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Recovery over pre-pandemic

Bata India’s sales grew 3.5x YoY on a weak base to its highest ever quarterly sales of Rs9.43bn. Sales grew by 7% over pre-pandemic quarter of 1QFY20. Growth was helped by franchise & MBO expansion, consumer relevant communication, portfolio casualization and digital footprint expansion. Gross margins improved marginally by 40bps YoY while fell 100bps QoQ to 56.6%. EBITDA margins stood at 25.9% vs. 27.6% in 1QFY20. We largely maintain our EPS estimates for FY23/24. We maintain our stance that Bata’s growth, like in past, will be largely led by increase in ASP. Its growth will be restricted given the fewer COCO store additions. And lastly we believe that in sneakers category Bata’s positioning is relatively weak and hence may face headwind as it tries and scales up. We maintain our estimates and REDUCE rating. We continue to value the business at 48x FY24E eps with TP of Rs1944.

Growth led by Sneakerization, footprint expansion and e-com

Bata’s ASP is up by 20% in 1QFY23 vs. 1QFY22 while sequentially it stood flat. Increase in ASP is on account of improving contribution from sneakers category. Current contribution from sneakers is at ~19% of total sales (+400bps vs. pre-pandemic). Bata has now put up 125 Sneaker Studios across India. North Star and Power brands are leading the Sneakers category. Another lever for growth has been franchisee store and SIS (Shop in Shop) led expansion. Franchisee stores have increased from ~170 to 323 and SIS stores have increase from 136 to 283 over the FY20-1QFY23. Sales from e-commerce was up by 1.7x over 1QFY20 which has also contributed to the growth.

MBO expansion underway

MBO business includes wholesale and SIS business. Wholesale business is the large part of MBO contribution while SIS at this point remains minuscule. Bata has increased town coverage from 687 to 1079 while its access to wholesale distributors has improved from 19% to 39% over FY19-1Q23. Despite the aforementioned measures we estimate MBO’s contribution stands at 13-15% (+200-300bps pre-pandemic). We maintain that it is going to be difficult to maintain brand equity and at the same time grow through MBO route.

Volumes yet to recover fully

Bata’s sales volumes grew by 19% in FY22 to 38mn pieces vs FY21. However, the volumes were still ~23% below the FY20 volume. School shoes (9% of sales) and office footwear volumes would not have gone back to pre-pandemic levels as per our estimates. As highlighted by the management low priced SKUs are still under pressure. Also, since the growth is led by franchisee stores there will be gap between volume and value growth. We estimate CAGR 2% volume growth over FY20-24E.

Valuation

We maintain our estimates and REDUCE rating. We continue to value the business at 48x FY24E eps with TP of Rs1944. We believe positives for next two years are already factored in to the current market price.

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