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Not out of the woods yet

Weak performance continued in 1Q (revenue declined 55%QoQ) due to operating restrictions. Portfolio-specific headwinds (higher formal and fashion salience) continued to hurt; some of the peers have been less impacted though. 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 improved mobility as things normalise. 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 Rs1,500.

* Weak operating performance: Q1FY22 revenue was down 55% QoQ even as Bata didn’t really see a good recovery in Q4 (compared to other discretionary categories as well). Product mix would have continued to be unfavourable for the quarter given lower demand of formals (schools were largely closed and offices had strict operating restrictions). Some of the recovery was driven by growth in digitally enabled platforms with e-commerce contributing 15% of sales for the quarter. Management did highlight that with easing restrictions (in 2QFY22) the footfalls in their retail outlets are seeing a strong recovery.

* 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 ‘Work from Home’, ‘Fitness at Home’ and Monsoon collections offering a good blend of comfort and functionality. Bata opened 7 additional franchise stores (total 234 now) in smaller towns and cities.

* EBITDA margin continued to be weak: Gross margin expanded 310bps QoQ (a positive surprise) to 56.2% in 1Q while the expansion was much stronger on a YoY basis (on the back of better costs absorption, 1Q was severely impacted). Staff costs and other opex were lower by 3% and 13% QoQ, respectively. EBITDA loss print was Rs340mn compared to the loss of Rs861mn in the previous year (Q1FY21). Management has highlighted efforts to introduce cost savings across operations and manufacturing.

* 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 revised target price of Rs1,500. At our target price, the stock will trade at 44x P/E multiple Mar-23E. Key upside risk is faster-than-anticipated recovery in discretionary demand.

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