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Steady revenue recovery to aid premiumisation play

About the stock: Bata India is a major player in the Indian footwear market with a presence across men’s, women’s and kid’s footwear segment. It has a pan-India presence with the largest network of retail stores in the footwear industry with 1500+ stores. Bata has a vision to open 500 franchisee stores by 2023.

* It has a robust balance sheet with healthy cash and bank balance worth | 1000+ crore (as on FY21), negative working capital cycle and generating RoCE of 23%+

Key triggers for future price performance

* Bata appears to be well placed to benefit from normalisation of demand scenario. Channel checks suggest a healthy recovery in August-September with discretionary retailers witnessing recovery rate of >80% of pre-Covid levels (vs. 50% in past year)

* Bata’s core product portfolio includes formal and fashion footwear category. While open footwear and slippers category witnessed speedy recovery (as witnessed in financials of Relaxo), fewer social gatherings and office/school closures had a material impact on performance of Bata in FY21. ASPs declined ~14% to | 535/pair with gross margin declining 660 bps YoY in FY21. With a gradual opening of economy, we expect premiumisation story to resume and bake in 11% blended realisation CAGR in FY21-24

* Bata has scaled up its digital initiatives with e-commerce contributing ~15% in FY21. Focus on omni-channel retailing resulted in 60% of marketplace orders being fulfilled by Bata stores and 100% for its own website

* Strengthening its wholesale distribution channel (~12% of revenues) with Bata now servicing ~25000 multi branded outlets. This enables it to leverage its brand strength in newer towns. Bata is also tapping into Tier IIIV cities through franchise route and has added 64, seven stores in FY21, Q1FY22, respectively, taking total store count to 234 franchise stores

* On a net basis, we expect the company to add ~240 stores in FY22-24E taking the total store count to 1765 stores

* We believe with its strong brand patronage and pan-India retail reach, it should be able to revive its revenue growth trajectory as and when the impact of the pandemic gets phased out.

What should investors do?

Bata has, over the last one year, delivered ~33% return whereas Relaxo delivered 77% returns owing to increased market share due to enhanced consumer preference towards open footwear. Strategies like cost reduction, focus on omni channel and calibrated expansion of retail network through asset light franchisee route can be structurally positive for Bata’s business. Strong revenue growth coupled with recovery in margin profile would enable Bata to reduce the valuation gap with Relaxo. We maintain our BUY rating on the company.

Target Price and Valuation: We value Bata at | 2120 i.e. 48x FY24E EPS (earlier TP: | 1925).

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