Neutral Bata India Ltd for the Target Rs 645 by Motilal Oswal Financial Services Ltd
Earnings recovery underway; topline acceleration remains key; reiterate Neutral
* Bata India delivered 4% revenue growth in 1QFY27, while underlying PBT grew 23% YoY. The earnings improvement reflects better merchandise productivity and cost efficiency.
* Gross margin expanded 130bp, with an underlying improvement of ~230bp after adjusting for the channel mix. Better inventory quality and higher fullprice sales are improving merchandise economics, with further upside from premiumization and lower markdowns.
* Redesigned product funnel is now entering stores, with a larger rollout planned over the next few quarters. Management believes greater design authority, comfort, technology, and premiumization should broaden the proposition while supporting higher ASPs.
* Franchise and digital expansion are broadening Bata’s growth runway, with franchise delivering sustained high-single-digit LFL growth and >600 potential trade areas still available.
* While operational initiatives are gaining traction, a sustained growth recovery will depend on the new product cycle translating into stronger consumer traction.
* We, therefore, retain a measured earnings recovery, forecasting FY26–28E revenue/pre-IND AS EBITDA/adj. PAT CAGR of 6%/13%/13% on a low base. Reiterate Neutral with TP of INR645 at 30x Sep’28E EPS
Stronger gross margin supports earnings recovery
* Revenue grew 4% YoY to INR9.8b (in line). Growth was driven by a combination of premiumization and volume growth, alongside strong consumer engagement across channels.
* Gross margin expanded 127bp YoY to 54.8% (160bp ahead), supported by higher full-price sales and lower markdowns, despite continued RM pressures. Gross profit consequently grew 6% YoY to INR5.4b.
* Employee costs declined 2% YoY, partly offsetting 16% YoY higher SG&A, primarily due to a ~25% increase in advertising spends.
* EBITDA grew 3% YoY to INR2.0b (4% below estimates), with margin contracting 27bp YoY to 20.8%, as higher brand investments offset gross margin gains.
* Depreciation/finance costs dipped 3%/5%. Other income grew 6% YoY.
* Adjusted PAT grew 13% YoY to INR640m (15% ahead), supported by lower depreciation and finance costs.
* One-offs of INR51m included forex and ERP implementation costs
Valuation and view
* Strategic initiatives are gaining traction, led by franchise expansion, product premiumization, sharper youth-focused offerings, and continued investment in inventory productivity, omnichannel capabilities, and brand building.
* While operating metrics are improving, we expect revenue growth and margin recovery to remain gradual, as the benefits of these initiatives take time to scale. Profitability is likely to remain below pre-COVID levels, even by FY28E.
* We, therefore, retain a measured earnings recovery, forecasting FY26–28E revenue/pre-IND AS EBITDA/adj. PAT CAGR of 6%/13%/21% on a low base.
* Potential demand recovery in the organized value-footwear segment following GST rationalization provides some downside support. Reiterate Neutral with TP of INR645 at 30x Sep’28E EPS.
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