Bata India: A good buying opportunity

While the company's financial performance disappointed for third consecutive quarter in Q4, the stock has declined 13 per cent in 2013 year-to-date

After slipping 4 per cent in intra-day deals, Bata India ended the day 3.5 per cent lower on Tuesday, as against 2 per cent fall in the broader markets. The fall comes on the back of disappointing financial performance for the December 2012 quarter, mainly on the profitability front though the festive season boosted sales growth.

Going ahead, even though sales growth prospects remain limited in calendar year 2013 (CY13) due to general slowdown in consumer spending, pressure on volume growth, limited pricing power amid company’s strategy to expand in Tier-II and III cities, analysts expect profitability to improve due to higher operating leverage and lower base of CY12 though downside risk to both persists.

The stock has come off from 52-week high levels of Rs 989 as on October 3 2012 (down 23 per cent) as the company’s financial performance has decelerated for third consecutive quarter. Though it trades at cheap valuation of 19.5 times CY13 estimated earnings, it does not fully factor in impending negatives and challenges. The worst for the company and stock may not be over yet. By all means, outperformance witnessed between 2010 – 2012 is unlikely to be repeated soon. However, most analysts feel this is the right time to accumulate the stock for the-long term.

AGGRESSIVE EXPANSION

While sales growth of 18 per cent in Q4 was tad behind expectations of 20 per cent, operating profit margin (OPM) of 15.8 per cent was significantly lower than analysts’ expectations of 17.1 per cent, as rent costs (up 266 basis points as percentage to sales) impacted savings in other overheads like raw material and employee costs.

Due to dismal show on the operational front, net profit margin at 10 per cent also came in below expectations. Nevertheless, compared to previous two quarters, demand and cost pressures (except rentals) receded in Q4. Sequentially the performance has jumped---sales up 20 per cent and margins up 250-400 basis points – as the company offered discounts in September 2012 quarter for inventory clearance.

Despite economic slowdown and inflationary pressures, the company managed to report a decent top-line growth of 19.4 per cent in calendar year 2012 partly due to higher than targeted addition of 152 stores (versus 100 each planned in next two years). Further despite cost pressure, the company maintained margins, which was impressive. According to analysts’ expectations, the company’s financial performance especially profitability is expected to bounce back in 2013 despite addition of new stores.

OUTPERFORMANCE

The stock has been a consistent outperformer in last three calendar years ending 2012 though has declined 13 per cent in 2013 year-to-date (YTD) as growth rates have decelerated. It is trading at lower end of the two-year historical price to earnings multiple band of 20-30 times, outperformance of the past may not repeat so soon as investors have turned cautious towards the stock since the company has disappointed in not one but three quarters back to back. However many analysts see this as good entry level from long term perspective. Suman Memani, analyst, Anand Rathi is bullish on the stock and has a target price of Rs 1,040 (an upside of 37 per cent). Points out Naveen Vyas, assistant vice president-research, Microsec in his report dated February 9, “As the stock has corrected by 20 per cent from its high and the valuation has cooled–off, Bata India is a good buying opportunity for investment at current level.” He has a target price of Rs 966 (an upside of 27 per cent).