IGI Logo

Asset light expansion to improve margins gradually.

Bata India Ltd. (BIL) is the largest retailer and leading manufacturer of footwear in India, with 2,150 retail store presence in 725 cities (Dec 2023).

• We upgrade our rating to BUY with a target price of Rs.1,870, considering the improvement in margins.

• Revenue declined by a 1.3%YoY in Q2FY24, partially impacted by the shift in the festive season and lower demand in the mass segment. BIL expects growth in both mass and premium segments, with premium portfolio growing 1.5x of overall growth.

• Gross margin improved by 300bps to 58% while EBITDA margin improved by 280bps to 22.2%, aided by improved channel mix, lower discount, and inventory management.

• BIL focuses on an asset light expansion strategy and targets ~500 franchisees by 2024, already opened 476 stores across 412 towns.

• BIL has recently signed comprehensive licensing & manufacturing agreement for globally renowned fashion brand ‘Nine West’ and 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 44x on FY26 EPS.

Shift in festive season impacts topline growth.

Q2FY24 revenue declined by 1.3% YoY, mainly due to shift in festive demand and continued demand weakness in the mass category on account of inflationary pressure and an increased GST rate. However, improvement in the premium mix supported realisation. With strong focus on network expansion, the distribution reach has now reached 1,398 towns (1,372 in FY23). With asset light focus, BIL added 28 franchise stores in Q2FY24, and the total number of franchise stores reached 476 vs. 303 in FY22 and targets to reach 500 in 2024 (412 towns covered Vs 275 in Q1FY23). ‘Sneaker’, ‘Comfit’ and ‘Floats’ categories led the sales growth with 1.17x, 1.05x & 1.7x respectively compared to last year while ‘Hush Puppies’ driving premiumization (1.05x YoY). Sneaker studios to display up to 300 styles across 9 brands crossed 612 vs. 565 QoQ and currently contributes ~20% of total revenue, improved by ~500bps over the last two years. Digital sales contribution was 7% vs. 5% in FY20. Bata’s strong focus on store expansion & distribution reach, along with marketing investments, will drive future volumes. We expect revenue to grow at a CAGR of ~9% over FY23E-25E.

Asset light expansion & cost saving steps to aid margin expansion.

Gross margin improved by 190bps YoY to 58%, while EBITDA margin improved by 280bps YoY to 22.2% aided by improved channel mix, lower discounts, and inventory management. PAT declined by 33% YoY due to one-off item (voluntary retirement benefit of ~Rs. 41cr), excluding this PAT grew by 48% YoY. BIL’s focus on asset light expansion strategy along with cost initiative measures for an efficient supply chain, flexible retail manpower, and technology initiatives with multiyear benefits, will support gradual margin improvement going forward. BIL’s strong focus on adding franchise stores will control fixed costs.

Valuation & Outlook

The demand is expected to improve in the festive season and also aided by lower inflation. 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 50x 1Yr Fwd P/E. Considering the improvement in margins, we upgrade our rating to BUY (from HOLD) with a target price of Rs. 1,870, valuing BIL at 44x on FY26E EPS.

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

SEBI Registration Number: INH200000345