Bata India - Recovery is (indeed) some time away - ICICI Securities

2Q continued with a weak performance (revenue declined 49%), as expected. We note several initiatives by Bata to accelerate recovery - (1) ramping up sales from new channels (ChatShop, Home Delivery, Store on Wheels) to 10% of sales (albeit on a low in-store sales), (2) capturing semi-urban / rural demand through franchisee stores, (3) expanding the distribution business, (4) ecommerce focus, and (5) restarting promotional campaigns and new launches. That said, we believe these initiatives are inadequate to mitigate the medium-term headwinds from potential pause in the growth of per capita spending on footwear. Inferior product mix, away from formals & fashion and more towards open style footwear, is likely to put further pressure on profitability. Reiterate REDUCE.

- Revenue yet to recover completely: Q2FY21 revenue declined 49% to Rs3.7bn while EBITDA declined 90% to Rs182mn and net loss reported was Rs0.4bn. 2Q performance was severely impacted due to subdued consumer demand for discretionary spends as prevailing uncertainties continued. That said, Bata did report consistent increase in footfall across its retail stores led by consumer safety measures, consumer relevant communication, and product availability. The recovery was also driven by growth in e-commerce channel and store expansion in smaller towns (Tier 3-5 cities).

- Company initiatives: To mitigate the impact, Bata has embarked on few initiatives - (1) Launched campaign 'Kick Out 2020' with new collection Ready Again, (2) cost-focused initiatives that will continue to have long-term positives, post-pandemic as well, (3) expanded its presence via distributor-led Multi-brand outlets route (present in 30,000 MBO's), and (4) scaled up its digital initiatives by widening its portfolio on the website, bata.in.

- EBITDA margin declined significantly due to negative operating leverage, but was still positive largely due to rent concessions: Gross margin declined 600bps to 50.4% due to lower fixed cost absorption by lower sales. Staff costs and other opex declined 7% and 31% YoY respectively. In terms of rent, Bata recorded Rs0.3bn of rent concessions in 2Q (of which, Rs0.1 bn is for subsequent quarters). EBITDA margin declined by 2070bps to 4.9%.

- Other highlights: (1) Digitally-enabled channels like Bata ChatShop, Bata Home Delivery and Bata Store on Wheels contribute over 10% of store revenues, (2) Portfolio mix evolved from Formals & Fashion categories to Casuals, Fitness, & Essential categories, (3) opened its 200th Franchise store at Tenali, Andhra Pradesh, a small town with 0.16mn population, responding to increased demand in semi-urban areas.

- Valuation and risks: We cut our earnings estimates for FY22 by 8%; modelling revenue / EBITDA / PAT CAGR of 0 / -2 / 3 (%) over FY20-22E. Retain REDUCE with a DCF-based revised target price of Rs1,170 (we roll forward to Sep-22). At our target price, the stock will trade at 41x P/E multiple Sept-22E. Key upside risk is faster-than-anticipated recovery in discretionary demand.

Shares of BATA INDIA LTD. was last trading in BSE at Rs.1376.3 as compared to the previous close of Rs. 1355.5. The total number of shares traded during the day was 36937 in over 3862 trades.

The stock hit an intraday high of Rs. 1379 and intraday low of 1348.3. The net turnover during the day was Rs. 50513530.

Source : Equity Bulls

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