rosealiza52: Bata India: Long-term story intact, but stock is fully valued in near term

Friday, June 7, 2013

Bata India: Long-term story intact, but stock is fully valued in near term

Nirmal Bang?attended the annual general meeting (AGM) held by Bata India (BIL) in Kolkata on 4 June 2013. They believe the long-term story is intact, but its stock is fully valued in the near term factoring in lower growth and high valuation at 23.8x/13.4x CY14E P/E and EV/EBITDA, respectively. Following are the key highlights:

- BIL board to consider stock split, but not bonus share issue.

- Of the total revenue in CY12, men?s segment contributed 40%, women?s segment 25% (up from 22%), kids segment 13%, sports segment 15%, and accessories segment 7%.

- The management has increased its focus on the women?s segment. This segment grew 25% in CY12 and the management expects it to post a 30% CAGR over the next few years. BIL launched Sundrop and Naturalizer brands in this segment apart from Footin outlets. BIL will re-launch its brand Sundrop in CY13, but after this no new brands are likely to be launched during the year.

- Many participants at the AGM stated that BIL shoes purchased by them witnessed high wear and tear within three to six months. The management stated that BIL is facing quality problems in in-house manufacturing as well as outsourcing.?Nirmal Bang?believe it will not have an impact in the short-term because of strong brand equity generated over eight decades, but in the long run it could hurt sales volume.

- The management stated that the business environment continues to remain challenging, but with higher footfalls the growth in Q2CY13 would be better than 11.8% achieved in Q1CY13. However, it would be lower than 19.4% achieved in CY12.

- The management is focused on increasing BIL?s volume as well as revenue rather than only realisation earlier. In order to grow volume, BIL will also look at Hawaii chappals and other products. A significant portion of improvement in margins over CY09-CY12 was due to a better product mix with healthy growth in average realisation.?Nirmal Bang?believe the increased focus towards volume growth than realisation will have an adverse impact on operating margin, as the overheads will be higher in respect of large-sized stores having an area of ~4,000 sqft.

- Following better growth in the domestic market, BIL was not focused on exports earlier. However,?BIL now plans to increase its focus on exports. Operating margin in exports is lower than the operating margin in the retail business in India.

- BIL was conservative in respect of spending on advertising earlier, but it now plans to go for aggressive advertisement campaigns on television post-monsoon.

- BIL, which has planned a capex of Rs1bn for CY13, has decided to set up ~100 outlets and modernise its three factories. It would also close/relocate ~ 74 small stores over the next two years.