Bata India’s topline growth of 15% (Rs 429 crore) in September 2012 quarter is commendable given the higher base (27% sales growth reported in same quarter last year). However on the negative side, the sales growth is lowest in last 8 quarters. Analysts had expected around 20% growth.
However, the stock has been pounded today (closed down by about 4%) as operating profit margin tanked 134 basis points (first time ever since December 2008 quarter in which it was down marginally by 6bps) to about 13% thanks to higher rentals, which shot up 49%. Due to weak operational performance, even net profit margin slipped by 68 basis points to 7.5%.
Festive season should prop up demand in second half ((H2) of FY13. However, same period last fiscal (H2FY12) provides a higher base with sales growth of 25%. The same is even higher for profitability as operating profit and net profit had grown 32% and 35% respectively in H2FY12.
However, aggressive expansion is likely to keep rentals higher and negate any benefit of outsourcing, savings in employee costs and better product mix. The company has already added 100 stores in first half of calendar year 2012 given its target of adding 100 stores per anum for the next two years. Besides, focus on expanding in tier 2 and 3 cities and higher presence in mass and economy segment will prevent excessive or frequent price hikes (if any) or affect volumes in a slowdown. Thus, downside risks exist especially for profitability, which analysts further expected to improve substantially in the next few years.
After disappointing on profitability, the company’s earnings estimates are likely to be revised downwards. Hence valuation at 28 times calendar year 2012 earnings (before revision), which is at the higher end of the historical price to earnings multiple band of 6-30 times, may seem to look higher.