Institutional Equities Bata India - Nirmal Bang India-Re-Initiating Coverage-13... · fashionable...

Institutional Equities

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Reuters: BATA.BO; Bloomberg: BATA IN

Bata India

Sleeping Giant Ready To Take Strides Bata India (BIL) did phenomenally well during the period CY10-CY13 (December year-end) before faltering from its high-growth path. During CY10-CY13, BIL clocked sales/EBITDA/PAT growth of 17%/26%/31%, respectively. FY15 marked the year of faulty SAP implementation, leading to severe supply chain problems. As a result, the performance took a hit and sales grew by a meager 4.4%. Although sales in FY16 improved 12.2% (on account of a low base and scrapping of SAP), they remained subdued for the first nine months of FY17. We believe the company should be able to post moderate sales CAGR of 8% over FY16-FY19E. Sales growth will mostly be led by improvement in realisation with a minor growth in volume. Our belief is based on the management’s stance to focus on the youth (which was not the case earlier) and concentrating on a more trendy and fashionable shoe-line with better price realisation. Improved sales growth supplemented with a slight improvement in gross margin (20bps), decline in rental costs as a percentage of sales (70bps), and moderate growth in employee costs (CAGR 5%) are expected to result in a rise in operating margin - from 11.2% in FY16 to 13.4% by FY19E. We expect sales/EBITDA/PAT to grow 8%/15%/19%, respectively, over FY16-FY19E. BIL stock has traded at 32x one-year forward earnings in the past 10 quarters. We have valued BIL at 30x FY19E earnings (EPS of Rs20.4) at Rs612, up 23% from the CMP.

Better product mix will lead to improved margins: Currently, BIL’s high-end brands such as Hush Puppies, Power, Marie Clarie and accessories account for ~30% of BIL’s total sales. The product development team is coming up with a new shoe line targeting the youth who prefer trendy and fashionable shoes and don’t mind shedding a few extra bucks for the quality. The management expects the new shoe line to have an average selling price or ASP of Rs3,000-Rs5,000/pair in the men’s category and Rs2,000-Rs,3000/pair in the women’s category. We also believe that Hush Puppies (ASP Rs2,500/pair) will continue registering good volume (growth of 10% in the past three years) supplemented by the growth in Power brand. With rising contribution from high-end products, BIL’s overall ASP will increase by ~4%. With rising ASP, we expect the operating margin to improve by 230bps over FY16-FY19E.

Goods and Services Tax or GST implementation to be volume-kicker: Indian footwear industry is largely dominated by the unorganised players, accounting for ~70% of the total shoes manufactured. India is the second-largest manufacturer of footwear after China and third-biggest consumer of footwear globally. India’s per capita footwear is way below that of developed economies and stands at 1.7 pair per person. With GST implementation, BIL will have to pass on the tax benefit, if any, to customers. However, we believe that volume growth coming from an unorganised player will be unprecedented. With ~1.5bn pairs of footwear being manufactured by unorganised players, we believe that post GST these players will become financially unviable. However, we haven’t factored in any volume growth because of GST implementation. Any incremental benefits from GST will only make our estimate look dwarfed.

Bata is still a strong and most trusted household brand: Despite rising competition from online stores and fancy international brands such as Nike, Puma, Steve Madden, etc, Bata continues to be India’s most trusted brand as per the Brand Trust Report. Bata brand is the perfect embodiment of value for money, high quality, comfort and footwear for the entire family. We do not see any reason for the Bata brand to erode despite having real competition from foreign brands. We continue to believe that Bata will keep capturing the ‘mind share’ of its customers in India.

BUY

Sector: Retail

CMP: Rs499

Target Price: Rs612

Upside: 23%

Akhil Parekh Research Analyst [email protected] +91-22-3926 8093

Key Data

Current Shares O/S (mn) 128.5

Mkt Cap (Rsbn/US$mn) 63.8/954

52 Wk H / L (Rs) 614/399

Daily Vol. (3M NSE Avg.) 524,822

Shareholding (%) 3QFY17 2QFY17 1QFY17

Promoter 53.0 53.0 53.0

Public 47.0 47.0 47.0

Others - -

One-Year Indexed Stock Performance

Price Performance (%)

1 M 6 M 1 Yr

Bata India 6.5 (6.9) 1.8

Nifty Index 6.1 2.5 21.9

Source: Bloomberg

Y/E March (Rsmn) CY12 CY13 FY15 (15M) FY16 FY17E FY18E FY19E

Revenues 18,425 20,652 26,940 24,181 24,932 27,550 30,755

YoY (%) 19.4 12.1 4.4 12.2 3.1 10.5 11.6

EBITDA 2,744 3,218 3,349 2,706 2,772 3,470 4,127

EBITDA (%) 14.9 15.6 12.4 11.2 11.1 12.6 13.4

Adjusted PAT 1,716 1,994 2,044 1,552 1,828 2,221 2,623

Reported PAT 1,716 1,908 2,312 2,187 2,012 2,221 2,623

FDEPS (Rs) 13.4 15.5 12.7 12.1 14.2 17.3 20.4

YoY (%) 47.3 16.2 -34.4 18.7 17.8 21.5 18.1

RoE (%) 26.9 24.8 19.9 19.8 14.7 16.1 17.0

RoCE (%) 26.1 25.5 17.7 14.2 14.8 16.3 17.2

RoIC (%) 32.9 35.6 22.8 18.6 21.3 27.4 30.4

P/E (x) 37.4 32.2 39.2 41.3 35.1 28.9 24.4

Price/sales (x) 3.5 3.1 3.0 2.7 2.6 2.3 2.1

EV/EBITDA (x) 22.8 19.1 23.1 22.4 21.1 16.6 13.7

Source: Company, Nirmal Bang Institutional Equities Research

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BATA INDIA LTD Nifty 50

13 February 2017


2 Bata India

Valuation

We have assigned Buy rating to BIL with a 12-month target price of Rs612, up 23% from the current market price. Our growth estimates are driven by the following key factors: 1) Introduction of new shoe line with higher price realisation leading to increased ASP, and 2) Improved product mix expected to improve blended margins. Other factors that are important to our estimates are: 1) Improvement in gross margin because of increased contribution from high-end products, 2) Decline in rental costs as a percentage of sales, and 3) GST implementation leading to higher volume growth and offsetting any possible negatives that may spring up in case our thesis does not pan out. BIL is expected to clock revenue/EBITDA/PAT CAGR of 8%/15%/19%, respectively, over FY16-FY19E. BIL stock currently trades at P/E of 35x FY17E, 29x FY18E earnings, and 24x FY19E earnings. We have valued the stock based on 30x FY19E earnings (one-year forward P/E for the past 10 quarters is 32x).

Exhibit 1: One-year forward EV/EBITDA Exhibit 2: One-year forward P/E

Source: Nirmal Bang Institutional Equities Research

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3 Bata India

Investment rationale

Better price realisation to improve operating margin

Youth segment was not a key focus area for BIL in the past. However, the management now believes that with a growing youth population and rising disposable income, this segment will be key driver for growth. The company hired an Italian designer, Mr. Mateo Lambert, in late 2015 who is currently head of the product development team comprising 25 designers based in Gurgaon and 70 designers based in Kolkata. Since the past two months, BIL has introduced many trendy and fashionable shoe designs targeting the youth segment. The trendy shoe line has been launched under Power brand and currently is being rolled out in 50 cities. The management expects rollout of the high-end shoe line in 200 cities during the year. ASP of these Italian designer shoes is ~Rs3,000-Rs5,000/pair for men and Rs2,000-Rs3,000/pair for women. BIL has been introducing better designs to improve its ASP. Rising sales of these products will help BIL to climb the value chain. Currently, ASP for BIL’s shoes across segments is ~Rs470/pair. ASP posted a CAGR of ~11% over CY05 – FY16. The rise in ASP was mainly on account of: 1) Scrapping of low-end products from its product line, 2). Increased share from high-end brands such as Hush Puppies (10%-11% of total sales), Power brand (8%-9% of total sales), Marie Clarie, etc. The rise in ASP of Bata’s core brand is by going for certain value addition in footwear.

Exhibit 3: Growth in price realisation


Repositioning of Bata brand

With a history of more than 80 years in India, BIL has come a long way. Bata has survived major financial crisis during the past two decades to emerge as a strong footwear brand. Bata was initially positioned as a family store for all footwear and related products. Bata became a need brand as it positioned itself as a provider of products to meet the needs of the middle class section of society. The brand has something for every member of the household. Then it came up with new brands like Marie Claire, Hush Puppies and North Star. BIL was known as a manufacturing company which produced footwear and sold them. Over the years, BIL changed its image from a manufacturing company to a marketing company. Bata placed itself in the market as a fashion conscious and lifestyle brand. It became more visible in shopping malls and created a shop-in-shop experience in multi-branded stores. Later, BIL also introduced international brands like Scholl, Marie Claire, Bubble gummers, Power, and North Star. Over the past few years, BIL has removed its low-end line-up of shoes and come up with high value brands of shoes. As a result, its operating profit per pair improved over CY10 – FY15 before dropping in FY16 (mainly because of the failure in SAP leading to supply chain problems). However, we are confident that with improved operational efficiency, rising contribution from high-end brands and voluntary retirement scheme or VRS expenses now a thing of the past, EBITDA/pair will improve going forward.

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Leather Foot Wear Footwear-Rubber/Canvas Footwear-Plastic Average


4 Bata India

Exhibit 4: Rising EBITDA per shoe pair


Bata has established itself as a strong household brand in India

BIL more than 1,250 stores across 500 cities, 2,500 designs, 300 distributors and 15,000 independent footwear dealers across India. BIL now sells ~50mn pairs annually. Men’s shoes contribute 50%-55%to total sales, women’s shoes account for 30%-32% of total sales; kids’ shoes contribute 7%-8% to sales, while the rest is contributed by accessories. Over the past few years, BIL has been able to change the consumer perception that Bata shoes are only meant for school kids (school shoes) and for elderly. By introducing young brands such as Hush Puppies, Weibrenner, Northstar, Power, Mocassino and Bubblegummers, BIL has been able to change its perception among customers.

One of the most popular brands of BIL, Hush Puppies, contribute 10%-11% to total sales with ASP of Rs2,500-Rs3,000/pair. Hush Puppies completed 20 years of its presence in India. Hush Puppies continue to live up to its brand image of comfort, quality and style. FY16 was a milestone year for Hush Puppies as BIL sold over 1mn pairs in 2015 itself. In addition to being available through retail stores, wholesale network and e-commerce channel of the company, the brand has been expanding its presence through 68 exclusive stores and 37 shop in-shops in premium departmental stores. In FY16, Hush Puppies embarked on a journey of re-positioning itself as an international premium lifestyle casual footwear brand.

Power brand is BIL’s premium brand in the sportswear segment. Power brand competes against some of the best global sportswear brands such as Nike, Adidas and Puma. However, prices of Power shoes are less then at least 30%-40% when compared with peers. Power brand contributes 8%-9% to total sales.

In order to cater to the children category, BIL introduced many new designs and innovative footwear under Bubblegummers and Disney brands. Through Bubblegummers, BIL strived to make quality shoes with uncompromising comfort and features that safeguard their little feet. With 18% of the population below the age of 10, the potential for growth in the children category of footwear is huge. Therefore, it is one of the key focus areas for BIL. With a revamped collection, a dedicated team to drive this brand, experience of being associations with brands like Angry Birds in the past and Walt Disney at present, BIL has robust plans to make Bubblegummers the best children’s footwear brand in India. Bubblegummers contribute ~3% to total sales of the company.

BIL has established an association with The Walt Disney Company India and is working with a set of designers from the latter to create a complete collection covering all types of footwear ranging from casual shoes, canvas shoes and ballerinas to everyday-wear sandals and chappals. BIL has been exploring the possibility to create exclusive ‘Disney Corners’ in some key retail stores across major cities in India to highlight the collection and add value to the children category of footwear. BIL is confident that its young little customers will be excited and thrilled to see their favourite characters in their favourite shoes.

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EBITDA EBITDA/pair

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5 Bata India

Exhibit 5: Bata brands

Men Women Kids

Ambassador Bata Bata

Bata Comfit Bubblegummers

Bata Life Hush Puppies Disney

Comfit Marie Claire Power

Hush Puppies Naturalizer

Mocassino North Star

North Star Power

Patapata Sandak

Power Scholl

Scholl

Sunshine

Weinbrenner


BIL has a far wider audience because of the number of brands it offers and varied price range. International brands such as Nike, Puma and Adidas cater to the high-end segment with their ASP more than Rs3,000/pair. Domestic brands such as Relaxo mainly cater to the mass segment where their ASP is ~Rs250/pair. Relaxo has mainly four brands – Bahamas, Flite, Sparx and Schoolmate. Metro shoes, although it offers a wide price range, has only four brands – Metro, Da Vinchi (premium brand), Mochi and MSL. ASP of Metro shoes is much on the higher side when compared to BIL and Relaxo. Metro’s ASP is ~Rs1,500/pair (MSL shoes at Rs500/pair, Mochi and Metro at Rs1,600/pair and Crocs at Rs2,300/pair.

Exhibit 6: Number of brands owned by the companies


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Bata Relaxo Metro Liberty

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6 Bata India

Strong retail distribution network

BIL has a retail network comprising 1,265 stores in India spread across 500 cities. Around 50% of its stores are in Tier-I cities, mainly metros. The balance 50% stores are spread in Tier-II and Tier-III cities. Of the 1,265 stores, 1,121 stores are of Bata brand, 102 are of Hush Puppies and 42 are foot-in stores. Pan India, BIL has a presence of 2,650,000 sq.ft. in the retail space. The company also operates a large non-retail distribution network through its urban wholesale division and caters to millions of customers through more than 30,000 dealers.

Exhibit 7: Retail reach through CoCo stores Exhibit 8: New store additions - Bata

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

In the past, BIL expanded its stores at an average run-rate of more than 100 stores every year. However, with demonetisation the company turned a bit cautious and wants to be careful in terms of store expansion. With rising store reach, we believe the Bata brand will continue capturing the mind share of its customers.

Exhibit 9: Rising sales revenues per store


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7 Bata India

Implementation of GST to give a major kick to volume

With GST implementation likely from 1 July 2017, we believe that organised players in the footwear industry will be major beneficiaries. Indian footwear industry is dominated by unorganised players who account for 70% of the total industry. Indian players, on an annual basis, manufacture ~2.1bn pairs of footwear annually, of which ~1.5bn pairs are manufactured by small unorganised manufacturers and the rest ~0.6bn pairs are made by organised players such as BIL, Relaxo Footwear, Metro Shoes, Liberty, Action, Khadims, Paragon, Nike, Puma etc. Of the 600mn pairs of footwear manufactured by organised players, BIL manufactures ~50mn pairs every year i.e. ~9% of pairs.

BIL pays ~17.5% in indirect taxes. There is a good chance that post GST, shoe manufacturers will come under the 18% tax bracket. Even though BIL won’t be able to save anything on the tax front, we believe it will be a major beneficiary in terms of increased volume. With GST, we believe small unorganised players will not be able to sustain financially. This will greatly benefit players like BIL. As a result, we believe that volume growth post GST implementation can be unprecedented.

Exhibit 10: Market segmentation


Even though we are confident of strong volume growth for organised players post GST implementation, we have not factored in strong volume growth in our estimates.

Exhibit 11: Assumption sheet

FY16 FY17E FY18E FY19E Growth(%) Comments

Sales 24,181 24,932 27,550 30,755 8% We believe that sales growth of 8% will come mainly on account of increase in price realizations and minuscle growth in volumes

Gross Profit 12,620 12,949 14,381 16,116 - -

Gross Margins (%) 52.2% 51.9% 52.2% 52.4% 20bps Small incremental improvement in gross margins will come due improvement in ASP

EBITDA 2,706 2,772 3,470 4,127 15% -

EBITDA Margins (%) 11.2% 11.1% 12.6% 13.4% 230bps Improvement in operating margins will come on account of - betterment in gross margins, decline in rental cost by 70bps over FY16-FY19E and moderate growth in employee cost

PAT 1552 1828 2221 2623 19% Moderate sales growth complemented with better operating margins will led to healthy PAT growth of 19%

PAT Margins (%) 6.4% 7.3% 8.1% 8.5% 210bps -


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Market segmentation

Organized Unorganized

Bata share: 9% of organized segment at ~50mn pairs


8 Bata India

Financial performance – YTD

Sales and sales growth

BIL’s sales have posted a CAGR of 14% over CY10 – FY16. Sales growth mainly was because of the rise in ASP over the years. Increase in ASP has been mainly on account of rising contribution from high-end brands such as Hush Puppies and increase in value-added products. Of the 14% sales growth, ~12% came from the rise in price realisation over CY10–FY16. We believe this trend will continue going forward. We expect moderate sales growth of 8% over FY16-FY19E. We have assumed moderate volume growth of 1.5% while the remaining portion of sales growth will be taken care of by the rise in price realisation.

Exhibit 12: Sales & sales growth - Annual Exhibit 13: Sales – Quarterly

Note: FY15 includes 15 months of sales. Growth normalized to 12 months.



Gross margin

BIL’s gross margin remained range-bound in the range of 52% to 54%. Margins peaked out during CY13 and FY15 at 54.1%. Margins bottomed out in 1QFY17 at 50% and have been on the rise since then. We believe that with the launch of trendy shoes under Power and Weinbrenner brands, ASP will increase and thereby pushing gross margin up by at least 50bps from 51.9% to 52.4% over FY17E-FY19E.

Exhibit 14: Gross margin – Annual Exhibit 15: Gross margin – Quarterly


EBITDA and EBITDA growth

BIL’s operating profit posted a CAGR of 8% over CY10 – FY16. With the exception of FY16, BIL reported healthy EBITDA growth. We expect operating profit to post a CAGR of 15% (15% over CY10 – FY15) over FY16 – FY19E. Healthy growth in operating profit will come on account of sales growth supplemented by improvement in operating margin from 11.2% in FY16 to 13.4% by FY19E.

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9 Bata India

Exhibit 16: EBITDA - Quarterly


EBITDA margin steadily increased from 13.3% to 15.6% over CY10 to CY13 before declining to 12.4% in FY15. FY15 was exceptionally challenging for BIL as sales growth moderated to 4% followed by a sharp rise in employee and rental expenses by 17% and 14%, respectively. We believe that operating margin should improve from here onwards (11.1 in FY17E to 13.4% in FY19E) mainly on account of improved product mix, improvement in operational efficiency because of plant modernisation and slightly reduced employee strength (~Rs220mn spent on VRS to let go employees at Faridabad unit in Haryana).

Exhibit 17: EBITDA margin – Yearly Exhibit 18: EBITDA margin - Quarterly


PAT and PAT growth

With sales growth of 8% and EBITDA growth of 15% over FY16 – FY19E, the company’s PAT is expected to grow at a healthy pace of 19% over the same period.

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10 Bata India

Exhibit 19: PAT - Quarterly


Return on equity and capital employed

BIL’s RoE and RoCE stayed at over 25% till CY13 before slipping to to sub-20% level in FY15. Last three years have been challenging for BIL because of a couple of mistakes, mainly implementation and then scrapping of SAP and aggressive store expansion. As a result, the company delivered poor returns on equity and capital. However, we expect the return ratios to improve from 14% in FY17E to 17.2% in FY19E.

Exhibit 20: Return on Equity (RoE) Exhibit 21: Return on Capital Employed (RoCE)


Free cash flow and cash from operations

BIL has been a cash guzzler mainly because of its better working capital cycle and lower capital expenditure requirement. The company generated cash flow from operations of ~Rs10,000mn over CY10 to FY16 and free cash flow of ~Rs4,700mn. We expect BIL to generate ~Rs9,000mn of Cash Flow from Operations (CFO) and ~Rs6,300mn of free cash flow or FCF cumulatively over FY17E – FY19E.

385

619

376

512

394

594

390 349

584

899

541

448

279

503

321 358

-

100

200

300

400

500

600

700

800

900

1,000

1CY

13

2CY

13

3CY

13

4CY

13

1CY

14

2CY

14

3CY

14

4CY

14

5CY

14

1QF

Y16

2QF

Y16

3QF

Y16

4QF

Y16

1QF

Y17

2QF

Y17

3QF

Y17

(Rsmn)

19.9 19.8

14.716.1

17.0

0

5

10

15

20

25

FY15 FY16 FY17E FY18E FY19E

(%)

17.7

14.214.8

16.317.2

0

2

4

6

8

10

12

14

16

18

20

FY15 FY16 FY17E FY18E FY19E

(%)


11 Bata India

Exhibit 22: FCF and CFO


Exhibit 23: CFO versus PAT Exhibit 24: Working capital cycle


Indian footwear market

Indian footwear market, like its international counterpart, can broadly be classified into – men, women and kids. Indian footwear segment is dominated by men who account for 60% of the industry while women and kids contribute 30% and 10%, respectively. Men’s footwear segment is growing at 10% whereas women’s footwear segment is growing at almost twice the rate of men’s, at 20%.

Exhibit 25: Market segmentation (%) Exhibit 26 : Market segmentation (mn pairs)


1,4

56

(20

2)

1,4

14

1,6

61

1,1

96

1,7

56

2,8

19

1,8

70

2,1

44

90

6

(1,4

00

)

57

6 96

4

(44

5)

1,3

41

2,0

19

87

0

1,1

44

(2,000)

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

3,000

3,500


CFO FCF

(Rsmn)

1,4

56

(20

2)

1,4

14

1,6

61

1,1

96

1,7

56

2,8

19

1,8

70

2,1

44

95

4

1,1

65

1,7

16

1,9

94

2,0

44

1,5

52

1,8

28

2,2

21

2,6

23

(500)

-

500

1,000

1,500

2,000

2,500

3,000


CFO PAT

(Rsmn)

36

5047

5457

52

45 45 45

0

10

20

30

40

50

60

70

0

20

40

60

80

100

120

140

160


Avg inventory period (days) Avg collection period (days)

Avg payment period (days) Cash conversion cycle

(Days)(Days)

60%

30%

10%

Men Women Kids

1,260

630

210

-

200

400

600

800

1,000

1,200

1,400

Men Women Kids

(mn pairs)


12 Bata India

Footwear market can broadly be classified into two categories based on usage – regular (includes daily and sports footwear for which material used can be leather/rubber/plastic and occasional (consists of premium and luxury shoes made mostly of leather and sometimes non-leather).

Exhibit 27: Market segmentation based on pricing


India is the second-largest producer of footwear globally after China, although the difference between annual productions between the two countries is huge. India currently accounts for ~9% of total global shoe production. Global volume of footwear stands at 22bn pairs per year of which ~2bn are produced in India. 90% of the footwear produced in India is consumed within the country while the rest 10% is exported primarily to European markets such as the UK, Germany, Italy and France and some shipped to North America.

Exhibit 28: Main footwear consumption countries

Source: ICRA, Nirmal Bang Institutional Equities Research

61%

22%

7%7% 3%

Casuals Mass Sports/active Premium Leather Premium non-leather

0

5

10

15

20

25

Ch

ina

US

A

Ind

ia

Jap

an

Bra

zil

Ind

on

esi

a

Fra

nce

Ge

rma

ny

UK

21.720.5

19.3

6 5.3 4.63.2 3.1 2.7

mn pairs


13 Bata India

Changing trend in Indian footwear Industry

Increase trust in branded footwear

Today, ~60% of Indian population falls under the age group of 15-54 years. With a growing youth population and rising middle-class, the thrust has been on branded products. A fast-growing economy and a rising number of affluent consumers pushed India into the league of most brand-conscious countries globally. However, there is growing consumer preference for footwear with price point ranging between Rs999 – Rs4,999/pair with regard to national as well as international brands. We believe this growing thrust on high-priced range of products will assist companies like BIL, Mochi (Metro Shoes) and Red Tape (Mirza International) in increasing the ASP of their products. Thus, growth will come not only from rising volume but also from increased price realisation.

Rising trend towards casual shoes and sports shoes

Even though comfort is the first criteria for most customers, there has been a rising trend where customers prefer more casual footwear such as sneakers. There is a surge in demand for designer footwear. Last year, there was an upsurge in casual category men’s and women’s footwear and there is rising customer preference for bright colours and quirkier patterns. BIL has appointed Mr. Mateo Lambert who heads the product development team comprising 70 designers who have been of late working on bringing more fashionable and trendy footwear catering to the youth. The new shoe line is sold under its own Bata brand at ASP of Rs2,500 – Rs3,000/pair. BIL has launched the new shoe line at 50 stores and plans to expand it further to 200 stores, mainly in metro and Tier-I cities.

We believe that given BIL’s increased focus on the youth segment and trendy footwear, this changing trend will hugely benefit the company going forward. BIL introduces more than 500 new designs every year (from close to 2,000 proposed internally by its design team). The management believes that the success rate with its new designs is 75%.

Growing opportunities in women’s segment: Women’s footwear constitutes only 30% of Indian market share currently. But the growth rate of this segment is double than that of the men’s segment. While the men’s footwear market has registered 10% CAGR in the last financial year, it is 20% in case of the women’s segment. In case of BIL, women’s footwear account for 30%-32% of total sales with popular brands such as– Bata, Comfit, Hush Puppies, Marie Clarie, Naturalizer, North Star, Power, Sandak and Sholl.

Omni-channel retailing: Retailers have started venturing into omni-channel retailing and trying in-store marketing solutions such as beacons to enrich the shopping experience and finding out ways to bridge the gap between offline and digital channels. In addition to engaging users on the digital platform, and even influence their merchandising decisions, many retailers are using the platform not just to showcase products but also to actually sell them. The same goes for mobiles. Companies won’t just use the small screen to ‘get in front’ of customers (i.e. through geo-fencing and mobile-enabled sites). In 2016, retailers incorporated mobile phones into other parts of the customer journey, including order fulfilment, payment, and loyalty.

BIL has tie-ups with major e-commerce portals mainly Amazon, Myntra, Jabong, Flipkart, etc. The company sold more than 3,80,000 pairs of footwear through online channels and achieved a turnover of around Rs360mn. BIL’s e-commerce presence is in more than 2,000 cities across India. 80% of the shoes sold through e-commerce portals are exclusive, while 20% overlaps with its brick and mortar stores’ shoe line. Currently, there are 500 exclusive designs sold through the e-commerce route. BIL has also launched ‘Click and Collect’ service for its stores in the Delhi NCR region. The customers can now shop the entire range of products available online with the click of a button and have their preferred footwear or accessories delivered to the local BIL retail store of their choice.


14 Bata India

Exhibit 29: Leading footwear brands in India

Brand Year of Establishment

Segment Presence Product Portfolio Retailing Format

Bata 1931 Mass/Economy/Active Sports/Premium

Men’s, women’s, kid’s footwear with international brands such as Hush Puppies, Marie Claire, Scholls etc.

1,250 stores across 500 cities, wholesale division, dealer-distribution network, own website and other e-commerce portals.

Metro 1947 Mass/Economy/Active Sports/Premium

Men’s, women’s, kid’s footwear with international brands like Clarks, Steve Madden, Crocs etc.

310+ EBOs in 90 cities and online retailing through brand website and other e-commerce portals.

Liberty 1954 Mass/Economy/Active Sports/Premium

Men’s, women’s and kid’s footwear. 400 EBOs & 6,000 multi-brand outlets.

INC. 5 1954 Economy/Premium Women’s footwear. 225 shop in shops and 32 stand-alone stores across the country.

Ajanta 1956 Mass/Economy Rubber, PU, PVC, EVA, canvas and leather footwear for men, women and kids.

20 showrooms in eastern part of the country, MBOs and distributors.

Khadims

1965 (wholesale & distribution) Mass/Economy/Active/

Sports Men’s, women’s & kid’s footwear. 600 retail outlets in 21 states.

1993 (Retail journey)

Action 1975 Mass/Economy/Active/ Sports

Men’s, women’s, kid’s footwear Franchised EBOs, brand website, leading e-commerce portals.

Paragon 1975 Mass/Economy Rubber, PU, PVC, EVA and TPR footwear for men, women and kids.

Distributed through 80 depots and more than 450 distributors across India.

Relaxo 1976

Mass/Economy/

Men’s, women’s, kid’s footwear. EBOs, franchised outlets, own website and e-commerce portals

Active/Sports

Sreeleathers 1987 (in Kolkata) Mass/Economy/Active Men’s, women’s, kid’s footwear. 6 EBO’s and dealer network.

Catwalk 1990 Economy/Premium Men’s & women’s footwear.

150 stores in 31 cities, in partnership with retail chains like Pantaloons, Globus, Central, Hypercity, Mega Mart, Lifestyle, Reliance Footprint, Shoppers Stop etc.

Mochi 2000 Economy/Premium Men’s, women’s and kid’s footwear. Footprint in more than 35 cities through 70 retail outlets.



15 Bata India

Financials (standalone)

Exhibit 30: Income statement

Y/E March (Rsmn) CY13 FY15 (15m) FY16 FY17E FY18E FY19E

Net Sales 20,652 26,940 24,181 24,932 27,550 30,755

% growth 12.1 4.4 12.2 3.1 10.5 11.6

Raw Material 9,488 12,378 11,560 11,984 13,169 14,640

Staff 2,133 3,119 2,627 2,640 2,812 3,008

Rent 2,620 3,743 3,363 3,451 3,692 4,060

Freight 429 498 525 573 551 615

Commission 642 862 720 747 827 923

Others 2,121 2,991 2,679 2,766 3,031 3,383

Total Expenditure 17,433 23,591 21,475 22,161 24,081 26,629

EBITDA 3,218 3,349 2,706 2,772 3,470 4,127

% growth 17.3 (16.8) 1.0 2.4 25.2 18.9

EBITDA margin (%) 15.6 12.4 11.2 11.1 12.6 13.4

Other income 313 432 301 514 536 569

Interest 13 18 17 26 40 40

Depreciation 592 792 752 648 723 798

Profit Before Tax 2,927 2,971 2,237 2,611 3,242 3,857

% growth 16.2 (18.8) (5.9) 16.7 24.2 19.0

Tax 935 928 685 783 1,021 1,234

Effective tax rate (%) 32.0 31.2 30.6 30.0 31.5 32.0

Adjusted Net Profit 1,992 2,044 1,552 1,828 2,221 2,623

% growth 16.1 (17.9) (5.1) 17.8 21.5 18.1

Extraordinaries (86) 268 635 184 - -

Reported Net Profit 1,906 2,312 2,187 2,012 2,221 2,623

% growth 11.1 (3.0) 18.3 (8.0) 10.4 18.1

Dividends 489 489 543 582 776 892

Carried over to BS 1,503 1,555 1,009 1,246 1,445 1,731

EPS (Rs) 15.5 12.7 12.1 14.2 17.3 20.4

% growth 16.2 (34.4) 18.7 17.8 21.5 18.1

DPS (Rs) 3.3 3.3 3.5 3.8 5.0 5.8

Payout (%) 21.9 18.1 20.6 24.0 28.9 28.2


Exhibit 32: Balance sheet


Equity 643 643 643 643 643 643

Reserves 7,767 9,579 11,188 12,654 14,099 15,830

Net worth 8,410 10,221 11,830 13,296 14,742 16,473

Deferred Tax Liability (681) (876) (1,019) (1,019) (1,019) (1,019)

Liabilities 7,729 9,345 10,811 12,277 13,723 15,453

Gross Block 6,094 7,265 7,656 8,646 9,646 10,646

Depreciation 3,549 3,883 4,635 5,284 6,007 6,806

Net Block 2,544 3,383 3,021 3,363 3,639 3,841

Capital work-in-progress 155 166 190 - - -

Long-term Investments 49 50 50 50 50 50

Inventories 5,827 7,047 6,789 6,771 7,358 8,137

Debtors 509 584 696 692 765 854

Cash 2,557 2,100 3,405 5,644 6,514 7,659

Other Current assets 1,505 2,169 2,294 1,995 2,204 2,460

Total Current assets 10,399 11,900 13,184 15,102 16,841 19,110

Creditors 3,654 4,545 4,277 4,617 5,017 5,548

Other current liabilities 1,763 1,608 1,357 1,621 1,791 1,999

Total current liabilities 5,417 6,153 5,634 6,237 6,808 7,547

Net current assets 4,981 5,747 7,550 8,865 10,034 11,563

Total Assets 7,729 9,345 10,811 12,277 13,723 15,453


Exhibit 31: Cash flow


EBIT 2,626 2,557 1,953 2,123 2,746 3,328

(Inc.)/Dec in working capital (111) (1,223) (497) 924 (299) (385)

Cash flow from operations 2,515 1,333 1,456 3,048 2,447 2,943

Other income 313 432 301 514 536 569

Depreciation 592 792 752 648 723 798

Deffered Liabilities (237) (195) (143) - - -

Interest paid (-) (13) (18) (17) (26) (40) (40)

Tax paid (-) (935) (928) (685) (783) (1,021) (1,234)

Dividends paid (-) (489) (489) (543) (582) (776) (892)

Extraordinary Items (86) 268 635 (184) - -

Net cash from operations 1,661 1,196 1,756 2,635 1,870 2,144

Capital expenditure (-) (697) (1,641) (415) (800) (1,000) (1,000)

Net cash after capex 964 (445) 1,341 1,835 870 1,144

Inc./(Dec.) in short-term borrowing

(267) - - - - -

Inc./(dec.) in long-term borrowing - - - - - -

(Inc.)/Dec. in investments - (1) - - - -

Cash from Financial Activities (267) (1) - - - -

Others / Extraordinary income (10) (11) (36) 220 - -

Opening cash 1,871 2,557 2,100 3,405 5,644 6,514

Closing cash 2,557 2,100 3,405 5,644 6,514 7,659

Change in cash 686 (458) 1,305 2,239 870 1,144


Exhibit 33: Key ratios

Y/E March CY13 FY15 (15m) FY16 FY17E FY18E FY19E

Per share (Rs)

EPS 15.5 12.7 12.1 14.2 17.3 20.4

Book value 65.4 79.5 92.0 103.5 114.7 128.2

Valuation (x)

P/E 32.2 39.2 41.3 35.1 28.9 24.4

P/sales 3.1 3.0 2.7 2.6 2.3 2.1

P/BV 7.6 6.3 5.4 4.8 4.4 3.9

EV/EBITDA 19.1 23.1 22.4 21.1 16.6 13.7

EV/sales 3.0 2.9 2.5 2.3 2.1 1.8

Return ratio (%)

RoIC 35.6 22.8 18.6 21.3 27.4 30.4

RoCE 25.5 17.7 14.2 14.7 16.0 17.0

RoE 24.8 19.9 19.8 16.0 15.8 16.8

Margin ratio (%)

EBITDA margin 15.6 12.4 11.2 11.1 12.6 13.4

PBIT margin 12.7 9.5 8.1 8.5 10.0 10.8

PBT margin 14.2 11.0 9.3 10.5 11.8 12.5

PAT margin 9.7 7.6 6.4 7.3 8.1 8.5

Turnover ratio

Asset turnover ratio (x) 2.7 2.3 2.2 2.0 2.0 2.0

Avg inventory period (days) 120 134 114 110 110 110

Avg collection period (days) 9 10 10 10 10 10

Avg payment period (days) 75 87 72 75 75 75

Solvency ratios (x)

Debt-equity - - - - -

Growth (%)

Sales 12.1 4.4 12.2 3.1 10.5 11.6

EBITDA 17.3 (16.8) 1.0 2.4 25.2 18.9

PAT 11.2 (3.1) 18.3 (8.0) 10.4 18.1



16 Bata India

Rating track Date Rating Market price (Rs) Target price (Rs)

26 September 2011 Buy 320 409

1 November 2011 Buy 363 419

10 January 2012 Buy 275 419

1 March 2012 Buy 350 419

20 March 2012 Buy 363 419

20 April 2012 Buy 422 504

26 April 2012 Buy 428 504

2 May 2012 Buy 439 504

22 June 2012 Buy 424 504

10 July 2012 Buy 436 504

27 July 2012 Hold 448 504

14 August 2012 Hold 457 504

4 October 2012 Hold 491 504

1 November 2012 Sell 427 393

4 February 2013 Buy 392 500

27 February 2013 Buy 379 500

26 April 2013 Buy 352 433

8 May 2013 Hold 393 433

14 May 2013 Hold 400 433

5 June 2013 Hold 432 433

26 July 2013 Buy 438 532

29 July 2013 Buy 454 532

7 October 2013 Buy 431 532

31 October 2013 Buy 444 532

20 December 2013 Buy 505 655

7 January 2014 Buy 513 655

22 January 2014 Buy 487 655

13 February 2014 Buy 500 655

26 March 2014 Buy 565 655

30 March 2014 Buy 538 655

2 May 2014 Buy 534 623

22 May 2014 Buy 546 628

4 July 2014 Buy 672 796

6 August 2014 Buy 627 754

25 August 2014 Buy 626 754

10 October 2014 Buy 669 754

7 November 2014 Buy 637 751

12 December 2014 Buy 656 751

12 February 2015 Buy 646 750

13 April 2015 Buy 579 750

22 May 2015 Buy 561 678

28 May 2015 Buy 520 678

10 July 2015 Buy 579 678

6 August 2015 Accumulate 617 678

15 October 2015 Accumulate 536 580

5 November 2015 Accumulate 484 461

11 February 2016 Accumulate 487 509

31 May 2016 Accumulate 570 550

4 August 2016 Accumulate 553 530

13 February 2017 Buy 499 612

Note: BIL reduced its stock face value from Rs10 to Rs5 with effect from 8 October 2015. Earlier market prices and target prices have been adjusted accordingly.

* Coverage shifted to Akhil Parekh w.e.f. 13 February 2017.


17 Bata India

Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

ACCUMULATE -5% to15%

SELL < -5%

This report is published by Nirmal Bang’s Institutional Equities Research desk. Nirmal Bang group has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. Reports based on technical and derivative analysis may not match with reports based on a company's fundamental analysis. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.

We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice.

Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication.

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