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Weak distribution channel drags down performance

* BATA revenue grew 2% YoY (in line) in 4QFY24, dragged down by weakness in the distribution channel and the mass segment. Improvement in gross margins (+170bp YoY) was offset by weak SSSG and high SG&A, which led to a 50bp YoY contraction in EBITDA margins.

* Persistent softness, particularly in the value segment (<INR1,000 ASP), remains a drag. However, a steady network rollout and a product revamp (including apparels and sneakers) could support growth going ahead. We estimate a CAGR of 10%/33% in revenue/PAT over FY24-26. We reiterate our Neutral stance on the stock with a TP of INR1,400.

Weak SSSG leads to decline in margins (in line)

* Revenue grew 2% YoY to INR8b (in line), likely due to weak SSSG.

* The company added three own stores and 24 franchise stores in the quarter, taking the total store count of 1,329 and 533, respectively.

* Revenue per store (including SIS) declined 6% YoY, mainly due to continued headwinds in discretionary spending.

* Gross margins expanded 170bp YoY to 60.1%, aided by a softening in RM prices and an improved product mix. Gross profits increased by 6% YoY to INR4.8b (in line).

* EBITDA was flat YoY at INR1.6b (in line) due to an increase in employee/other expenses by 3%/13% YoY, offsetting the GM benefit. EBITDA margins contracted 50bp YoY to 22.8%.

* The cost of retailing per store was under control (flat YoY).

* PAT declined 3% YoY to INR636m (6% miss) due to higher depreciation/ finance costs, which rose 18%/14% YoY.

* FY24 revenue rose 1% YoY, while EBITDA/adj. PAT declined 1%/9% YoY.

* The company declared a dividend of INR12 per share (vs. INR13 in FY23).

* FY24 OCF declined 65% YoY to INR 1.1b due to an amount blocked in WC and a 10% increase in LL. Capex rose 9% YoY to INR980m and the dividend payment stood at INR1.7b. This led to cash outflow of INR1.6b, resulting in a decrease in net cash to INR4.3b

Key takeaways from the management interaction

* Rationalization of stores- The company closed some loss-making COCO stores during the quarter and expects to add new stores to the franchisee network (40 stores per quarter). BATA continues to expand in tier-3/tier-4 cities.

* Guidance- It aims to clock double-digit revenue growth consistently and expects to maintain marketing costs at 3%.

* Mass segment improving- Distribution business and lower ASP products have been a drag on overall growth, but the management has seen some signs of improvement in the mass market.

* Power apparels picking up- The company is extending power apparels across stores, as the segment has seen good momentum from winters. BATA targets to expand to 100 stores by Dec’24 (vs. 70 at present).

Valuation and view

* Its robust balance sheet, marked by a net cash position, healthy FCF generation and impressive returns profile, along with a substantial growth potential within the industry, should help BATA drive its growth initiatives.

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

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

* We estimate a CAGR of 10%/33% in revenue/PAT over FY24-26. We reiterate our Neutral stance on the stock with a TP of INR1,400, based on 35x FY26E EPS

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