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Healthy recovery from second wave…

Bata India Ltd (BIL) is the largest retailer and leading manufacturer of footwear in India with ~1,700 retail stores as of Sept 2021.

* We maintain Accumulate rating with a revised Target of Rs.2,290 (earlier Rs1,920) factoring healthy recovery in the quarter.

* Q2FY22 revenue grew by 67%YoY (+130%QoQ) on a low base (degrowth of 49% in Q2FY21) aided by volume recovery.

* EBITDA improved by 556% to Rs.119cr (Vs. loss of Rs.34cr QoQ) while PAT was at Rs.37cr Vs loss of Rs.44cr YoY & loss of 71cr QoQ.

* BIL’s cost saving measures across rentals, operations & manufacturing will drive sustainable margin expansion in future.

* Demand outlook is positive given ongoing vaccination, re-opening of markets and GoI’s strong focus to revive the economy.

* We believe, BIL will be able to revive its revenue growth trajectory as the economy is back to normal given its strong brand recall & reach. Expect 38%CAGR over FY21-23E. We value BIL at 64x on Dec 2023 EPS.

Witnessing healthy recovery in volumes

Q2FY22 revenue grew by 67% YoY on a low base (de-growth of 49% in Q2FY21 due to Covid-19 first wave) and grew by 130% on a sequential basis as last quarter was impacted by second wave related lockdowns. Now, with the re-opening of markets we expect the volumes recovery momentum to pick up going forward. Sales through digitally enabled services continued to witness uptick and now contribute ~14% of total sales (Vs. ~10% in Q2FY21). To reach smaller towns, the company opens new stores via franchise route and ensures availability in multi-brand outlets via distribution channels. The total franchisee reached 270+ Vs 234 last quarter and targets to open 500 in smaller towns by 2023. The company had introduced other channels like Bata Chatshop, Bata Store on Wheels during Covid period. To generate demand in the current scenario, BIL has launched products to suit work from home, Fitness at home and Monsoon collection. We expect revenue to grow at ~38% CAGR over FY20-23E (44% de-growth in FY21).

Cost saving measures will drive sustainable margin expansion…

BIL reported EBITDA growth of 556% YoY to Rs.119cr Vs loss of Rs.34cr QoQ supported by recovery in volumes due to ease in restrictions. Gross profit margin has improved to 52.9% from 50.4% in YoY quarter. Covid-19 led disruption has changed the consumer preference and impacted the portfolio mix of the company, from Formals (including school business) & Fashion categories to Casual, Fitness & Essentials. This change in mix had negatively impacted the gross margin. However, ease in lockdowns has gradually improved the margins in subsequent period and is likely to improve the product mix going forward. BIL now strongly focuses on cost reduction measures across rentals, operations & manufacturing which will drive sustainable margin expansion when the economy comes back to normal. During FY21, the company got rent concession for Rs.101cr (Rs.49.4cr in H1FY22 Vs Rs.77.6cr in H1FY21)

Valuation & Outlook

We believe, BIL has capability to revive its revenue growth trajectory when the economy is back to normal. The demand outlook is positive given ongoing vaccination, re-opening 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 with a cash balance of ~Rs.869cr as of Q2FY22. We maintain Accumulate rating with a revised Target of Rs.2,290 by valuing at 64x on Dec 2023 EPS factoring healthy recovery.

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