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Underwhelming. Period. Hope is all that's left

Bata reported a revenue print of Rs9bn (+7% YoY; below our estimates). Revenue growth of 2.8% on 3-year CAGR basis also appears weak. However, this needs to be seen in the context of rationalisation in COCO store footprint (net closure of ~120 COCO stores between March’20 and March’22). Further, the quality of growth is now different (vs few years back) – initiatives of casualisation, high fashion salience and youth focus (improved connect) were much needed measures and were always expected to have higher gestation. We believe Bata would have defocused on some of the not-so-value-accretive segments to drive long-term initiatives.

The margin delivery was decent – gross margin (54.8%) was down 20bps QoQ. EBITDA margin print came in at 22.9% (up 350bps QoQ). Digitally enabled sales now contribute 10% of overall sales.

We believe, while Bata’s focus on premiumisation, improving brand perception and expanding distribution are steps in the right direction, there will be challenges along the way. That said, the outcome of improving execution will take some time with not so supportive macro environment. Further, the footwear segment now has multiple good-quality listed names, hence historical 'scarcity premium' may not really come back. Its (current) headline recovery is also weaker compared to the broader discretionary space. Maintain HOLD

* Revenue print below our estimates: Q3FY23 revenue was up 8% QoQ and 7% YoY to Rs9bn (below estimates). On 3-year CAGR basis, revenue growth came in at 2.8%. Management highlighted that mass categories demand remains sluggish due to inflationary pressure. We note while the headline recovery is coming out to be slightly weak, the same is on the back of multiple initiatives which will yield results in the medium-term. Management highlighted (1) continued focus on casual and fashion footwear (growth in Sneakers continued and Floatz (now expanded to 1,000+ stores) also continues to grow QoQ) and (2) Premiumisation continues – Hush Puppies grew 121% YoY and Comfit grew 122% YoY.

* Decent margin performance: Gross margin were down just 20bps QoQ (up 210bps YoY) to 54.8% despite inflationary. EBITDA margin print was also decent at 22.9% (FY20 margin of 27.2%). We note that other footwear players are also highlighting inflationary pressure. Improved product mix should aid Bata on the margin performance going forward. Further, Bata is implementing multiple cost savings and efficiency initiatives which should aid in margin expansion - manpower (Flexi-Manpower increased 8% QoQ), sourcing (reduction of sea freight cost and material pricing) and supply chain (slotted angle racks).

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