Neutral Bata India Ltd For Target Rs.1,225 by Motilal Oswal Financial Services Ltd
Sustainable volume growth recovery remains key
* Bata India (BATA) delivered a tepid revenue growth of 2% YoY (4% miss) in 3QFY25, led by a volume uptick across channels.
* EBITDA was up 9% YoY (5% miss) as various cost-control initiatives led to margin expansion (gross margin +10bp YoY, EBITDA margin: +150bp YoY).
* The company delivered volume-led growth after a few quarters, driven by better execution on EoSS and improvement in customer value proposition. However, we believe BATA needs to deliver volume growth on a sustained basis over the medium term for the stock to re-rate.
* We trim our FY26-27E revenue by 2-3% and PAT by 2-4%. We build in a CAGR of 5%/6%/10% in revenue/EBITDA/adj. PAT over FY24-27E. We reiterate our Neutral rating with a TP of INR1,225 (based on 40x Mar’27E EPS).
Revenue growth muted; cost control drives margin improvement
* Revenue at INR9.2b (4% miss) grew by a modest ~2% YoY, majorly driven by volume growth.
* BATA closed net 2 stores during 3Q, taking the total store count to 1,953. Gross store addition was normal; however, the company closed a higher number of unprofitable stores during 3Q.
* Gross profit inched up 2% YoY to INR5.2b (~5% miss) as gross margin expanded ~10bp YoY to 56.2% (down ~40bp QoQ, 80bp miss).
* Gross margin was boosted by improved sourcing, efficient in-house production and lower salience of discounted product.
* EBITDA increased 9% YoY to INR2b (5% miss) on good cost control as SG&A cost declined ~4% YoY, while employee cost inched up only ~1% YoY.
* EBITDA margin expanded 150bp YoY to 21.7% (broadly in line).
* Reported PAT at INR587m was up by a modest ~1% YoY (22% miss). BATA reported ~INR108m of VRS cost as an exceptional item.
* Adjusted for the cost, PAT grew 15% YoY to INR669m, but missed our estimate by 11% due to lower EBITDA and lower other income (-11% YoY).
Key takeaways from the management interaction
* Volume growth: Management indicated that volume growth was broadbased across channels, majorly led by better execution of the EOSS calendar and the company’s initiative on providing superior value proposition to customers.
* Margins: Gross margin improvement was driven by better sourcing, efficient in-house manufacturing, and lower salience of a discounted product. Benefits of IHM factory closure have also started to yield results as per management. Management indicated that gross margin may be lower amid the rising share of franchise in store mix, but EBITDA should not see any significant impact.
* Store additions: Gross store additions during 3Q remained normative, while the company closed a higher number of unprofitable stores. Management indicated that store closures will continue for the next couple of quarters. However, it intends to add 30-40 stores per quarter, including through the franchise model.
* Zero Base Merchandising (ZBM): There are 17 stores under the initiative now (from 8 earlier). The benefits from ZBM include an ~8% increase in footfalls, a reduction in lines in these stores by 60%, ~7% increase in sales per sq.ft, inventory reduction (0.62x), and an increase in store RoIC. Initially, management aims to roll out the ZBM initiative in ~100 stores, which collectively contribute ~25% to BATA’s turnover. Further, management indicated that a ~33% reduction in the planned range for stores led to clutter reduction and improved customer experience.
Valuation and view
* Over the last couple of years, following the change in management, a renewed focus on growth has been evident, characterized by a brand refresh, the introduction of new product lines (such as Sneakers), and enhancements in the backend supply-chain infrastructure.
* A robust balance sheet, marked by a net cash position, healthy FCF generation, and an impressive return profile, enables BATA well to tap the growth opportunities in the footwear category.
* BATA’s focus on premiumization (Hush Puppies, Power), steady network rollout, and a product revamp (including apparel and sneakers) could boost growth and offset the weak demand trends in the value category.
* We trim our FY26-27E revenue by 2-3% and PAT by 2-4%. We build in a CAGR of 5%/6%/10% in revenue/EBITDA/adj. PAT over FY24-27E. We reiterate our Neutral rating with a TP of INR1,225 (based on 40x Mar’27E EPS). A sustainable volume recovery remains the key trigger for the stock.
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