Reliance Industries – A Firm to Rely On

  • CMP: ₹1,532
  • Industry: Refining, Petrochem, ++ Conglomerate 
  • Large Cap with ₹9,85,000 crore mkt cap
  • Current Valuation: P/E: 23 times and P/B: 2.4 times
  • BUY with a target of ₹2,200 by May 2022 

Summary

  • Overview: Reliance Industries is the largest private sector firm and #1 by market cap in India. RIL has over decades proven its ability to build businesses of global scale and execute complex, time critical, and capital-intensive projects. ~80% of RIL’s operating profits are being generated from the refining and petchem verticals. Going ahead newer businesses like Retail and Telecom are expected to grow profitably. RIL earnings has green shoots from (a) Improving ARPU from Jio wireless business (b) Launch of Jio Fiber Broadband services (c) Traction in enterprise solutions service offering (d) Lower interest costs as RIL aims to become net debt free (e) improving margins and stable growth in Retail and eCommerce.
  • Key Risks: (a) Adverse crude prices/ petroleum margins (b) Inability to reduce debt at the committed pace. (c) Lower plastic consumption affecting the petchem vertical. (d) Muted growth in Indian economy. (e) regulatory changes in telecom
  • Advice: Investors can BUY this share with a May 2022 target price of ₹2,200/share. This will allow their investment to appreciate 42% absolute or 17% annualized over this period.

The entire report in PDF form is available here – JainMatrix Investments_Reliance Industries_Jan2020

Disclaimer and Disclosure

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has no position in Reliance Industries. In addition, JM has no known financial interests in RIL or any related group. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of Investments can go down as well. The suitability or otherwise of any Investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Avenue Supermarts IPO: The Mart of Choice

  • Date 7th Mar 2017, IPO Open 8-10th Mar at Rs. 295-299
  • P/E 39.9 times TTM
  • Large Cap: Rs 18,660 crore Mkt cap
  • Industry – Retail 
  • Advice: Investors can BUY with a 2 year perspective

jainmatrix investments, dmart supermarkets

  • Overview: D-Mart is an emerging national supermarket chain, with a focus on value retailing. Total income for FY16 was Rs 8,606 cr. and net profit Rs 319 cr. Its revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% resp. CAGR over 5 yrs. It has 118 stores with total retailing area of 35.9 lakh sq.ft. It has a low employee count and uses contract staff to contain costs.
  • Operations: D-Mart has a cluster based growth strategy which has allowed it to extend reach in areas where it has a presence. The store expansion strategy and cost control techniques are good. D-Mart has a professional management team, a respected promoter and clear vision and growth strategies which are likely to keep the company on the successful path. At a current P/E of 39.9, the asking price is fair, considering that DMT is the leader in its segment.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Most good IPOs get oversubscribed and few applicants get share allotments. Subscribe to JainMatrix Investments to get their pre-listing IPO notes, and invest successfully.  

Here is a note on Avenue Supermarts Ltd. (DMT) IPO.

IPO highlights

  • This IPO opens: 8-10th Mar 2017 with the Price band: Rs.295-299 per share.
  • Shares offered to public number 6.25 cr. The FV of each is Rs. 10 and market Lot is 50. These shares are 10.02% of equity. The IPO will collect Rs 1,870 cr. with a fresh issue of shares.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35. This is good for Retail.
  • DMT was incorporated in the year 2000 by Mr. Radhakishan Damani. He is also a well known Stock market Investor, Stockbroker and a Trader. He owns 43.8% in DMT while his investment vehicle Bright Star owns another 15.8%. His brother and several family trusts own the remaining shares. The promoter group holds 91.36% stake, which will fall to 82.2% post-IPO.
  • DMT will benefit from the fresh issue of shares as the proceeds will go the company.
  • Utilization of IPO proceeds: Repayment of loans / redemption of NCDs Rs. 1,080 cr., construction and new stores Rs. 366.6 cr., and general corporate purposes Rs. 423.4 cr.

Introduction

  • DMT is an emerging national supermarket chain, with a focus on value-retailing.
  • Revenue in FY16 was Rs. 8,606 cr. and profit Rs. 319 cr. It has 4,738 full time employees.
  • According to Technopak, DMT was among the larger and more profitable Food and Grocery (F&G) retailer in India in FY16. DMT offers a range of products like Foods, Non-Foods (FMCG) and General Merchandise & Apparel. See Fig 1.
  • For FY16, sales were from Mah. (62.6%), Guj. (18.8%), Telangana (10.15%) and Kar. (6.14%).

jainmatrix investments, dmart superstores

Fig 1 – D’Mart Segment revenues

  • DMT opened its first store in Mumbai, Mah. in 2002. By Jan 2017, they had 118 stores and retail area of 35.9 lakh sq.ft, located across 45 cities in Mah. (59), Guj. (27), Telangana (13), Kar. (7), AP (4), MP (3), Chhattisgarh (1), NCR (1), Daman (1) and Raj. (2).
  • DMT will expand store network in south & west India, and follows a cluster-based expansion.
  • Leadership is Ignatius Noronha (MD), Ramakant Baheti (CFO), Udaya Yarlagadda (COO Retail).

News, Updates and Strategies of DMT

  • DMT operates and manages all its stores. They operate mostly on an ownership model (incl. long-term lease, with lease period over 30 years and building is owned by the company).
  • DMT opens new stores using a cluster approach on the basis of adjacencies and focuses on an efficient supply chain, targeting densely-populated residential areas with middle class consumers. It operates distribution & packing centers that form the supply chain backbone for stores. They have 22 dist. centers and 6 pack. centers in Mah., Guj., Telangana and Kar.
  • DMT’s approach is to retail quality goods at competitive prices. The majority of products stocked are everyday basic products rather than discretionary items. They minimize operating costs by procuring goods directly from vendors /manufacturers, having an efficient distribution system, minimize inventory build-up, and good store operations.
  • DMT is piloting a project to open delivery centers or pick-up points in catchment areas where it has a store, for online customers. The 150-250 sq. ft. centers named “D’Mart Ready” and will be package pick-up points for eCommerce.
  • DMT plans to add 60% more store space in 3 years, about 21 lakh sq. ft. by FY20.
  • A high proportion of DMT staff are employees on contract. As of Dec 2016, they had only 4,738 full-time employees compared to a high number of employees on contract.
  • The grey market premium for the IPO is about Rs. 227-228. This is a positive.
  • A personal visit to the store was interesting. There were discounts on most products, and on some very good deals. The store location was good, and it was in a busy area. The parking space was ample for customers. There were a range of products under various categories, and in one section DMT had its own private label products with brand names like “D Homes” and “D Premia”. One had to search a little to find shop assistants. There were long queues, even though there were many cashiers counters, indicating popularity at 9.30 pm on a weekday. Overall the experience was good because of the location and deals.

Retail Sector Outlook

  • While organized retail, primarily brick & mortar, has been in India for more than two decades, its contribution to total retail is still low at 9% (USD 55 bn.) as of 2016, a modest increase from around 7% in 2012. This is expected to become 12% (USD 115 bn.) by FY20.
  • Share of urban retail is expected to grow from 49% in FY16 to 52% in FY20 due to increasing urbanization, a higher urban household income, rural distress due to erratic monsoons and increasing penetration of organized retail in urban centers.
  • Currently, the food and groceries (F&G) segment constitutes a majority share of retail (67%). According to Technopak, F&G will have a share of 66% in 2020. Apparel & accessories and consumer electronics categories account for another 8% and 6% of the the retail market.
  • 16 Indian states contribute 85% of the total retail spend. Retail opportunity in three south states – Kar., AP and Telangana is currently USD 100 bn. According to Technopak, these three south states will witness robust growth. Mah. with 19% and Gujarat will grow steadily.
  • Footwear has the highest penetration in organised retail at 40%; apparel & accessories, jewellery and CDIT have penetrations of 22%, 27% and 25%, resp. whereas F&G has just 3%.
  • The implementation of GST will benefit the retail industry over the next 1 year. Source: RHP
  • At present, the organized general merchandise players in India occupy around 40-45 million sq. ft. area. This requirement of retail space is estimated to grow to 60-65 mn. sq. ft. by 2020.
  • Supermarkets have been observed to garner higher levels of productivity amongst the general merchandise focused formats. The store productivity of a supermarket is typically 20-25% higher than that of a hypermarket. Though the efficiencies are higher for supermarkets, the margins are lower as compared to hypermarkets due to F&G category accounting for a greater portion of the product mix, in which the margins are lower as compared to other non-FMCG categories.

jainmatrix investments, dmart superstore

Exhibit 2 – Sales PSF of Supermarket Firms

  • We can see in Exhibit 2 that DMT has superior sales psf. The profit drivers of this industry are 1) Growth of Private Label 2) Optimum Store Size and 3) Growth in Food Processing.
  • Organized retail at a national level opened up only 10-15 years ago in India. On introduction, there were worries that a lot of labor intensive small retail businesses will be affected, so it will have negative social impact. However quite quickly we saw that 1) the sector has taken off rapidly and consumer habits have changed fast 2) small retail has not been much affected 3) political opposition has eased. However there are still restrictions on Walmart or other MNC chains with multiple brand retail business directly entering India without local partners.
  • Market shares – Per reports, in F&G, Future group holds the largest market share with 13% followed by D’Mart at 10% and Reliance at 8%. Together, they contribute 31% of F&G segment. Additionally, the overall organised retail market in India is $60 billion in size. With DMT revenue for FY16 = Rs. 8,606 cr., DMT has a 2.11% in the total organized retail market.

Financials of D-Mart

  • DMT’s revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% CAGR from FY12-16, see Fig 3. (FY17 data is a projection of 9M FY17 financials). Thus revenue & PAT growth is good.
  • The EPS has risen sharply in the last 5 years. This is excellent.

jainmatrix investments, dmart superstores ipo

Fig 3 – D-Mart Financials

jainmatrix investments, dmart superstores, IPO

Fig 4 – D-Mart Cash Flow

  • DMT has positive cash from operations, see Fig 4, but it has been investing into fresh capacities and hence the company has negative FCF.
  • DMT has an ROE of 21% and ROCE of 23.7% for FY16 which is excellent.
  • DMT has not declared dividend in the last 5 years though the promoter has 91.4% stake. The firm has instead reinvested funds generated into capacity expansion.
  • DMT has good margins. The PAT margin for FY16 stood at 3.7% and for 9M FY17 at 4.4%. The margins will improve as the company reduces debt. DMT has a bank balance of Rs. 351 cr. which translates into Rs. 5.6 as cash/share which is low. So cash is being managed efficiently.

Benchmarking

We benchmark DMT against other retail majors and global retail giant Walmart. See Fig 5.

jainmatrix investments, dmart superstores IPO

Exhibit 5 – Financial Benchmarking (click image to enlarge)

  • PE for DMT appears average compared to listed Indian retail firms. (TTM is trailing 12 months). However it is high as Trent and Shoppers Stop are recovering from losses till 2 years ago.
  • DMT has witnessed excellent PAT growth compared to peers in the last few years. The 3 year PAT growth over 50% makes it the leader. The D/E ratio at 0.74 is moderate. This will fall after the IPO and so it’s a positive. The inventory turnover ratio at 14.2 times makes DMT leader on this parameter too. The ratio indicates how quickly inventory is sold / rotated.
  • The return ratios are best in the industry. Majority of the retail players are stressed.
  • Notes: Revenues, EBITDA and PAT values for Walmart are for CY15/CY16. Operating Margin (EBIT)/Operating Income is used interchangeably with EBITDA Margin/EBITDA for Walmart. Exchange rate of 1USD = Rs. 67.8

Positives for DMT and the IPO

  • DMT is good at offering value retail to the cost conscious consumers. The consumption story in India is robust with a rising aspirational urban middle class. This sector has potential.
  • DMT has taken up its footprint expansion using a distinct store acquisition strategy and ownership model. Business has grown rapidly in recent years, and there is ample opportunity in current presence states in West & South, as well as growth in Central, North & East regions.
  • DMT as high operating efficiencies and a lean cost structure through stringent inventory management and good IT systems. DMT has a strong track record of growth and profitability.
  • DMT enjoys a strong promoter background and an experienced & entrepreneurial management team and high of employee ownership.
  • DMT can aspire for high valuations given that they are growing steadily, profitably and organically. It may soon reduce debt, and has a sustainable business model.
  • The IPO is a fresh issue of shares. Hence the promoters aren’t cashing out, this is positive.
  • With just 9% penetration in retail, the organized sector has massive room to grow.
  • The company has been conservatively managed financially with a D/E of 0.74 this year.

Risks and Negatives for DMT and the IPO

  • The valuations look expensive in terms of P/B ratio. However DMT is able to ask for a premium because of its leadership position.
  • Warren Buffet sold off his stake in global retail leader Walmart last quarter. This is partially due to fierce competition from eCommerce, like Amazon. However USA is at a very different stage of development compared to India. Organized retail dominates there; it is at an early stage of penetration here. eCommerce is well established there; it is at a nascent mostly PE stage here.
  • Having said this, well-funded eCommerce firms are offering good discounts and rapid delivery in urban regions thus grabbing volumes and market share, and changing buying habits.
  • In many pockets in India real estate development is restricted by hidden forces like local politician fiefdoms, administrative permit raj and corruption. Any of the retail firms can be victims of this.
  • Future Retail is a fierce competitor with all India presence, and both organic and acquisition based growth with brands like EasyDay, Nilgiris and Heritage retail. Reliance Retail too is a very big player with Reliance Fresh and vertical chains. Several MNC firms are keen to enter.
  • With stake of 82% post IPO, the promoters will need to reduce to 75% within 3 years of listing.

Overall Opinion and Recommendation

  • Organized retail in India has a good future, and will offer consumers better services and range of products. We can certainly expect multi-year growth, new formats and innovation.
  • DMT has managed current operations and growth very well, and built up a loyal customer base. It has good performance metrics and should grow well organically.
  • The IPO is going to benefit the company in terms of premium inflows that will help reduce debt and grow the network/ operations. Repayment of debt will reduce finance costs.
  • DMT has a professional management team, a respected investor promoter and clear vision and growth strategies which are likely to take the company to new heights in the near future.
  • At a current P/E of 39.9, the valuations are good, considering that DMT is the leader in its segment.
  • This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain intends to apply for this IPO in the Retail category.  Other than this, JM has no known financial interests in DMT or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Café Coffee Day IPO – Very Hot Coffee

  • Date 10th Oct 2015
  • Mid Cap – Rs 4,979 cr Mkt Cap
  • Industry – Coffee QSR, conglomerate
  • Price range: Rs. 316-328 and Period:  14-16th Oct 2015
  • Advice: Average offering with medium to high risks. 

Summary

  • Overview: Coffee Day Enterprises is a conglomerate into coffee, logistics, hospitality, financial services and technology parks. The “Café Coffee Day” brand and chain is a valuable asset.
  • The CCD chain is a network of 1,538 café outlets in 209 cities with a 46% market share. The coffee business is integrated from plantation to processing, retail and exports.
  • Revenue and EBITDA have grown 29.7% and 25% CAGR over 5 years. But losses were Rs 87.2 cr. in FY15. The firm is debt heavy. Profitability appears to be 2-5 years away.
  • Opinion: The CCD IPO is rated Average as it carries medium to high risks and is only appropriate for investors with patience and a minimum 3 year investment perspective.

Download/ read the entire report.

JainMatrix Investments_Cafe Coffee Day_Oct2015

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in CCD or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

 

Bata India has Happy Feet

—————————————————————————————————————————————

  • 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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