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Change in product mix to boost revenue growth…

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 franchise stores by 2023.

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

Rationale:

* Bata has devised new strategies that would aid in providing thrust to revenue growth. It is tweaking the product portfolio in favour of casual footwear that is experiencing higher demand. It is providing more visibility at stores for younger brands like Hush Puppies, Power and North Star. Channel checks suggest a healthy recovery in August-September with discretionary retailers witnessing recovery rate of >80% of pre-Covid levels

* Bata has scaled up its digital initiatives with e-commerce contributing ~15% in FY21 from a low single digit share in FY20. It has introduced ~ 5000 new styles on its website

What should investors do? Bata has, over the last one year, delivered ~48% return whereas Relaxo delivered 101% returns owing to increased market share due to enhanced consumer preference towards open footwear. 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. Strong revenue growth coupled with recovery in margin profile would enable Bata to reduce the valuation gap with Relaxo.

Target Price and Valuation: We maintain our BUY recommendation on the stock and value Bata at | 2380 i.e. 50x FY24E EPS (earlier target price: | 2120).

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

* Bata is also tapping into Tier III-V cities through franchise route and has added 64 stores in FY21 taking total count to 234 franchise stores (15% of store network). Over the next two years, it is aiming to increase the franchisee store share to ~ 30%

 Alternate Stock Idea: Besides Bata, in our retail coverage we like Shoppers Stop

* With the new management team in place, we expect SSL to revive its revenue trajectory and margin profile with higher share of private labels.

* We have a BUY rating with a target price of | 400/share

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