Despite reporting a good set of numbers for the December quarter after market hours yesterday , Bata India slipped one per cent today to close at Rs 694 on the Bombay Stock Exchange. The muted reaction could be attributed to the fact that results were largely in line with analysts’ expectations (no big surprise) and the slowing growth momentum.
Also, after doubling in the past year, against a nearly flat Sensex, the stock valuations are not cheap, say analysts. It’s trading at 23 times calendar year (CY)12 estimated earnings, at the higher end of its seven-year historical one-year forward PE (price-to-earnings ratio) band of 15-25 times.
Given the favourable demographics, healthy growth prospects and the company’s effort to grab a share of this opportunity, Bata remains one of the best plays in India’s domestic consumption story.
Stefano Natella, analyst at Credit Suisse, said in a report, “The trend of shift from unbranded products is expected to continue, and thus, we prefer companies like Bata that have strengthened their positioning in the minds of consumers and have strong brand equity in their segment.”
| SLOWING, BUT STILL HEALTHY | ||||
| in Rs crore | Q4’ CY2011 | CY2011 | CY2012E | CY2013E |
| Sales | 433.5 | 1554.0 | 1860.0 | 2177.3 |
| % chg y-o-y | 20.4 | 22.7 | 19.7 | 17.1 |
| Operating profit | 73.5 | 242.0 | 319.0 | 370.0 |
| % chg y-o-y | 23.5 | 43.2 | 31.8 | 16.0 |
| OPM (%) | 17.0 | 15.6 | 17.2 | 17.0 |
| Net profit | 45.0 | 145.0 | 194.0 | 240.0 |
| % chg y-o-y | 30.8 | 52.0 | 33.8 | 23.7 |
| E: Estimates, year ended December Source: Company, CapitaLine Plus, Analysts reports | ||||
Against this backdrop and given that analysts have a one-year target price of Rs 800-820, investors with a longer-term perspective may consider it on dips.
Q4: Slowdown signs
Though Bata clocked a healthy 20 per cent rise in sales in the fourth quarter, it was slightly lower than the average 23.5 per cent clocked in the past three quarters and despite the festive season during October-December.
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With strong store expansion of 78 in the second half of CY11 (40 in the December quarter), slowing of sales growth momentum indicated slower same store sales growth — suggesting consumers might have postponed their purchases due to high inflation and slowing economic growth.
Though operating profit margin (OPM) and net profit margin (NPM) were at their historic highs of 17 per cent and 10.4 per cent, respectively, improvement year-on-year (y-o-y) was lower than the past three quarters.
OPM inched up only 43 basis points (bps), compared to an average increase of 298 bps in the past three quarters. Raw material costs as a percentage to sales jumped by 118 bps, but the company did well on the employee cost front (down 115 bps). Higher depreciation (store expansion) also restricted the rise in NPM at 83 bps (lower than the average increase of 221 bps seen in recent quarters). Abhishek Ranganathan, analyst at MF Global, said in his post-result note, “We have marginally revised our margin estimates in CY12 downwards to factor in slower gross margin expansion.”
Long-term multi-bagger
The March quarter has been historically a weak quarter for the company. Also, the March 2011 quarter provided a high base, especially for profits. Thus, investors should not expect a substantial improvement in the company’s financial performance, which may keep the stock range-bound in the near term.
However, there are strong long-term triggers. First, even as the base grows bigger, analysts expect Bata to sustain healthy growth of 18-19 per cent in sales during CY12 and 13, thanks to low penetration of organised footwear retail (around 35 per cent), large presence of unorganised players in the women footwear market (86 per cent), store expansions (incrementally beyond Tier-I cities), rising volumes from existing stores (higher same store sales growth) and higher realisations due to increasing share of leather shoes in overall sales (about 70 per cent).
Thanks to the restructuring exercise undertaken between 2004 and 2008, OPM tripled to 15.6 per cent in CY11, from 5.5 per cent in CY06, while NPM rose to 9.3 per cent, from 5.2 per cent.
Going ahead, analysts expect another improvement of 220 bps in OPM and 170 bps in NPM over the next few years, due to operating leverage on the back of robust sales growth, improved product mix, continued lower employee costs, working capital efficiency, debt-free balance sheet and cost-rationalisation measures like outsourcing of rubber/plastic/canvas shoes (about 50 per cent of sales).
Additional help will come from the incremental expansion of K-stores (20 per cent of the current network of 1,300 stores), wherein the company bears all costs except employee costs and pays six-eight per cent commission to the agent who runs the store.
Jignesh Kamani and Saiprasad Prabhu, analysts (institutional equities) at Nirmal Bang, said in their post-result note, “We expect a further fall in employee costs due to the rising share of K-stores (commission stores) in revenue, whose employee costs are relatively low.”
However, high raw material costs and rentals are key risks, as price hike benefits are reflected after a lag of one quarter and real estate market in Tier-II and III cities are witnessing buoyancy unlike a slump in Tier-I cities.