Bata India - Good initiatives, yet, inadequate - ICICI Securities

1Q performance was a miss even on already low expectations. That said, we highlight Bata's initiatives - (1) ramping up e-commerce reach, (2) launch of new channels (ChatShop and Store on Wheels), (3) curated portfolio to more relevant products (fitness-at-home, easy wash, etc.), (4) focus on distribution business (now at 30,000 MBOs) and (5) continuing with franchisee store roll out plans to benefit from rural demand. While these initiatives are good, yet inadequate to mitigate the medium-term headwinds from potential pause in the growth of per capita spending on footwear and a delay in premiumisation tailwind. Reiterate REDUCE.

- Disrupted quarter: Revenue declined 85% while (adjusted) operating and net loss were Rs0.6 bn and Rs1.0 bn respectively. 1Q performance was severely impacted given the non-essential nature of the business and hence Bata witnessed no production in the period. Even when the stores were given permissions to start in a staggered manner, store operations have been constrained in terms of duration allowed and frequent localised lockdowns now.

- Company initiatives: To mitigate the impact, Bata has embarked on few initiatives - (1) ramping up of e-commerce reach, (2) launch of new channels - Bata ChatShop (interacting with stores on WhatsApp) and Bata Store on Wheels (setting up temporary stores in large housing societies), (3) curated portfolio to more relevant products (fitness-at-home, easy wash, etc.), (4) focus on distribution business (now at 30,000 MBOs) and (5) continuing with franchisee store roll out plans to benefit from rural demand.

- EBITDA loss due to negative operating leverage: Gross margin declined 1430bps to 40.4% due to fixed cost absorption by lower sales. Staff costs declined 14% YoY. In terms of rent, Bata recorded Rs0.5 bn of rent concessions in 1Q (of which, 0.2 bn is for subsequent quarters). Adjusting for the Rs 0.3 bn of rent concessions which is reported as other income, EBITDA came in at a loss of Rs 0.6 bn.

- Valuation and risks: We cut our earnings estimates by 8-15%; modelling revenue / EBITDA / PAT CAGR of 2 / 1 / 7 (%) over FY20-22E. Maintain REDUCE with DCF-based revised target price of Rs1,100 (was Rs 1,200). At our target price, the stock will trade at 38x P/E multiple Mar-22E. Key upside risk is faster-than-anticipated recovery in discretionary demand.

Shares of BATA INDIA LTD. was last trading in BSE at Rs.1231.5 as compared to the previous close of Rs. 1235.6. The total number of shares traded during the day was 50796 in over 4013 trades.

The stock hit an intraday high of Rs. 1249.9 and intraday low of 1226. The net turnover during the day was Rs. 62747866.

Source : Equity Bulls

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