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Muted topline, margins lower due to higher ad spend & IT cost, maintain NEUTRAL!

Result Synopsis

Bata India’s topline remained flattish on YoY basis at Rs9.45Bn (6% below consensus estimates). Company opened ~54 new stores (COCO + franchise) during the quarter, of which ~33 franchise stores were added, primarily in Tier-III&V cities. Also, Bata launched its 2nd Power EBO in Delhi. Operating margins contracted meaningfully to 19.6% Vs 25%/22.8% in Q1FY24/Q4FY24 respectively, largely due to higher employee cost and other expenses. Company had spends of Rs147Mn towards investment in technology and advertisement cost stood at Rs271Mn Vs Rs158Mn in Q1FY24, which lead to higher other expenses and weighed on operating margins (excluding the cost towards technology, EBITDA margins stands at 21.1%). On the back of premiumization strategy, company renovated ~37 stores during the quarter. Company had gain on sale of land of Rs1,340Mn which inflated net profit in Q1FY25.

We reckon topline growth to be muted at 6%CAGR over FY24-FY26E which will be driven by premiumization trend and new store additions. Owing to lower margins in Q1FY25, we have revised our FY25E margin estimate downwards to 22% from 23% earlier while FY26E margins should come in at 23.5% with higher focus on premiumization & cost optimization. Hence, we expect EBITDA to grow by 8%CAGR over FY24-FY26E.

At CMP, the stock trades at P/E(x) of 63x/50x on FY25E/FY26E EPS of Rs23(excluding profit on sale of land)/Rs29. We continue to value the company at P/E(x) of 50x on FY26E EPS, arriving at a target price of Rs1,453 (7.7% below previous target price). Hence, we maintain our NEUTRAL rating on the stock.

Result Highlights

* Revenue stood at Rs9.44Bn (6% below consensus est), remaining flattish YoY.

* EBITDA margins came in at 19.6% Vs 25%/22.8% (consensus est of 26.2%). Margins were sharply lower due to employee cost and other expenses which was elevated due to one-time expenditure of Rs147Mn towards investment in technology. However, adjusting the impact of the same, EBITDA margin stands at ~21.1% which is considerably below estimates. Hence, absolute EBITDA declined by 23%YoY.

* Company had a gain from sale of land of Rs1,340Mn, barring which the PBT stood at Rs832Mn, a decline of 42%YoY.

* PAT (excl gain on sale of land) stood at Rs402Mn, a degrowth of 63%YoY.

* During the quarter COCO and Franchise stores count expanded to 1,916nos Vs 1,862nos in previous quarter. 37-new stores were renovated, and 33-franchise stores were added primarily in Tier-3&5 towns. Bata also launched its 2nd POWER EBO in Delhi.

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