Bata India sales for the quarter ended June were disappointing, especially considering the company’s renewed focus on volumes and aggressive store expansion this year and the fact that the quarter is traditionally one of the busiest.
After the company’s results were announced on Thursday, its stock fell about two per cent (after market hours), against the Sensex’s rise of about three per cent and the fast-moving consumer goods index’s two per cent rise. If growth in sales slows further, it could reflect negatively on the stock, which rose 41 per cent in the last one year and is trading at about its peak valuation of 24 times the estimated earnings for 2013. Abhishek Ranganathan, analyst, MF Global, says, “Sustaining revenue growth in the current challenging environment is a risk, by our estimates.” Jignesh Kamani of Nirmal Bang adds, “Valuation of Bata is expected to be capped until the revenue growth returns to its earlier trajectory.”
Slow sales growth
The June quarter is one of the busiest (most schools reopen at this time) and a major contributor to the company’s revenue. However, Bata recorded year-on-year growth of 17 per cent in revenue in the quarter, lower than 20.4 per cent in the quarter ended December and 30.5 per cent in the quarter ended March. This is despite the company’s focus on volumes rather than on pricing and its aggressive store expansion strategy (39 stores were opened in the quarter ended June; 61 in the quarter ended March). Kamani of Nirmal Bang had estimated 21.9 per cent growth in revenue (Rs 528 crore).
| GROWTH AT RISK | |||
| In Rs crore | Jun '12 | CY2012E | CY2013E |
| Net sales | 506.5 | 1895.5 | 2237.5 |
| % change y-o-y | 17.0 | 22.0 | 18.0 |
| Operating profit | 85.9 | 317.0 | 387.0 |
| % change y-o-y | 23.6 | 31.0 | 22.1 |
| Net profit | 52.7 | 193.0 | 219.3 |
| % change y-o-y | 28.4 | 33.1 | 13.6 |
| Year ending is December E: Estimates Source: Company, Analysts reports | |||
The rise in operating profit margin (17 per cent) and net profit margin (10.4 per cent) would have been more if rents hadn’t risen significantly. As s percentage of sales, rents rose 208 basis points, eroding savings in employee costs, which slipped to single digit for the first time (9.7 per cent of sales; down 141 basis points). Ranganathan says, “The stores were opened in metro cities and malls, where rents are higher and based on a large format, with a store size of about 3,000 sq ft. For the fifth quarter, rental expenses continue to impact operating margin.” However, thanks to savings in raw materials, the company was able to improve its operating profit margin.
Wait and watch
Until the results for the quarter were announced, the sentiment for Bata was quite upbeat. A June 22 report by Nirmal Bang said the management was upbeat on its prospects and felt the growth momentum was on track, even in the current scenario. Similarly, IDFC Institutional Securities’ report of June 27 stated the company wasn’t seeing any signs of a slowdown. However, after the results were announced, revenue growth momentum, the biggest investment argument in favour of the stock, seems to be at risk.
Though the company plans to open 150 stores this year (it has already added 100 stores till date), the lower-than-expected sales growth, coupled with the quick rise in rents, could restrict margins. Kamani of Nirmal Bang says, “It would be difficult for Bata to improve the operating margin from the current levels if the pace of revenue growth moderates in the second half of this year.”
The company’s stock is trading close to the higher end of its seven-year historical band of 15-25 times. Therefore, there is potential downside risk if the sales momentum slows further, or if growth disappoints.
