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Published on 3/06/2020 2:41:48 PM | Source: ICICI Securities Ltd

Reduce Bata India Ltd For Target Rs. 1,100 - ICICI Securities

Posted in Broking Firm Views - Long Term Report| #Broking Firm Views Report #Quarterly Result #Bata India Ltd. #ICICI Securities

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* Recovery to take time

Q4FY20 (revenue declined 9%) marks the start of a cycle of misses and consensus estimate cuts for retail companies, in our opinion. Bata is likely to face multiple headwinds in medium-term – (1) delay in premiumisation tailwind (a key growth driver over the past 10 years) due to value focused consumers, (2) pressure from online competition (Bata is focusing on ecommerce but has a long way to go, in our opinion) and (3) a pause in the overall higher per capita spending on footwear (both volume and value terms). Market share gains is a tailwind though. Reiterate REDUCE (recently downgraded).

 

* Growth impacted from lockdown:

Comparable revenue / EBTIDA / PAT (excluding the Ind AS 116 accounting changes) declined 9% / 32% / 36%. Management stated that the decline was primarily due to the severe disruption of store operations in March-end. That said, we note Bata’s initiatives to ramp up its digital business – (1) expanding its ecommerce footprint through online marketplaces (now allowing delivery at over 1300 cities), (2) rolling out home delivery across 900+ stores and (3) giving customers option to shop via WhatsApp chat with neighbourhood stores.  FY20 performance: Full year comparable revenue / EBITDA / PAT grew 4% / 4% / 9%. The year was marked with various initiatives by Bata – (1) growth in franchisee and distribution businesses and (2) introduction of “experience centre” stores providing services like 360-foot scanning, customised insoles, medicated pedicure and shoe laundry. The company continued its marketing activities around young millennials, collaborating with Lakmé Fashion Week 2020 as well as emphasizing its sports brand with the Power Fitness Challenge.

* Margin impacted by negative operating leverage:

Comparable EBITDA margin declined 360bps YoY to 10.3% despite a 160bps expansion in gross margin (to 58.8%). This was primarily driven by negative operating leverage – employee costs (+230bps; +8% YoY on an absolute basis) and other opex (+240bps; +4% YoY on an absolute basis). The company continues to focus on rent negotiations for cost controls – rent is down 5% YoY in Q4; has grown at just 3% CAGR over FY16-20.

* Balance Sheet:

Bata’s cash generation took a hit given the weak performance. Working capital increased by 4 days to 52 (Mar’20) from 48 (Mar’19) primarily driven by lower payables (down by 4 days). Comparable OCF/ FCF declined 32% / 44% to Rs 2.3 bn / Rs 1.5 bnGrowth impacted from lockdown: Comparable revenue / EBTIDA / PAT (excluding the Ind AS 116 accounting changes) declined 9% / 32% / 36%. Management stated that the decline was primarily due to the severe disruption of store operations in March-end. That said, we note Bata’s initiatives to ramp up its digital business – (1) expanding its ecommerce footprint through online marketplaces (now allowing delivery at over 1300 cities), (2) rolling out home delivery across 900+ stores and (3) giving customers option to shop via WhatsApp chat with neighbourhood stores.

 

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