Bata India has Happy Feet

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  • Date: July 27, 2012
  • CMP: Rs 895
  • Large Cap – Market Cap 5,750 crores
  • Advice:  Buy systematically
  • Target:  2 year target of 1258

Bata India is the largest manufacturer and marketer of footwear products in India. Riding the ‘consumption’ theme, the growth figures are impressive as FY11 sales at 1659 crores are up 15%, EBITDA 31%, and Net Profit 30% CAGR over the last 5 years. Bata is investing in new stores, manufacturing improvements and branding. Domestic competition is set to intensify, but Bata is a deeply embedded brand, that is just starting to discover it’s rightful place in the Indian market.  Buy systematically with a 2-year target of Rs. 1258. 

Bata India – Description and Profile

  • Bata India is a large Calcutta based retailer and manufacturer of footwear in India since 80 years. It is part of the Bata Shoe Organization with HQ in Switzerland. The FY12 revenues were 1659 crores and PAT 152 cr.
  • Manufacturing is located at Batanagar-WB, Bataganj- Bihar, Faridabad-Haryana, Peenya- Karnataka and Hosur- Tamil Nadu. It employs 6,800 personnel. Listed since 1973, Bata today has a market Cap of 5682 cr.
  • Bata has a market share of 35%. The brands include Hush Puppies, Dr Scholls, Weinbrenner, North Star, Power, Marie Claire, Bubblegummers, Ambassador, Comfit, QUOVADIS and Wind India.
  • Bata sells through 1300 retail stores spread across 500 cities/towns. It also operates a non-retail distribution network through its urban wholesale division and caters to customers through over 30,000 dealers.
  • Bata won the ‘Consumer Awards 2010’ as ‘India’s Most Preferred Retailer’ given by CNBC Awaaz.
  • Shareholding pattern is: Foreign Corporate Promoters – 52%, MFs/ DII 12.8%; FIIs 18.6%, Bodies Corporate plus others 2.8%, Individuals retail /HNI 13.8%. We can see that the shareholding is well distributed.
  • Key Executives are: Uday Khanna – Chairman, R Gopalakrishnan – MD and Ranjit Mathur, Director – Finance.
  • ICRA has reaffirmed a rating of [ICRA] A1+ to Bata India for its CP programme, the highest for short-term debt.

Recent Events and Strategies executed by Bata

  • Bata straddles the entire range of footwear – from value to premium. With a current slowdown, it is currently focusing on value/ volume. It has the flexibility to switch to a premium focus in a short period, if required.
  •  The Bata group through a Singapore firm provides guidance and managerial support in functions like store layout, marketing, shoe line, up gradation of factories, manager training and guidance from senior managers.
  • Growth is excellent. In 2011, Bata opened 146 stores, (compared to 69 in 2009 and 108 in 2010) with average floor size >3,000 sq.ft. and also remodeled 30 small stores into the larger format stores. Some unviable small stores, which could not display the variety of footwear collections, are being shut down.
  • Through retail, Bata sells over 5 cr pairs of footwear annually, serving 1,50,000 customers every day. The wholesale division operates with a network of 275 distributors and 20,000 independent shoe dealers. Industrial division caters to the safety footwear needs of various industries. Export sales in 2011 were about 3 million pairs worth Rs 16.9 crores compared to Rs.11.8 cr in 2010.
  • Bata is seeing store expansions in Tier II and III cities, higher same store sales growth and higher realizations due to increasing share of leather shoes in overall sales (about 70%).
  • The Bata website www.bata.in has been set up for online search, shopping and home delivery.

Product notes

  • The Bata brands include
  1. Hush Puppies range of footwear in the premium segment and dress comfort segment brands Comfit, Ambassador and Mocassino.
  2. In theladies segment, the trendy Marie Claire range.
  3. The youth focused brand North Star and specialty outdoor brand Weinbrenner.
  4. For children Bubblegummers offers lightweight all-weather footwear and Naughty Boy is a school shoe.
  5. A new retail concept, FOOTIN, offers affordable fashion and trendy styles.
  6. The CHIARA shoes Collection (with elastic tape upper) has been launched here after international success.
  • For Bata, the opportunities include the low penetration of organized footwear retail (40%) and large presence of unorganised players in the women footwear market (86%).
  • Bata India was selected as a POWERBRAND in the POWERBRANDS 2010. The selection is done after an extensive pan India research conducted by Indian Council for Marketing Research.

Industry Note:

  • India’s per capita shoe consumption or the number of footwear (shoes, chappals, sandals) worn by an individual has gone up from 1.4 shoes a year in 2004 to 2.2 shoes per year in 2010. (Government report).
  • Footwear is the second most organized retail category in India, next only to watches.
  • Today, about 220 cr pairs of shoes are made in the organised and unorganised sector. India is the second largest footwear manufacturer in the world, next only to China. The Indian footwear market is currently estimated to be Rs 15-20,000 crore, growing at 12% per year. Of this, 40% is organized, with rural India accounting for 75% of the consumption.
  • This retail market is classified:
    • Men’s Footwear accounts for 48% and is the largest segment.
    • Women’s Footwear accounts for 41%. Growth rate is highest here.
    • Children’s Footwear accounts for 11%.
  • The competitors for Bata are Liberty, Red Tape, Woodland, Khadim and Metro.
  • Retailers are highly sensitive to regional preferences with wide variations in styles, festivals and consumers.

Stock Valuation, Performance and Returns

  • Bata has been listed for a long time. For our analysis purpose, we will consider the period from 2007-12.
Bata Price Chart, JainMatrix Investments

Fig 1 –  Bata Share Price over 5 years,  JainMatrix Investments, Click to Enlarge

The Bata share is up 41% CAGR over the last 5 years. The all time peak of 922 was achieved recently on May 29, ‘12. It is today within 3% of this.

Quarterly Sales and Profits, JainMatrix Investments

Fig 2 – Quarterly Sales and Profits, JainMatrix Investments,  Click to Enlarge

  • The growth numbers are excellent with Sales up 15%, EBITDA 31% and Net Profit 30% CAGR over 5 years.
  • Profit margins have improved steadily, and are at 10.4%. Operating margins are at 15% this quarter.
Bata - Dividend and Price movement, JainMatrix Investments

Fig 3 – Bata – Dividend and Price movement, JainMatrix Investments

This rapid business growth is also accompanied by an increase in dividend. See Fig 3. The dividend at 60% gives a dividend yield of only 0.7%.

EPS and Cash Flow, JainMatrix Investments

Fig 4 – EPS and Cash Flow, JainMatrix Investments

  • The annualised EPS is up a very healthy 30% CAGR over the last 5 years. However, cash from operations peaked in 2009, and has reduced due to investments into new stores and manufacturing improvements.
  • ROCE and RONW are in the 40-41% range. The Equity Capital has been steady at 64.3 crores for the last 7 years. This is a sign of good capital stability.
Price and PE Graph, JainMatrix Investments

Fig 5 – Price and PE Graph, JainMatrix Investments

Price and PE Chart, Fig 5, indicates that in 6 years, the average PE has been 25 times. Current PE of 35.6 times (TTM, trailing 12 months) indicates market acceptance of the consumption & growth prospects of Bata.

Price and EPS Graph, JainMatrix Investments

Fig 6 – Price and EPS Graph, JainMatrix Investments

  • The view of the EPS charts in Fig 6 shows that EPS growth has accelerated after 2009.
  • The EPS is today at all time high of 25.53 TTM, including Apr-June quarter 2012.
  • The EPS of Bata is expected to stay in the channel as per Fig 6.
  • PEG is at 1.2 – indicates fairly valued status.  

Benchmarking and Financial Estimates till FY15

In a Benchmarking exercise, we have compared Bata to Mirza International (a Peer), Titan Industries and Marico (two consumer oriented firms with retail presence), see Exhibit 7.

Peer Comparison, JainMatrix Investments

Fig 7 – Peer Comparison, JainMatrix Investments

All the firms with strong brands have high PEs. Bata seems to be a bit overpriced. But it scores high on many parameters, and excels in terms of margins.

The financials and PE of Bata have been projected for the next 3 years. See Exhibit 8.

Financial Projections, JainMatrix Investments

Fig 8 – Financial Projections, JainMatrix Investments

Risks:

  • Intense competition at the higher end of footwear market from Gucci, Jimmy Choo, and other global brands.
  • The unorganized and small scale sector still own 60% of the Indian market. While Bata will be a first stop for an upgrade by these consumers, the competition from lower price points is intense.
  • The Government of India has allowed 100 per cent FDI in single-brand retailing in India and has plans to allow upto 51 per cent FDI in multi-brand retailing in the near future.
  • Rapidly evolving footwear market – Bata will need to be sensitive to new tastes.
  • The Bata brand itself while strong, has an ageing appeal, and needs to be refreshed, recharged and replaced where necessary to keep winning in this market.

Opinion, Outlook and Recommendation

  • Footwear is an exploding category in India, and Bata remains one of the best plays in India, on the basis of favorable demographics, retail presence, manufacturing improvements and good marketing/ branding.
  • Significant opportunities stem from growth against the unorganized sector, in upgrading current customers and in dominating the domestic market. Exports too are an opportunity given Bata’s global presence.
  • At CMP of 895, Bata is at high valuations of 35.6 times TTM. In difficult equity market conditions, the ‘safety in consumption’ theme is playing out, where such firms all have PE valuations in the 30s.
  • We expect Bata to continue at these high valuations for the next 2 years. Business performance will also continue on the growth and profitability path we have seen in the last 2 years.
  • Buy Bata systematically for a 2-year target of 1258, a 40% appreciation from current levels.

JainMatrix Knowledge Base:

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Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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