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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 1600+ stores. Bata has a vision to open 500 franchise stores over the next few years.

It has a robust b/s with healthy cash, bank balance worth | 865+ crore (as on H1FY22), negative working capital cycle and generating RoCE of 23%+

Q3FY22 Results: On the back of strong festive demand and easing of trade restrictions, revenues for Bata has surpassed pre-Covid levels in Q3FY22.

On a benign base, reported revenue growth of 37% YoY to | 614.1 crore with recovery rate reaching 101% of pre-Covid levels

EBITDA margins improved 100 bps YoY to 20% with absolute EBITDA increasing by 44% YoY to | 168.6 crore

Tracking the strong operational performance, PAT grew 2.8x YoY (up 95% QoQ) to | 72.3 crore (highest PAT in the last eight quarters)

What should investors do? Bata has, over the last one year, delivered ~48% return. Bata’s focus on cost reduction, omni channel, change in product mix (higher proportion of casual footwear) and calibrated expansion of retail network through asset light franchisee route can be structurally positive.

Target Price and Valuation: We maintain BUY recommendation on the stock and value Bata at | 2360 i.e. 50x FY24E EPS

Key triggers for future price performance:

On a net basis, we expect the company to add ~240 stores in FY22-24E taking the total store count to 1765 stores (vs. 1575 stores currently)

Bata is also tapping into Tier III-V cities through franchise route and has added 34 stores in Q3FY22 taking total store count to 284 franchise stores (18% of store network). Over the next two years, it is aiming to increase the franchisee store share to ~ 30%.

It has significantly enhanced its distribution reach through MBOs with presence in 1000+ towns. It has covered ~28% of targeted distributors network vs. 19% in June 2021

Bata has scaled up its digital initiatives with e-commerce contributing ~| 90 crore in revenue, which was more than double pre-Covid levels

We build in earnings CAGR of 17% in FY20-24E with higher RoCE of 33%+

Alternate Stock Idea:Apart from Bata, in our retail coverage we also like Trent

Inherent strength of brands (Westside, Zudio, Star, Zara) and proven business model position Trent as a preferred pick

We have BUY with target price of | 1300/share

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