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Strong recovery in demand…

Bata India Ltd (BIL) is the largest retailer and leading manufacturer of footwear in India with ~1,700 retail stores as of June 2022

We upgrade our rating to Buy with a revised Target of Rs. 2,151 factoring strong sales recovery in the quarter.

• Strong recovery in demand along with price growth (+19% YoY) resulted in revenue growth of 253%YoY (+42%QoQ). On a 3yr CAGR basis, revenue grew by +2% from Q1FY20.

• Higher volumes led to recovery in EBITDA margin to 25.9% Vs loss YoY while gross margin improved by 40bps YoY to 56.6%, supported by changes in mix and price growth.

• BIL’s cost-saving measures across operations & manufacturing will drive sustainable margin expansion in future while the demand outlook is positive given normalization of the economy.

• Given its strong brand recall & reach, we believe, BIL is capable of reviving its revenue growth trajectory as the economy is back to normal. We value BIL at 53x on FY24 EPS.

Strong recovery helped to cross pre-covid level sales

Q1FY23 revenue grew by 253% YoY (+42%QoQ) on a low base (+2% on a 3yr CAGR basis). With the re-opening of markets, we expect the volumes to pick up going forward. The distribution reach has now crossed 1,079 towns Vs 917 YoY. To reach smaller towns, the company opens new stores via franchise routes and ensures availability in multi-brand outlets via distribution channels. BIL opened 20 new franchise stores in Q1FY23 and the total franchise stores reached 323 (275+ towns covered Vs 234 in Q1FY22) and targets to open 500. The digital penetration increased to 10% Vs 5% in FY20. Continued growth of ‘Sneaker’ category led the growth recovery. BIL has added 125 (100 QoQ) Sneaker studios to display up to 300 styles across 9 brands, which now contributes ~19% of total revenue, up by 400bps from pre-covid levels. Strong focus on expanding distribution reach, including digital, along with strong marketing investments and casualization of products portfolio will drive volumes going forward. We expect revenue to grow at ~29% CAGR over FY22E-24E.

Cost saving measures will drive sustainable margin expansion…

BIL reported EBITDA at Rs. 245cr Vs Rs. 34cr loss YoY supported by strong recovery in sales. Gross profit margin improved by 40bps to 56.6% aided by price growth and change in Mix. ASP (Average Selling price) increased by 19% YoY for compensating cost and GST increase. BIL now strongly focuses on cost reduction measures across operations & manufacturing including variabilisation of costs which along with improving product mix will drive sustainable margin expansion as the economy comes back to normal. The company focuses on adding franchise stores which will control rental cost (added 75 franchise stores in FY22).

Valuation & Outlook

We believe, BIL has capability to revive its revenue growth trajectory as the economy is back to normal. The demand outlook is positive given normalisation of markets and the strong thrust of the GoI to revive the economy. BIL has a strong brand recall & distribution reach and strong balance sheet. We upgrade to Buy rating with a revised Target of Rs. 2,151 by valuing at 53x on FY24E EPS, factoring strong sales recovery in the quarter.

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