Bata India expands footprint but performs below expectations in Q1

Footwear manufacturer trails peers on 3-year growth parameter

The April-June quarter (first quarter, or Q1) of 2022-23 (FY23) performance of footwear major Bata India was below expectations.

While the sales trajectory over a three-year period was weaker than key peers, its operational performance, too, disappointed the Street.

Some brokerages have cut their operating and net profit estimates 5-10 per cent for FY23 and 2023-24 after Q1 performance.

Although the company has outlined multiple initiatives on various segments, product, and distribution, the Street will await results of the same.

The stock has corrected about 5 per cent from its highs in August and an upward trend in the same will depend upon its ability to execute and reverse the sales gap with peers.

Bata India posted its highest-ever revenue at ~943 crore, which was up 253 per cent over a low base and 41 per cent more on a sequential basis.

The record sales, according to the company, was due to focus on franchise and multiple brand outlet expansion, consumer relevant communication, increased proportion of casualwear in portfolio, and digital footprint expansion.

Revenue, according to Nirmal Bang Research, missed estimates primarily due to weaker performance in June this year, given weaker sales of school shoes and lower volume growth. The company expects some demand in the school footwear segment, which accounts for 9 per cent of revenue, to spill over into the current quarter.

While volume is at 90 per cent of Q1 of 2019-20 (pre-Covid) levels, it is improving month-on-month. Although revenue is above pre-Covid levels, the company’s three-year average annual sales growth is disappointing, say brokerages. Its recovery from Covid levels trails peers. Metro Brands had done much better with growth at 18 per cent.
 

The company, which has a distribution presence in 1,079 towns, is expanding its network across formats — be it company-owned or through the franchise model.

E-commerce sales continue to scale up.

On the product front, the sneaker category continues to grow faster than overall company sales. The share of this category is now 19 per cent to overall sales and 400 basis points (bps) over pre-Covid levels.

Gross margins were up 45 bps year-on-year to 56.6 per cent, while it was down 100 bps quarter-on-quarter. At the operating level, margins came in at 25.9 per cent, against a loss in the year-ago quarter.

This missed estimates despite a gross margin beat as normalisation in the cost of retailing outpaced sales recovery, according to HDFC Securities.

Girish Pai of Nirmal Bang Research highlights multiple reasons for optimism on the margin front due to better product mix, pricing action, regional sourcing, improved profitability of the company-owned stores, and lower discounting.

Brokerages have mixed ratings on the stock. While Nirmal Bang Research maintains a ‘buy’ rating, given the structural growth opportunity and multiple initiatives by the company, HDFC Securities has a ‘sell’ rating as execution remains untested.

ICICI Securities has a ‘hold’ rating, given weaker headline recovery, compared to discretionary space.

Further, a slew of good quality listed footwear majors means the company may not get the scarcity premium it used to enjoy earlier, observes the brokerage.