IGI Logo

High ad spends to push demand

Bata India Ltd. (BIL) is the largest retailer and leading manufacturer of footwear in India, with 1,835 retail store presence in 1518 towns (Dec 2023).

• We downgrade our rating to Accumulate with a revised target price of Rs.1,670, considering the demand weakness in mass market segment.

• Revenue growth was muted YoY in Q3FY24, impacted by weakness in the mass segment. However, premium segments recorded strong growth, resulting in gross margin improvement of 120bps YoY, while EBITDA margin declined by 280 bps YoY due to higher ad and IT spend.

• BIL adopts asset-light expansion, adding 90 franchisees in 9MFY24, totaling 509, will support growth. Digital sales, currently 6% of revenue, grow at double digits.

• BIL has recently signed a comprehensive licensing & manufacturing agreement for the global brand ‘Nine West’ and the launch is expected in Q4FY24. Bata has also forayed into apparel segment (Power brand), currently in 62 stores.

• Given its strong brand recall & reach, we believe, BIL can revive its revenue growth trajectory. We value BIL at 47x on FY26 EPS

Sluggishness in mass market impacts topline growth.

Q3FY24 revenue grew by a marginal 0.4% YoY, on account of continued muted performance in the mass market portfolio. However, improvements in the premium mix supported realisation. With strong focus on network expansion, the distribution reach has now reached 1,518 towns (vs. 1152 YoY). With asset light focus, BIL added 33 franchise stores in Q3FY24, and the total number of franchise stores reached 509 (vs. 419 in FY23). ‘Red label’, ‘Comfit’, ‘Floats’ and ‘Hush Puppies’ categories led the sales growth in the premium segment, with a growth of 387%, 22%, 65% and 7% YoY respectively. Digital sales grew handsomely in strong double digits YoY in Q3FY24. Bata’s strong focus on store expansion & distribution reach, along with marketing investments, will drive future volumes. Additionally, the launch of the global brand ‘Nine West’ is expected in Q4FY24 which along with scale up in apparels segment will provide additional support to topline growth. We expect revenue to grow at a CAGR of ~10% over FY24E-26E.

Higher marketing & IT spend squeeze margins.

Gross margin improved by 120bps YoY to 56%, supported by strong growth in premium segments, while EBITDA margin contracted by 280bps YoY to 20.1% on account of higher expenditure on marketing and technology (excluding this, the EBITDA margin would be ~22.5%). The company is strongly focusing on cost efficiencies, like outsourcing non-core areas like warehouses. BIL’s efforts on premiumization and cost optimization will support gradual margin improvement. The company has refrained from implementing price increases for the past six quarters to support volumes. Investment in technologies will improve inventory management, decision-making, product mix and margins

Valuation & Outlook

The enhanced investments in technology and marketing, as well as tight control on overhead costs, are likely to bear fruits in the long run. We believe, BIL has the capability to revive its revenue growth trajectory given its strong brand recall & distribution reach and strong balance sheet. BIL currently trades at 49x 1Yr Fwd P/E. Considering the continued weakness in demand, we downgrade our rating to Accumulate (from BUY) with a revised target price of Rs. 1,670, valuing BIL at 47x on FY26E EPS.

For More Geojit Financial Services Ltd Disclaimer https://www.geojit.com/disclaimer 

SEBI Registration Number: INH200000345