Monday, July 16, 2012

Bata India - Buy on declines



"Bata India Ltd. (BIL) focused on premium products and sacrificed volume, which grew by a mere 1.1% in CY11. It has started focusing again on volume and as a result, volume grew 14% in 1QCY12. As per the management, volume growth is expected to remain in double-digits in CY12. Strong volume growth along with higher realisation (due to better product mix) should result in revenue growing 20.0-25.0% as against our estimate of 19.7% in CY12E. Revenue has already grown by a robust 30.6% in 1QCY12. The management is confident of doubling its revenue in the next four-five years."

"BIL opened ~67 new outlets (including Hush Puppies stores) in 1QCY12. It set up ~25 more stores in 2QCY12 and new store addition has already touched ~92 in 1HCY12, which is expected to be ~150-170 by the end of CY12. Of the total 146 outlets opened in CY11, around 53% were opened in 2HCY11, which resulted in high inventory and lower revenue from these outlets in CY11. Currently, BIL is front-loading the setting up of new outlets and out of the total target of ~150-170 outlets planned in CY12, it has already opened ~92 outlets in 1HCY12. BIL has started bar-coding its products and currently 60-70% of its products are bar-coded. As a result, BIL would be able to report healthy revenue growth and also control its inventory in CY12. BIL plans to incur a capex of Rs1,000mn - ~Rs700mn in retail and ~Rs300mn in upgrading its manufacturing facility - in CY12E."

"Footin, owned by BSO (Bata Shoe Organization), is very popular in Thailand, Bangladesh etc, catering to college-going youth in the range of 15-25 years. BIL launched Footin in India in 1QCY12, with its USP being contemporary designs at an affordable price of Rs500-700/pair. In order to de-link Bata’s brand image, BIL is setting up exclusive Footin outlets of 1,000-1,500 sq ft. It has already opened nine Footin outlets till now in Delhi and Mumbai, where the response has been excellent. Currently, the exercise is more of a trial and if the response stays buoyant, BIL plans to aggressively open Footin outlets in the next two-three years. BIL is also very bullish on kids and women segments and is looking at launching new brands, either BSO-owned or strong in-licensed brands, in India."

Valuation

"We expect BIL, which trades at CY13E P/E of 22.3x and EV/EBITDA of 13.5x, to witness a further re-rating. On the back of strong revenue/net profit CAGR of 18.8%/31.2%, respectively, likely over CY11-13E, BIL would continue to trade at premium multiples. The stock is attractively priced, with a PEG ratio of 0.87x CY12E," says Nirmal Bang research report.

Recommendation  

Bata was quoting around 530 levels on Jan 2, 2012 and has so far given investors a decent 60% appreciation.  There is more steam left in the stock as we believe it is likely to cross Rs.1000/- levels.

Smart Investor
Equity Research Division

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