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Softness in operating profitability drags PAT down

* BATA’s EBITDA/PAT declined 11%/30% YoY (miss) as revenue remained flat. A gross margin improvement of 130bp YoY was offset by higher operating expenses. Store additions continued as the company added 54 new stores, with a total store count of 2,204 (including Shop-in-Shops).

* Continued softness, particularly within the value segment (We reiterate our Neutral rating on the stock with a TP of INR1,480.

Soft revenue growth and higher opex drag operating profits (a big miss)

* BATA’s consolidated revenue for the quarter remained flat YoY at INR9b (5% miss), dragged by continued headwinds within discretionary spending.

*Gross profits, however, grew modestly at 3% YoY to INR5.1b, with margin expanding ~130bp YoY to 56.1% (vs. 58.2% estimated). This could possibly be due to the softening of RM prices and an improved product mix.

* Employee costs remained flat on a YoY basis at INR1b, while other expenses grew 20% YoY to INR2.2b. This led to an EBITDA decline of 11% YoY to INR1.8b (a big miss). EBITDA margin contracted 270bp YoY and stood at 20.2% (vs. 26.8% estimated).

* The Depreciation/Finance costs grew 14%/3% YoY. BATA’s other income rose 47% YoY during the quarter.

* PAT declined 30% YoY to INR580m (a big miss), mainly due to the weak operating performance.

Key takeaways from the management interaction

* Marketing costs are likely to reach 300bp of sales; management expects the investments within marketing to translate into improved demand.

* Outperformance of the premium category was offset by continued softness in the value segment (ASP

*Same-store-sales remained flat YoY as higher pricing (mid-single digit growth) led by improved product mix and channel mix was offset by volume decline.

* The omni business, which remained restricted to CO-CO, has now been expanded to franchisee outlets as well (80% franchise stores).

Valuation and view

*BATA leverages its robust balance sheet, marked by a net cash position, healthy FCF generation, and impressive returns profile, alongside substantial growth potential within the industry, to drive its growth initiatives.

* Over the last couple of years, following the change in management, a renewed focus on growth has been evident. This has been characterized by a brand refresh, introduction of new product lines (such as the newly-launched sneaker segment), and enhancements to the backend supply chain infrastructure.

*While the company continues to explore growth opportunities through product improvement and introduction, revenue growth has been challenging with a weak demand recovery within the value category and an improving share of the sneaker segment.

* We model a revenue/PAT CAGR of 5%/11% over FY23-25 and ascribe a P/E of 35x on FY26E to arrive at our TP of INR1,480. Reiterate Neutral.