es Result Update Rating matrix Rating : Buy Target : 700 Target Period : 12 months Potential Upside : 13% What s changed? Target Changed from 650 to 700 EPS FY18E Changed from 17.0 to 17.5 EPS FY19E Changed from 21.7 to 21.8 Rating Unchanged Quarterly performance Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) Revenue 736.1 663.1 11.0 591.4 24.5 EBITDA 95.5 85.1 12.2 56.6 68.8 EBITDA (%) 13.0 12.8 14 bps 9.6 341 bps PAT 60.4 50.5 19.6 35.9 68.2 Key financials ( crore) FY16 FY17 FY18E FY19E Net Sales 2,415 2,467 2,755 3,158 EBITDA 276 278 350 428 Net Profit 218 159 225 281 EPS ( ) 16.9 12.4 17.5 21.8 Valuation summary FY16 FY17 FY18E FY19E P/E 36.7 50.4 35.5 28.5 Target P/E 41.3 56.7 40.0 32.0 EV to EBITDA 27.8 26.9 21.5 17.6 Price to book 6.5 6.0 5.3 4.7 RONW (%) 17.8 12.0 15.0 16.4 ROCE (%) 16.1 16.0 18.4 20.1 Stock data Particular Amount Market Capitalisation ( Crore) 7,994.4 Debt (FY17) ( Crore) - Cash (FY17) ( Crore) 520.8 EV ( Crore) 7,473.7 52 week H/L 625 / 400 Equity Capital ( Crore) 64.3 Face Value ( ) 5 Price performance 1M 3M 6M 12M Bata India 13.1 7.5 25.9 12.4 Relaxo Footwear -4.2-6.3 4.8-4.4 Liberty Shoes 15.7 6.6 16.3 5.6 Research Analysts Bharat Chhoda bharat.chhoda@icicisecurities.com Cheragh Sidhwa cheragh.sidhwa@icicisecurities.com August 4, 2017 Bata India (BATIND) 622 Strong performance driven by retail channel Bata reported healthy double digit revenue growth of 11% YoY to 736.1 crore (I-direct estimate: 727.8 crore), which is its highest quarterly sales. The company s focus on the lifestyle segment and improved visual merchandising resulted in like to like (LTL) sales growth of 10%. Bata added 40 new stores this quarter. Revenues from retail channels grew 15% YoY On account of higher proportion of value added products in the product mix, gross margins improved 80 bps YoY to 52.3%. However, higher operating expenses (employee, rent and other expenses up 12.1%, 13.1% and 13.8%), moderated the EBITDA margin expansion. Consequently, EBITDA margins expanded 20 bps YoY to 13.0% (I-direct estimate: 11.3%) Higher other income (up 45% YoY) coupled with a decline in depreciation cost (down 15% YoY), boosted PAT growth by 19.6% to 60.4 crore (I-direct estimate: 52.8 crore) Premiumisation to improve margin profile Over the past couple of years, shopping preferences of consumers have got transformed from price sensitive to fashion quotient. Subsequently Bata has constantly focused on tapping the fashion conscious youth, working women and children through introduction of latest and trendier styles of footwear. In addition, the women s market will be the key area of focus for Bata in FY18. It intends to scale up the share of women s category in the product mix from 26% in FY17 to 35% in the next two years. Bata is planning an aggressive advertising campaign for the same. In Q1FY18, higher proportion of premium products in the product mix resulted in gross margin expansion by 80 bps YoY. Going forward, with premiumisation of products, we expect gross margins to improve 100 bps by FY19E. Aggressive store expansion to boost revenue growth The company has adopted a dual strategy of driving same stores sales growth (SSSG) while adding new stores every year. During the quarter, the company added 40 new stores and clocked a healthy revenue growth of 15% YoY through retail channels. With constant focus on improved visual merchandising and refurbishment of existing stores, like to like sales growth (LTLT) for the quarter came in at 10% YoY. Bata is in line with its guidance to open 50 stores via franchisee route in Tier II, Tier III markets and 100 stores through company owned-company operated stores (COCO) in high-street locations in FY18. Performance on track; maintain BUY With strong Q1FY18 numbers coming in for Bata, we believe the management is on the right track to achieve healthy topline growth via: a) retail expansion through franchisee route in Tier II & Tier III cities and b) improved visual merchandising, refurbishment of existing stores and new styles of footwear to drive SSSG. In addition, constant enhancement of product mix through increase in share of premium products will aid operating margins. Thus, we revise our estimates upwards for FY18E and FY19E and expect revenues and earnings to grow at a CAGR of 13.1% and 33.0%, respectively, in FY17-19E. We continue to maintain BUY recommendation with a revised target price of 700 (based on 32.0 FY19E EPS of 21.8). ICICI Securities Ltd Retail Equity Research
Variance analysis Q1FY18 Q1FY18E Q1FY17 YoY (%) Q4FY17 QoQ (%) Comments Revenue 736.1 727.8 663.1 11.0 591.4 24.5 Strong revenue growth driven by healthy SSSG of 10% in the retail channel Raw Material Expense 350.8 363.6 321.8 9.0 271.4 29.2 Gross Margin (%) 52.3 50.0 51.5 88 bps 54.1-264 bps Employee Expense 74.1 76.4 66.1 12.1 71.8 3.1 Rental Expenses 94.8 100.4 83.9 13.1 94.1 0.8 Other Expenses 120.8 105.5 106.2 13.8 97.5 23.9 On account of higher proportion of value added products in the product mix, gross margins improved 80 bps YoY to 52.3% EBITDA 95.5 82.0 85.1 12.2 56.6 68.8 EBITDA Margin (%) 13.0 11.3 12.8 14 bps 9.6 341 bps Higher employee and other expense stemmed margin growth Depreciation 13.7 17.1 16.2-15.2 16.6-17.2 Interest 0.9 1.4 0.7 33.1 1.6-44.2 Other Income 11.6 10.9 8.0 44.9 12.2-5.1 Exceptional Item 0.00 0.00 0.00 NA 0.00 NA PBT 92.5 74.3 76.2 21.3 50.6 82.8 Tax Outgo 32.10 21.6 25.7 24.7 14.7 118.4 PAT 60.4 52.8 50.5 19.6 35.9 68.2 Lower depreciation cost and higher other income, supported PAT growth Change in estimates FY18E FY19E ( Crore) Old New % Change Old New % Change Comments Revenue 2,754.9 2,754.9 0.0 3,158.5 3,158.5 0.0 We have maintained our revenue estimates EBITDA 325.0 349.9 7.6 400.0 428.2 7.0 EBITDA Margin (%) 11.8 12.7 90 bps 12.7 13.6 89 bps PAT 219.0 224.9 2.7 279.0 280.7 0.6 EPS ( ) 17.0 17.5 2.9 21.7 21.8 0.6 We have revised our earning estimates upwards ICICI Securities Ltd Retail Equity Research Page 2
Exhibit 1: Bata brands Company Analysis Revenues to grow at CAGR of 13.1% for FY17-19E Bata has adopted a strategy to design products based on various consumers. Other than its leather footwear, the company has started focusing on products catering to the youth, women and kids along with brand extensions in the accessories segment. Bata is lining up new launches in youth-oriented space through its sub-brands like Power, Weinbrenner and Footin. Upcoming new brands will be more casual and stylish to attract the youth. Bata is also focusing on increasing its online presence through innovations to provide a user friendly shopping experience on mobile application and websites with interactive interfaces. Bata plans to expand its online presence via placement of online kiosks in major retail stores, tie-up with payment banks and increasing the presence of product offerings through partner websites. In FY17, it sold 6.3 lakh pairs of footwear through online channel and achieved revenue of 69.2 crore. At the top of the product pyramid for Bata, it has placed the brand Hush Puppies. The brand has a presence through 75 exclusive brand stores and 56 shop-in-shops in premium departmental stores. The company is planning to position Hush Puppies as an international premium lifestyle brand, which will be more comfortable and contemporary fashion style. The company is also aggressively focussing on children s footwear through the Bubblegummers brand. As per the company, this segment has huge potential with ~18% of India s population below 10 years of age. For FY17, Bata reported marginal revenue growth of 2% YoY to 2467.1 crore owing to subdued consumer sentiments and demonetisation impacting the consumer discretionary spending. However, Q1FY18 has started off on a strong note with topline growth of 11% driven by healthy SSSG of 10% YoY. Going forward, we expect revenue growth to revive from FY18E onwards on account of improved product mix and company following dual strategy of driving SSSG and opening new stores in untapped locations via franchisee roué. Exhibit 2: Revenue trend 3,500 3,158 crore 3,000 2,500 2,000 1,500 1,000 987 1,092 1,258 1,543 1,842 2,065 2,694 2,415 2,467 2,755 500 - CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16 FY17 FY18E FY19E ; FY15 is for 15 months ICICI Securities Ltd Retail Equity Research Page 3
Focus on expansion via franchise stores During FY17, Bata added 100 new retail stores and 23 franchisee outlets across India taking the total store count to 1293 spread across 2.62 mn sq feet. To tap the opportunities and expand its footprints in Tier II and Tier III markets, it intends to open 50 new stores in FY18 via the franchisee route. Alongside, the company also plans to add 100 new retail stores via the COCO format to increase its presence in malls and high-street locations. The company has adopted a dual strategy of driving same stores sales growth (SSSG) while adding new stores every year. Also, the company will continue renovating existing stores and improving layouts with the objective of increasing same store sales growth for these stores EBITDA margins to improve on back of higher share of premium brands For FY17, EBITDA margins remained suppressed on account of a stagnant revenue growth and higher fixed overheads such as rent expense and employee cost, resulting in negative operating leverage. Operating margins remained flattish YoY at 11.3% in FY17 while absolute EBITDA grew 2.8% YoY to 277.9 crore. However, we expect margins to stabilise in FY18E owing to a) revival in revenue growth b) improved product mix (higher share of premium brands) and c) higher SSSG from existing stores. Exhibit 3: EBITDA margins to improve from FY18E onwards ( crore) 450 400 350 300 250 200 150 100 50-13.3 11.9 9.2 16.2 15.5 15.5 239 285 334 335 12.4 11.4 11.3 91 129 168 276 278 350 13.6 12.7 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16 FY17 FY18E FY19E 428 20 15 10 5 (%) EBITDA EBITDA Margin ICICI Securities Ltd Retail Equity Research Page 4
PAT, return ratios to recover from FY18E onwards PAT for FY17 declined 27.4% YoY to 158.7 crore on account of subdued revenue growth and one-time exceptional expense of voluntary retirement scheme for the Faridabad unit, which was at 21.7 crore. Going forward we anticipate revival in PAT from FY18E onwards. We expect PAT to increase from 159 crore in FY17 crore to 287 crore in FY19E, translating to a CAGR of 33%. Simultaneously, return ratios are likely to pick up, going forward. We expect return on capital employed to increase from 16.1% in FY17 to 21% in FY19E. Exhibit 4: PAT margin to improve FY18E onwards Exhibit 5: and return ratios to improve FY18E onwards ( crore) 300 250 200 150 100 50-226 172 8.6 191 231 218 9.3 9.2 8.6 9.0 159 225 281 8.2 6.4 CY11 CY12 CY13 FY15 FY16 FY17 FY18E FY19E 8.9 15 10 5 (%) (%) 45 38 31 24 17 10 34 33 33 33 28 39 25 18 20 24 25 16 23 23 16 20 12 18 15 16 CY09 CY10 CY11 CY12 CY13 FY15 FY16 FY17 FY18E FY19E PAT PAT Margin RoE RoCE ICICI Securities Ltd Retail Equity Research Page 5
Valuation With strong Q1FY18 numbers coming in for Bata, we believe the management is on the right track to achieve healthy topline growth via: a) retail expansion through franchisee route in Tier II & Tier III cities and b) improved visual merchandising, refurbishment of existing stores and new styles of footwear to drive SSSG. In addition, constant enhancement of product mix through increase in share of premium products will aid the operating margins. Thus, we revise our estimates upwards for FY18E and FY19E and expect revenues and earnings to grow at a CAGR of 13.1% and 33.0%, respectively, in FY17-19E. We continue to maintain BUY recommendation with a revised target price of 700 (based on 32.0x FY19E EPS of 21.8). Exhibit 6: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY16 2415.4-10.3 16.9-5.9 36.7 27.8 17.8 16.1 FY17 2467.2 2.1 12.4-27.0 50.4 26.9 12.0 16.0 FY18E 2754.9 11.7 17.5 41.7 35.5 21.5 15.0 18.4 FY19E 3158.5 14.7 21.8 24.8 28.5 17.6 16.4 20.1 ICICI Securities Ltd Retail Equity Research Page 6
Recommendation history vs. consensus estimate ( ) 950 850 750 650 550 450 350 250 Jul-15 Oct-15 Dec-15 Mar-16 May-16 Aug-16 Oct-16 Dec-16 Mar-17 May-17 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Aug-17 (%) Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jan-11 From the 10-12% topline growth, the company starts to report revenue growth in excess of 20% Sep-11 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) Dec-11 After a series of margin expansions over the last five to seven years, the operating margin remains flat at 15.5% for CY11 May-12 The company continues to post robust topline growth. The PAT growth was even faster considering margin expansion Apr-13 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 Jul-13 Bata announces plans to open 100 stores each year thereby increasing the scope for revenue growth Jan-14 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 2.5-3.5% range May-15 Announces stock split from face value 10 to 5 Aug-15 Ties up US footwear brand Caterpillar Sep-15 Bata stock split from face value 10 to 5 Dec-16 Lining up new launches in youth oriented space through its sub-brands like 'Power' and 'Weinbrenner' Mar-17 Extension of EOSS period impacts margin in Q4FY17 Top 10 Shareholders Rank Investor Name Latest Filing Date % O/S Position (m) Change (m) 1 Bata (BN) B.V. 31-Mar-17 52.96% 68.1 0.00 2 Life Insurance Corporation of India 31-Mar-17 6.52% 8.4 0.00 3 Franklin Templeton Asset Management (India) Pvt. Ltd. 30-Jun-17 3.71% 4.8 0.05 4 ICICI Prudential Asset Management Co. Ltd. 30-Jun-17 2.49% 3.2-0.18 5 Fidelity International Asset Management Company (Korea) 31-Mar-17 2.00% 2.6 0.00 6 FIL Investment Management (Singapore) Ltd. 31-Mar-17 2.00% 2.6 0.00 7 Kotak Mahindra Asset Management Company Ltd. 30-Jun-17 1.91% 2.5 0.79 8 Birla Sun Life Asset Management Company Ltd. 30-Jun-17 1.66% 2.1-0.18 9 IDFC Asset Management Company Private Limited 31-Mar-17 1.21% 1.6 0.00 10 Kotak Mahindra Old Mutual Life Insurance, Ltd. 31-Mar-17 1.01% 1.3 1.30 Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Promoter 53.0 53.0 53.0 53.0 53.0 FII 7.5 5.8 5.6 6.8 6.8 DII 20.3 21.8 22.8 21.3 21.3 Others 19.3 19.5 18.6 19.0 19.0 Recent Activity BUY SELL Investor Name Value Shares Investor Name Value Shares Kotak Mahindra Old Mutual Life Insurance, Ltd. 11.4 1.3 Lombard Odier Darier Hentsch & Cie -7.2-0.9 Kotak Mahindra Asset Management Company Ltd. 6.6 0.8 ICICI Prudential Asset Management Co. Ltd. -1.5-0.2 Manulife Asset Management (Asia) 2.3 0.3 Birla Sun Life Asset Management Company Ltd. -1.5-0.2 Reliance Nippon Life Asset Management Limited 1.2 0.1 Excel Funds Management Inc. -0.3 0.0 BlackRock Institutional Trust Company, N.A. 0.8 0.1 Peerless Funds Management Co. Ltd. -0.2 0.0 Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7
Financial summary ES Profit and loss statement Crore (Year-end March) FY16 FY17 FY18E FY19E Total operating Income 2,415.4 2,467.2 2,754.9 3,158.5 Growth (%) 2.1 11.7 14.7 Raw Material Expenses 1,144.7 1,152.8 1,267.2 1,444.8 Employee Expenses 260.9 272.7 303.0 360.1 Mfg, Admin & selling Exps 734.0 764.0 834.7 925.4 Total Operating Expenditure 2,139.6 2,189.5 2,405.0 2,730.3 EBITDA 275.8 277.6 349.9 428.2 Growth (%) 0.7 26.0 22.4 Depreciation 78.8 65.0 74.3 84.6 Interest 1.7 4.0 2.8 3.2 Other Income 26.7 46.6 55.1 63.2 Exceptional Item 74.7-21.7 0.0 0.0 PBT 296.7 233.6 327.9 403.6 Growth (%) -25.3 15.0 28.5 23.1 Total Tax 79.1 74.8 103.0 122.9 PAT 217.6 158.8 224.9 280.7 Growth (%) -27.0 41.7 24.8 EPS ( ) 16.9 12.4 17.5 21.8 Cash flow statement Crore (Year-end March) FY16 FY17 FY18E FY19E Profit before Tax 222.0 255.2 327.9 403.6 Add: Depreciation 78.8 65.0 74.3 84.6 (Inc)/dec in Current Assets 5.0-25.7-105.1-167.7 Inc/(dec) in CL and Provisions -106.6 88.8-33.1 63.6 Taxes Paid -79.1-74.8-103.0-122.9 Others -12.8-10.0-13.8-15.8 CF from operating activities 107.3 298.6 147.3 245.4 (Inc)/dec in Fixed Assets 24.8-39.4-146.7-181.7 Others 16.4 14.0 16.5 19.0 CF from investing activities 41.2-25.4-130.2-162.8 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Inc/(dec) in loan funds 0.0 0.0 0.0 0.0 Dividend paid & dividend tax -50.3-54.1-52.2-65.1 Others 32.3-38.7-20.6-15.9 CF from financing activities -18.0-92.9-72.8-81.0 Net Cash flow 130.5 180.3-55.7 1.6 Opening Cash 209.9 340.4 520.8 465.0 Closing Cash 340.4 520.8 465.0 466.7 Balance sheet Crore (Year-end March) FY16 FY17 FY18E FY19E Liabilities Equity Capital 64.3 64.3 64.3 64.3 Reserve and Surplus 1,157.8 1,261.0 1,433.7 1,649.3 Total Shareholders funds 1,222.1 1,325.2 1,498.0 1,713.5 Total Debt - - - - Deferred Tax Liability - - - - Minority Interest / Others - - - - Total Liabilities 1,222.1 1,325.2 1,498.0 1,713.5 Assets Gross Block 751.1 779.6 942.2 1,125.6 Less: Accu Depreciation 448.9 513.6 561.4 645.9 Net Block 302.2 266.0 380.8 479.6 Capital WIP 13.4 24.3 8.5 6.8 Intangibe Assets under develop 5.6 5.6 - - Total Fixed Assets 321.3 295.9 389.3 486.4 Investments 5.0 5.0 5.0 5.0 Inventory 678.8 705.4 769.9 891.3 Debtors 69.6 67.1 75.5 86.5 Loans and Advances 175.1 175.1 198.4 227.4 Other Current Assets 51.1 52.8 61.8 68.0 Cash 340.4 520.8 465.0 466.7 Total Current Assets 1,315.1 1,521.2 1,570.6 1,739.9 Current Liabilities 501.8 581.6 544.1 603.8 Provisions 6.6 15.6 20.0 24.0 Total Current Liabilities 508.4 597.2 564.1 627.7 Net Current Assets 806.8 924.0 1,006.5 1,112.2 Deferred Tax Assets 89.1 100.4 97.3 110.0 Application of Funds 1,222.1 1,325.2 1,498.0 1,713.5 Key ratios (Year-end March) FY16 FY17 FY18E FY19E Per share data ( ) EPS 16.9 12.4 17.5 21.8 Cash EPS 23.1 17.4 23.3 28.4 BV 95.1 103.1 116.5 133.3 DPS 3.2 3.5 3.5 4.4 Cash Per Share 26.5 40.5 36.2 36.3 Operating Ratios EBITDA Margin (%) 11.4 11.3 12.7 13.6 PBT Margin (%) 12.3 9.5 11.9 12.8 PAT Margin (%) 9.0 6.4 8.2 8.9 Inventory days 103.1 101.2 102.0 103.0 Debtor days 9.5 10.0 10.0 10.0 Creditor days 136.4 161.8 136.0 134.0 Return Ratios (%) RoE 17.8 12.0 15.0 16.4 RoCE 16.1 16.0 18.4 20.1 RoIC 24.8 19.9 21.9 22.6 Valuation Ratios (x) P/E 36.7 50.4 35.5 28.5 EV / EBITDA 27.8 26.9 21.5 17.6 EV / Net Sales 3.1 3.0 2.7 2.3 Market Cap / Sales 3.3 3.2 2.9 2.5 Price to Book Value 6.5 6.0 5.3 4.7 Solvency Ratios Debt/EBITDA 0.0 0.0 0.0 0.0 Debt / Equity 0.0 0.0 0.0 0.0 Current Ratio 2.6 2.5 2.8 2.8 Quick Ratio 1.3 1.4 1.4 1.4. ICICI Securities Ltd Retail Equity Research Page 8
ICICIdirect.com coverage universe (Retail) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E Bata India 622 700 Buy 7,994 16.9 12.4 17.5 36.7 50.4 35.5 27.8 26.9 21.5 16.1 16.0 18.4 17.8 12.0 15.0 Shoppers Stop 350 360 Hold 2,950 0.3-4.5 3.6 1,212.1 NA 97.0 19.8 29.9 15.6 4.3-2.9 5.2 0.5-7.7 5.9 Titan Company (TITIND) 557 510 Hold 49,531 8.0 8.6 12.0 70.1 64.9 46.4 44.6 34.6 28.5 23.4 25.6 27.9 20.1 17.7 22.2 Trent 275 310 Buy 9,180 1.9 4.3 5.5 144.9 64.4 49.9 65.0 34.8 27.0 7.7 15.0 18.0 4.5 10.1 12.4 ABFRL 170 210 Buy 13,099 0.1 0.7 1.4 NM NM 118.4 39.4 34.8 28.6 2.4 7.5 9.7 1.3 5.6 10.4 RoE (%) ICICI Securities Ltd Retail Equity Research Page 9
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 400 093 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 10
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