Bata: Despite subdued Q4, hope of faster recovery may keep sentiment intact

Q4 was weak with 8.8% fall in top line and 45.5% decline in pre-tax profit

There is no doubt that businesses across industries will take at least a couple of quarters to recover, but the ones that show promise of faster recovery will grab investor attention. Bata could be such an example. Though the company’s March 2020 quarter (Q4) earnings — announced on Monday, a market holiday — were below expectations, its stock ended Tuesday with 0.8 per cent gains even as leading indices slipped marginally.

To start with, amid the coronavirus-induced lockdown, Bata’s top line declined by 8.8 per cent year-on-year (YoY) to Rs 619.7 crore, about 8 per cent lower than consensus expectations of Rs 677. 

However, its YoY fall in pre-tax profit of 45.5 per cent to Rs 57.4 crore is more than 28 per cent lower than Street’s expectation of Rs 79.9 crore. This was mainly for higher operating expenses, which lead to 360-basis point YoY contraction in Ebitda margin (adjusted for IND-AS 116 impact) to 10.3 per cent, the lowest in last 12 quarters.

Going ahead, the enhanced focus on economic products and emphasis on distribution, along with strong brand equity, should help Bata fare better in the current situation, say analysts.

 

 

According to Kaustubh Pawaskar, analyst at Sharekhan, “Bata’s strategy in terms of new relevant collections (washable footwear, etc) and a strong focus on distribution via the omni-channel approach, WhatsApp and e-commerce, seems to be in the right direction, and should help in faster recovery as the situation normalises.” Bata’s choice to push its economic portfolio is a right step towards recovery, he added.

While emphasis on delivery and e-commerce channels is common across industries, Bata is pushing non-premium (Rs 499 per pair) products. This would be relevant in the Covid-19 context, where most individuals are working from home and schools’ re-opening has been delayed. The larger push to demand, according to Bata’s management, will come from festive season (after September).

Market share gains from local/unbranded players should further aid the recovery process for the company, which has a strong balance sheet. However, these moves may impact profitability/margin gains in the near term, due to a change in the revenue mix towards lower-priced products.

Some margin support, however, is expected from the June quarter as half of Bata’s landlords have agreed to waive off rent during the lockdown and revisit agreements (indicates likely lower rent) till the business situation normalises, according to the management.

Overall, how fast the company’s strategy delivers will be crucial for the stock, which has already recovered 20 per cent since March 23 closing lows, and currently trades at 43 times FY21 estimated earnings.