Bata India - Focus on Premium Portfolio - Nirmal Bang

To increase market penetration, Bata India (BIL) opened 146 outlets in CY11 versus 108 in CY10. BIL decided to move up the value chain and gave priority to premium products in each category rather than volume growth. As a result, total volume grew by only 1.1% to 48.8mn pairs in CY11 but witnessed a robust 20.2% improvement in bended realisation at Rs308/pair. Following better realisation, net revenue grew 22.6% to Rs15,421mn in CY11. Fall in staff costs by 200bps, coupled with lower other expenses, improved operating margin by 214bps to 15.5%, as a result of which net profit grew 49% to Rs1,421mn. Higher capex, aggressive expansion and higher inventory levels exerted pressure on working capital and free cash flow in CY11. However, with stabilisation of new outlets, the working capital requirement should decline in CY12/13 and BIL should be able to generate free cash flow of Rs3,682mn over CY12-13E.

Focus on value rather than volume: BIL sold 48.8mn pairs in CY11, up by a mere 1.1%, as strategically it decided to focus on premium products, the effect of which is reflected via its product mix and average realisation. Bended realisation increased by a robust 20.2% to Rs308 per pair. Share of low-value items like plastic footwear fell from 18.2%/8.3% to 16.5%/7.4% in volume/value terms, respectively, over CY10-11.

Aggressive expansion plan: BIL opened 146 stores in CY11, much higher than 69/108 stores opened in CY09/10, respectively. It has already opened 61 stores in 1QCY12, and plans to open over 200 stores in CY12 compared to 146 stores in CY11. Hush Puppies brand also witnessed expansion with the opening of four exclusive new stores and two shop-in-shops at leading department stores in 1QCY12.

Aggressive expansion exerts pressure on working capital, free cash flow: BIL opened 35 stores in 4QCY11 alone, which contributed to inventory but not to revenue in CY11. On the back of aggressive expansion, inventory increased to 108 days in CY11 from 99 days in CY10. On getting better cash discount from its suppliers for prompt payment, its creditor days reduced from 71 days in CY10 to 65 days in CY11, following which ex-cash working capital requirement increased to Rs2,046mn (13.3% of sales) in CY11 from Rs747mn (5.9% of sales) in CY10. BIL improved its EBIT by 46% to Rs1,977mn in CY11, but due to higher working capital and higher capex at Rs905mn, BIL reported negative free cash flow of Rs1,144mn for CY11.

Valuation: We expect BIL, which is trading at CY13E P/E of 23.1x and EV/EBITDA of 14.0x, to witness a further re-rating. On the back of strong revenue/net profit CAGR of 18.8%/31.2%, respectively, over CY11-13E, BIL would continue to trade at premium multiples. It is attractively priced, with a PEG ratio of 0.9x in CY12. Based on 16x CY13 EV/EBITDA, we retain our Buy rating on the stock with a TP of Rs1,008.

Source : Equity Bulls

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