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Weak performance continued in 4Q (revenue declined 5%; 2-year CAGR decline of 7%). Portfolio-specific headwinds (higher formal and fashion salience) continued to hurt; some of the peers have already seen good recovery. We note several initiatives by Bata to accelerate recovery – (1) ramping up sales from new channels (ChatShop, Home Delivery, Store on Wheels), (2) capturing semi-urban / rural demand through franchisee stores, and (3) restarting promotional campaigns and new launches. That said, Bata is likely to be a key beneficiary of ‘full unlocking’. Inferior product mix (away from formals & fashion and more towards open style footwear), is likely to put further pressure on profitability till then. Reiterate REDUCE; TP Rs1,400.

Revenue yet to recover completely:

Q4FY21 revenue / EBITDA / PAT declined 5% / 19% / 22% respectively. Revenue decline of 5% is weaker when seen in the context of a weak base (2-year CAGR decline of 7%). Despite Q4 being a seasonally weak quarter (festive season in Q3), sequential decline of 4% is weak given it was a near-normal quarter for several discretionary categories. Product mix would have continued to be unfavourable for the quarter given lower demand of formals (schools were largely closed and offices had resumed only partially). Some of the recovery was driven by growth in digitally enabled platforms and store expansion (franchise stores) in smaller towns. For FY21, revenue and EBITDA declined 44% and 81%, respectively; net loss came in at Rs857mn.

Company initiatives:

Bata continued to scale-up its digital initiatives (Bata website, online marketplaces, Bata ChatShop, Bata Home Delivery and Bata Store on Wheels). It launched a ‘Relaxed Workwear’ collection (across brands) offering a good blend of comfort and formal aspect. Bata opened 10 additional franchise stores (total 228 now) in smaller towns and cities.

EBITDA margin continued to be weak:

Gross margin declined 566bps to 53.1% in 4Q due to unfavourable product mix and lower fixed cost absorption with lower sales. Staff costs and other opex were lower by 1% and 6% YoY, respectively. EBITDA margin contracted 340bps to 19.0% (broadly flat QoQ). Management has highlighted efforts to introduce efficiencies in value chain and elimination of redundancies.

Balance Sheet:

Bata’s cash generation took a hit given the weak performance. There were some WC savings (absolute basis) due to a 30% reduction in year-end inventory. BS continued to be strong with net cash balance of Rs10.9bn. Reported OCF / FCF declined by 21% / 15% to Rs4.6bn / Rs4.2bn respectively.

Valuation and risks:

Our FY23 earnings estimates are largely unchanged; modelling revenue / EBITDA CAGR of 42 / 145 (%) over FY21-23E. Retain REDUCE with a DCF-based target price unchanged at Rs1,400. At our target price, the stock will trade at 41x P/E multiple Mar-23E. Key upside risk is fasterthan-anticipated recovery in discretionary demand.

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