Bata India - Management Meet Update - Nirmal Bang

We had a meeting with the management of Bata India (BIL) recently to discuss its key strategies. After our meeting, we are more confident on its revenue growth strategy and margin levers. We have introduced our CY15 estimates with 18.1%/27.2% revenue/net profit growth, respectively, on the back of likely healthy SSG (same-store sales growth) and a 102bps improvement in operating margin. Strong revenue CAGR of 17.1% supported by operating margin improvement of 206bps, working capital efficiency and a debt-free status should drive 26.7% profitability CAGR, generate operating/free cash flow of Rs4,650mn/Rs2,750mn, respectively, and improve RoIC by 720bps at 35.8% over CY13E-CY15E, thereby supporting the valuation. We have rolled forward our target price based on CY15 estimates. We have retained our Buy rating on BIL with a revised target price of Rs1,310 (Rs1,064 earlier) based on 16x/26.5x CY15E (16.5x/27.4x CY14E earlier) EV/EBITDA and P/E, respectively. Followings are the key highlights of the meeting:

Considers malls apart from high-street when it comes to opening new stores: Earlier, BIL used to focus on high-street for opening its stores, but since the past few years it has adopted a balanced approach and set up stores in malls too. Currently, ~50% of its new stores are in malls. Lease rental for a store in a mall is higher than the one on highstreet, and in addition stores which came up for lease renewal witnessed a 20%-30% increase in rentals in CY10-CY12. Hence, lease rentals witnessed a 29.5% CAGR over CY11-CY13E as against a 18.4% revenue CAGR. However, currently, BIL has a balanced portfolio of outlets, between high-streets and malls, and therefore incremental lease rentals will be low. BIL opened ~65 outlets in the 9MCY13 period compared to 189 in CY12, partly because of the delay in construction of malls.

Investment in back-end for sustainable growth: BIL is investing in improving its product quality, supply chain system and inventory management, increasing its vendor base, upgrading the technology and other aspects so that it can handle healthy growth in the long Run. Investment is being made at the capex as well as operating expense level. BIL plans to invest a part of incremental margins back into the business, thereby providing healthy growth in the long run. One such initiative is brand building, where BIL has tied up with the DDB Mudra Group to plan its advertisement strategies so as to improve brand equity and thereby create a platform for strong sustainable growth.

Focusing on multiple growth levers: BIL stated that with its focus on better product mix, it lost market share in the school shoe segment. Now, BIL is preparing to gain lost market share, thus providing additional volume. BIL also launched its HP5 series with a new range of designs in Hush Puppies segment, carrying a price tag of Rs10,000/pair. BIL is also focusing on increasing the client conversion rate along with better price points and productivity, thereby increasing revenue per sqft. BIL is aggressively focusing on accessories and has introduced new items like sunglares etc. The share of accessories increased from 4.0%/5.1% in CY11/CY12, respectively, to ~7.0% currently and is expected to touch 10.0% in two years, with the long term target being 15%-20%. With all these measures, BIL is quite hopeful of double-digit SSG rate in CY14.

Source : Equity Bulls

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