Stock’s re-rating likely to continue as the company grows through store expansion, volume growth and higher realisations.
High growth to continue...
In the nine months ended September, sales grew 23 per cent year on year (y-o-y) on account of retail expansion and strong same-store sales growth. Analysts expect sales growth of around 21 per cent between CY2010 and 2012. Says Jignesh Kamani, analyst at Nirmal Bang, “The sales growth is expected to be strong on the back of higher penetration through aggressive store expansion and increasing volumes from existing stores.” Varun Lohchab, analyst at Religare Securities, maintains his view as in a September 30 report: “Bata, the leader in India’s branded footwear market, is likely to see its top line growth trajectory improve over the next two–three years, led by a mix of higher volumes and realisations.”
| ON THE FAST TRACK | ||||
| Rs crore | CY2009 | CY2010 | CY2011E | CY2012E |
| Net sales | 1,092.0 | 1,258.0 | 1,540.0 | 1,853.5 |
| % chg | – | |||
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More than sales growth, margin improvement is the key bigger favourable investment argument for investing in the company. Adds Lohchab, “After the 800-basis point jump in operating margins over CY04-10 on account of all-round business restructuring, margins could see another 300 bps expansion over CY10-13 (from 14 per cent levels in CY10).”
Operating profit margin and net profit margin jumped 280 bps and 260 bps (adjusted for an extraordinary item), respectively, in the nine months ended September, due to improved product mix and lower employee costs. Employee costs as a percentage to sales were at a decadal high of 28.5 per cent in CY2003. However, due to restructuring between CY2004 and 2008, these almost halved in CY2010 and came further down to 12.4 per cent in the nine months of CY2011.
Analysts expect margins to consistently improve in the next few years, due to operating leverage on the back of robust sales growth, increasing share of high-margin leather footwear (49 per cent and 72 per cent in terms of volume and value, respectively, for CY2010), continued lower employee costs, higher outsourcing (of rubber/canvas and plastic shoes) at 46 per cent of sales in the September quarter, working capital efficiency and a debt-free balance sheet.
…aided by expansion
Bata plans to expand its 1,300 retail stores aggressively over the next few years. The estimate is 100 more stores every year, with a minimum area of 3,000 sq ft (called big format). It opened 68 stores in the first half of CY2011, compared to 108 in CY2010.
The company intends to extend its reach in tier-2 and tier-3 cities. Also, most of the stores in future will be K-stores (20 per cent of the current network), wherein the company appoints an agent who runs the store and bears all employee costs associated with it, while the company bears all other costs such as store rent, furniture, etc. In return, the K-store agent gets a commission of six to eight per cent, depending on the turnover.
However, high rental is a key risk, as tier-2 and tier-3 cities have been relatively less affected by the overall slump in the real estate market and economic slowdown. The company plans to focus on ladies footwear, a highly untapped category in the organised space (14 per cent penetration). The stock is down 25 per cent from its 52-week high of Rs 741 in August to around Rs 550. Analysts advise investors to buy at current levels, as they feel there is a lot of steam in the stock.