Execution key as Bata India eyes expansion, change in product mix

The company has been underperforming peers on the growth front over the FY19-22 period

Footwear maker Bata India’s revenue rose about 13 per cent year-on-year (YoY) in the March quarter (Q4FY22), coming to the pre-pandemic level of Q4FY19. Though sales were impacted by the disruption caused by the Omicron variant’s spread, improved consumer sentiment led to a pick-up in the second half of the quarter.

Despite the recovery, top line growth, which came on a benign base, missed the Street estimates as the company ended FY22 with a revenue growth of 40 per cent.

The company’s sales were driven largely by value growth, with significant contributions from price hikes and improved product mix. Sneakers now account for a fifth of sales. Overall growth over the past two years has also been aided by expansion in franchisees and shop-in-shop stores.

Franchisees’ footprint has increased 75 per cent to 303 stores and that of shop-in-shops has risen 73 per cent to 236. The expansion of these formats is expected to continue. Revenue from the digital channels has grown two-and-a-half times in this period.

The company expects improved demand for premium and closed footwear because of increased mobility, opening of schools and offices as well as a rise in social gatherings.

Though value growth has been strong, volumes are yet to reach pre-Covid levels. Centrum Broking Research estimates that it is 15 per cent below the FY20 level. Despite the recovery, school shoes and office footwear have not reached pre-pandemic levels, which, coupled with exit from lower priced products, resulted in lower volume growth.

Besides, the company is trailing its rivals on the growth front. Jay Gandhi and Premraj Survase of HDFC Securities say, “Over FY19-22, Bata’s recovery significantly lagged that of its immediate peers. While Bata’s annual revenue growth in this period stood at -7 per cent, Metro Brands, Relaxo Footwears, and Campus Activewear reported a growth of 3 per cent, 5 per cent, and 26 per cent, respectively.”

Though sales growth was below expectations, margins beat estimates. Gross margins increased by 450 basis points (bps) YoY and 490 bps sequentially to 57.6 per cent. Along with lower employee expenses this reflected at the operating profit level, with margins rising 540 bps YoY to 24.4 per cent. In addition to the better mix, higher full price sales and cost optimisation led to the improvement in profitability.

Despite the strong operational performance, both HDFC Securities and Centrum Broking have ‘sell’/‘reduce’ ratings on the stock. The former believes that treading the growth-margin equation while pivoting to different growth channels (wholesale, franchise) and realigning assortment isn’t a walk in the park as execution remains untested.

Centrum, on the other hand, believes that growth could reduce given lower company-owned store additions. Besides, in the sneakers category, Bata’s positioning is relatively weak and, hence, may face headwinds as it tries to scale up, they add.

At the current price, the stock is trading at about 44 times its FY24 earnings estimate and factors in growth assumptions.