jan10 Bata achieves 10.6% revenue growth in CY09. Operating margin expands 265 bps to 11.9% on the back of improving product mix Sep10 Topline continues to grow at 1015% and the company continues to witness margin expansion Jan11 From the 1012% topline growth, the company starts to report revenue growth in excess of 20% Sep11 In Q3CY11, the company achieved a topline growth of 26.3% YoY. The operating margin too expanded from 12.8% (Q3CY10) to 14.5% (Q3CY11) Dec11 After a series of margin expansions over the last five to seven years, the operating margin remains flat at 15.5% for CY11 May12 The company continues to post robust topline growth. The PAT growth was even faster considering margin expansion Apr13 The rate of topline growth comes down to low double digits and as margins remain flattish, pace of PAT growth starts to decline. PAT grows 6.8% in Q1CY13 Jul13 Bata announces plans to open 100 stores each year thereby increasing the scope for revenue growth Jan14 The company's growth rate slipped to higher single digits on the back of dampened consumer sentiment. Revenues grew ~9% in Q4CY13 and Q1CY14. Similarly, PAT growth slipped to the % range May15 Announces stock split from face value 10 to 5 Aug15 Ties up US footwear brand Caterpillar Sep15 Bata stock split from face value 10 to 5 Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m)n Change (m) 1 Bata (BN) B.V. 30Jun FIL Investment Management (Hong Kong) Limited 31Mar IDFC Asset Management Company Private Limited 30Jun Fidelity Worldwide Investment (UK) Ltd. 30Jun Axis Asset Management Company Limited 31May Lombard Odier Darier Hentsch & Cie 30Jun HDFC Asset Management Co., Ltd. 30Jun Birla Sun Life Asset Management Company Ltd. 30Jun ICICI Prudential Asset Management Co. Ltd. 30Jun DNB Asset Management (Asia) Limited 30Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep14 Dec14 Mar15 Jun15 Sep15 Promoter FII DII Others Recent Activity Investor name Investor name Investor name Value Shares Investor name Value Shares Fidelity International Asset Management Company (Korea) 25.83m 0.45m Norges Bank Investment Management (NBIM) 8.53m 0.41m Birla Sun Life Insurance Company Limited 11.29m 0.13m William Blair & Company, L.L.C. 5.26m 0.30m ICICI Prudential Asset Management Co. Ltd. 6.29m 0.10m Wasatch Advisors, Inc. 4.17m 0.24m HDFC Asset Management Co., Ltd. 2.55m 0.10m Axis Asset Management Company Limited 3.58m 0.22m Lion Global Investors Limited 0.87m 0.04m Capital Investment Trust Corporation 3.27m 0.16m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary Profit and loss statement Crore (Yearend March) CY13 FY15* FY16E FY17E Total operating Income 2, , , ,011.1 Growth (%) Raw Material Expenses , , ,482.2 Employee Expenses Manufacturing Expenses Selling & Distribution Expenses Admin & Other Expenses Total Operating Expenditure 1, , , ,611.3 EBITDA Growth (%) Depreciation Interest Other Income Exceptional Item PBT Growth (%) Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Yearend March) CY13 FY15* FY16E FY17E Profit before Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Taxes Paid Others CF from operating activities (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Others CF from financing activities Net Cash flow Opening Cash Deposits with maturity > 3 months Closing Cash Balance sheet Crore (Yearend March) CY13 FY15* FY16E FY17E Liabilities Equity Capital Reserve and Surplus , ,207.9 Total Shareholders funds , , ,272.2 Total Debt Deferred Tax Liability Minority Interest / Others Total Liabilities , , ,272.2 Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets 1, , , ,578.1 Current Liabilities Provisions Total Current Liabilities Net Current Assets Deferred Tax Assets Application of Funds , , ,272.2 *FY15E is for a period of 15 months Key ratios (Yearend March) CY13 FY15* FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios EBITDA Margin (%) PBT Margin (%) PAT Margin (%) Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 10

11 ICICIdirect.com coverage universe (Retail) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Bata India (BATIND)# Buy 6, Shoppers Stop (SHOSTO) Buy 3, Titan Company (TITIND) Hold 31, ICICI Securities Ltd Retail Equity Research Page 11

12 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/10%; Sell: 10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 12

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