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Strong store additions to drive future growth.

Bata India Ltd. (BIL) is the largest retailer and leading manufacturer of footwear in India, with 2,000+ retail stores as of December 2022.

* We downgrade to Accumulate rating (from Buy) and revise our target price to Rs.1,620 (from Rs. 2,155), factoring current weak demand.

* Revenue grew by 7%YoY aided by an improvement in the premium mix. Average selling price (ASP) improved by 13% YoY to Rs.772.

* Inflationary pressure and an increased GST rate impacted volumes in mass categories, which is likely to improve gradually.

* Gross margin improved by 210bps YoY to 54.8%YoY, while EBITDA margin improved by 290bps YoY to 22.9% abetted by improved ASP and cost optimization measures.

* BIL targets ~500 franchisees by 2024 and has already opened 392 across 330 towns. This, along with store renovation, portfolio casualization, and distribution expansion will support volumes. Measures to improve the supply chain and asset light retail expansion, will enhance margins.

* Given its strong brand recall & reach, we believe, BIL can revive its revenue growth trajectory. We value BIL at 43x on FY25 EPS.

Weak demand slowed topline growth

Q3FY23 revenue grew by 7% YoY, mainly due to an improvement in the premium mix while volumes declined by ~6%YoY due to weak demand. Mass categories witnessed sluggishness in demand due to an increased GST rate and inflationary pressure. Focus on the premium mix aided improvement in average selling price (ASP), which was up by 13% YoY to Rs. 772. The company is focusing on network expansion to improve volumes. The distribution reach has now crossed 1150+ towns (1,100 QoQ). BIL has strong focus on expansion via franchisee route. During Q3FY23, BIL added 18 own stores (COCO- net addition was 1 store as 17 closed), 39 franchise stores (FO) and 25 shop-in-shop (SIS). The total number of franchise stores reached 392 vs. 303 in FY22 (300+ towns covered Vs 275 in Q1FY23) and targets to open 500 by 2024. The digital penetration increased to 10% from 5% in FY20. The continued growth of ‘Sneaker’ category (+142% YoY) led the growth recovery. BIL has added 353 (250 QoQ) sneaker studios to display up to 300 styles across 9 brands. Strong focus on store expansion & distribution reach, along with strong marketing investments, will drive future volumes. We expect revenue to grow at a CAGR of ~11% over FY23E-25E.

Cost saving measures will drive sustainable margin expansion…

EBITDA grew by 22%YoY, supported by an improvement in gross margin (+210bps YoY to 54.8%), largely aided by an improvement in premium mix and a decline in raw material prices. However, PAT growth was lower on account of lower other income due to the dividend payout by the company last year. Input prices have begun softening, which along with BIL’s initiatives for an efficient supply chain, flexible retail manpower (15% currently vs. 3% pre-Covid), and technology initiatives with multiyear benefits, will support margin improvement going forward. BIL’s strong focus on adding franchise stores will control fixed costs.

Valuation & Outlook

The current weakness in demand is expected to normalise as the inflation recedes. We believe, BIL has the capability to revive its revenue growth trajectory given its strong brand recall & distribution reach and strong balance sheet. The company had paid a special dividend of Rs.50.5 in FY22 apart from the normal dividend of Rs.4 (dividend yield of ~3.8%), which will improve the return ratios going forward. We downgrade to Accumulate rating with a revised target of Rs. 1,620, valuing BIL at 43x on FY25E EPS.

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