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Witnessing a gradual recovery

* BATA reported a healthy recovery in revenue, up 35% YoY and 15% from pre-COVID levels. However, rising RM prices and higher ad spends pulled down PAT 23% below pre-COVID levels (33% miss).

* The slower recovery from pre-COVID levels, the impact of inflation on consumers, and GST rate hikes are still affecting the Mass Consumer segment. However, the ongoing cool-off in RM prices is a silver lining.

* Subsequently, we have cut our FY23 PAT estimate by 6%, factoring in a revenue/PAT CAGR of 23%/81% over FY22-25. We maintain our neutral rating.

Higher RM and SG&A dented margin; PAT up 47% YoY

* Consolidated revenue rose 35% YoY and 15% from pre-COVID levels to INR8.3b (inline) due to increased footfalls during the festive season and better performance by the Sneaker segment.

* Gross margin grew 210bp YoY to 55%, but remained 140bp below preCOVID levels due to higher RM cost. Gross profit grew 40% YoY to INR4.6b (inline).

* Reported EBITDA declined by 13% from pre-COVID levels to INR1.6b. However, the same increased by 35% YoY (19% miss). Adjusting for the provision of INR110m, EBITDA margin grew 130bp YoY, but fell 500bp below pre-COVID levels, to 20.7%.

* PAT increased by 47% YoY, but fell 23% from pre-COVID levels, to INR550m (33% miss).

* FCF stood at INR1.9b in 1HFY23 v/s INR1.6b in FY22, led by higher profit in 1HFY23, especially in 1Q (INR1.2b v/s INR1b in FY22). WC days fell to 64 in 1HFY23 from 74 in FY22.

* Net cash stood at INR3.3b in 1QFY23 v/s INR9.7b in FY22 due to a dividend payout of INR7b.

Key takeaways from the management interaction

* Revenue came in 15% higher than pre-COVID levels, of which 6-7% came in from volume growth and rest from ASP. It will not be able to raise its ASP as the Mass segment is still under pressure.

* The management is following a capital efficient model, and targets 500 franchise stores by FY24.

* It expects the inflation in RM cost to reverse, which may lead to an increase in gross margin.

* Advertisement expenditure is expected to be nearly 3%. The management expects spending on renovation of stores to return an SSSG of 7-8%.

Valuation and view

* BATA’s strong net cash position, healthy FCF generation, return profile, and the huge runway for growth for the industry as a whole offer positive levers.

* However, the recovery from the COVID levels remained weak. Slower revenue recovery than its peers and acceptance of the recently launched Sneaker segment remains a key monitorable going forward.

* BATA continues to target: a) 500 franchise stores by FY24, and b) ramping up of sales through its online and MBO networks.

* We ascribe a P/E of 40x on a FY25 basis to arrive at our TP of INR1,900. We maintain our Neutral rating.

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