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Subdued start to FY26 as growth remains a challenge

• Bata India (BATA)’s 1QFY26 marked another subdued quarter, with flattish revenue and adjusted EBITDA, missing our estimates by 2-3%.
• Reported EBITDA grew 7% YoY to INR2b, driven by accounting adjustments, while adjusted PAT declined 33% YoY to INR568m.
• Positive developments included the value offering in ladies’ footwear, improving conversions, and Zero Base Merchandising (ZBM) alongside tactical measures, contributing to a 15% reduction in inventory.
• Strategic initiatives such as inventory cleanup, curated product refreshes, and franchise-led expansion should enhance efficiency and aid margin recovery, though near-term competitive pressures remain.
• We cut our FY26-27 revenue and EBITDA estimates by 3-6% due to continued weakness in growth. We model a revenue/EBITDA/adj. PAT CAGR of 5%/9%/ 11% over FY26-28. Reiterate Neutral with a revised TP of INR980.

Growth remains tepid; accounting change drives optical EBITDA growth

• Revenue remained flat YoY at INR9.4b (3% below our estimate) as ~5% YoY store additions were likely offset by a decline in SSS.
• Gross profit declined 3% YoY to INR5b (8% miss) as gross margins contracted 140bp YoY to 53.5% (down 530bp QoQ) and were ~250bp below our estimate.
• Other expenses declined 11% YoY, likely due to a change in royalty structure for one of the brands (~INR155m boost in 4QFY25).
• As a result, EBITDA grew 7% YoY to INR2b (2% below), with EBITDA margin expanding ~155bp YoY to 21.1% (~20bp miss).
• However, EBITDA on a like-for-like basis would likely be flat to -1% YoY, with EBITDA margin likely stable YoY.
• Depreciation and amortization expense surged 22% YoY due to a change in royalty structure for one of the brands, and finance cost rose 13% YoY.
• As a result, reported PAT declined 70% YoY to INR520m (27% miss) due to weaker EBITDA, higher D&A, and finance costs.
• Bata continued its VRS program, leading to a one-time exceptional cost of INR48m. Adjusted for the same, PAT at INR568m dipped 33% YoY (21% miss).

Key takeaways from the management commentary

• Muted demand: Despite a weak demand environment weighing on overall revenue, BATA is witnessing selective volume-led growth in both value and premium segments—particularly in the sub-INR1k products and the Floatz portfolio. Internal initiatives such as zero-based merchandising are improving store-level efficiency and driving better conversions, partly offsetting broader market softness.
• Margin pressure amid value focus: BATA’s sharper value-for-money portfolio has supported consumer retention but compressed gross margins by 230bp, due to an adverse channel mix and lower ASPs. An additional 100bp impact on operating margins stemmed from one-off employee costs. However, cost resets and product portfolio rationalization are underway to rebuild operating leverage.
• Brand and channel mix: BATA continues to evolve its multi-channel approach, with ~80% of new store additions from the franchise network and a renewed focus on modern trade. Brand-wise, Floatz has emerged as a premium growth driver (40%+ growth, nearing INR2b), while Power and Hush Puppies (~20% contribution each) support the dual strategy of value and premiumization.
• Inventory-led efficiency gains: The company reduced inventory by 16% YoY, with aged stock now at a low level of 2-3% of the total inventory. ZBM implementation across 146 stores led to a 40% SKU reduction and 25% inventory decline. This also enhanced agility, enabling more curated, innovation-led product replenishment, supporting margin recovery through lower markdown.

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. However, these initiatives have yet to result in sustained growth.
• Despite muted demand, BATA is seeing early traction in the value segment (sub INR1k). Strategic inventory cleanup, curated product refreshes, and franchiseled expansion are positioning the company for improved efficiency and gradual margin recovery, though near-term pressures persist.
• We cut FY26-27 revenue and EBITDA estimates by 3-6% due to continued weakness in growth. We build in FY26-28 CAGR of 5%/9%/11% for revenue/ EBITDA/adj. PAT. We reiterate our Neutral rating with a revised TP of INR980. ? Sustained volume recovery remains the key trigger for the stock.

Detailed takeaways from the management commentary

• Demand: Bata India continues to see steady demand across core categories, with network optimisation and franchise-led growth expanding its footprint into Tier II–IV towns. Management maintains net COCO store additions near flat, with gross additions (~70–80/year) offset by closures, prioritising profitability. Franchisee expansion target: 130–150 stores annually.
• Margin Profile: Bata’s gross margin contracted ~135bp to 53.5% due to liquidation of aged and discontinued inventory under ZBM. EBITDA faced pressure from higher opex, franchise mix dilution (~200bp GM impact but EBITDA accretive), and inflationary overheads. COCO store closures add 40– 50bp, partially offset by 30–40bp first-year losses from new stores.
• Store Closures: COCO stores undergo stringent margin reviews, requiring a twoyear minimum history unless losses are significant. In FY26E, 70–80 gross COCO additions were planned, but net growth would likely remain ~10–15 stores, as closures largely offset new openings.
• Inventory fell 16.5% YoY to INR 6,741m, with stock turns at 1.9. Aged inventory dropped 50%+, and Zero Base Merchandising stores saw 22% inventory reductions. ZBM approach resets assortments each season from a clean slate, driving higher sell-through (>80%) and reducing slow-moving inventory. This has improved the proportion of fresh styles and supported full-price sales.
• Value Proposition: Bata has introduced lower entry price points (starting ~INR 299) in select ranges to capture value-seeking customers, particularly in Tier II/III markets. This complements its mid-premium positioning, broadening appeal, and driving higher unit throughput. Combined with franchise-led penetration and MBO tie-ups, these value SKUs are delivering incremental volumes without significantly diluting overall gross margins.
• Online Channel Digital sales remain a supplementary growth lever, enhancing brand reach without large capex for physical presence. While still <10% of total sales, online supports younger consumer acquisition and acts as a clearance channel for aged inventory, complementing the primary offline push.
• Floatz sustained strong traction, with 1QFY26 turnover up 1.33x YoY and volumes up 1.29x YoY. Distribution has expanded to 400 doors, driving an annualised run rate of ~INR2b.
• Hush Puppies continues premiumization with 144 doors (117 COCO, 27 franchises) and store upgrades — 36 stores already converted to new clutterfree layouts.
• Franchisee count reached 644 stores in 505 towns, contributing ~12% of turnover (up from <3% pre-pandemic). The model is EBITDA accretive despite ~200bp lower gross margin, owing to minimal opex burden on Bata’s books. 60% of new stores are opened by existing partners, with an average of 1.6–1.7 stores per partner.

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