Buy Bata India Ltd For Target Rs.1,540 - Motilal Oswal Financial Services Ltd
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Muted demand; inventory optimizing
* Bata reported 2% YoY growth in revenue (9% miss), led by a 3% increase in ASP and decline in volumes as the low ASP mass segment is yet seeing challenging demand environment. Despite the softening RM costs due to increased market discounts, the GM declined 190bp YoY. Subsequently, EBITDA/PAT declined 2%/10% YoY.
* Despite the steady network rollout and product revamp in the youth segment, Bata has continued to observe a decline in volumes, particularly in the value segment (<INR 1,000 ASP CATEGORY)We have cut our PAT estimates by 7% to factor in revenue/PAT CAGR of 10%/23% over FY23-25. We reiterate our Neutral stance on the stock with a TP of INR1,540.
Revenue up 2%; GP/EBITDA down 2% YoY
* Revenue was up only 2% YoY to INR9.6b (9% miss), led by a 3% increase in ASP.
* The company added 47 stores in 1QFY24 to reach 2,100 stores in around 700 cities.
* GP declined 2% YoY to INR5.2b (12% miss). Margins declined 190bp YoY to 54.7%.
* Controlled operational cost cushioned EBITDA showing 2% YoY decline to INR2.4b (10% miss) with 90bp YoY margins contraction to 25%.
* PAT declined 10% YoY to INR1.1b (19% miss), led by a miss in revenue.
Key takeaways from the management interaction
* Inventory optimization and early EOSS led to a decline in gross margins. The stores are now stocked with new merchandise being sold at full price, which could potentially result in normalizing margins.
* Revenue has been adversely impacted by the weakness in the mass segment, primarily attributed to elevated inflation rates, a reduced number of wedding days, a high GST rate, and no price hike taken in the last eight months.
* India contributes 1/3rd of the global Bata production, but still a large part of the products is sourced from China. The company is consciously diversifying out of China, and hence, India is a preferred sourcing hub.
* The company is targeting to start an apparel athleisure category in the price range of INR800-1100. It is still in the pilot phase, but once the product gains acceptance, the company plans to widen its coverage. Valuation and view
* BATA leverages its robust balance sheet, marked by a net cash position, healthy FCF generation, and impressive returns profile, alongside a substantial growth potential within the industry, to drive its growth initiatives.
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