Bata India. Institutional Equities. Ground Research Analysis

Transcription

1 Ground Research Analysis Bata India Reuters: BATA.BO; Bloomberg: BATA IN Work In Progress For Structural Growth; Retain Buy We contacted over 31 stores of Bata India Ltd or BIL, spread across Delhi, Kolkata, Pune, Mumbai, Nagpur, Jaipur, Indore etc. and secured qualitative/quantitative feedback from them. We found that demand was weak from September 2013 onwards and continued to remain so even during the Diwali 2014 festival season. This, coupled with poor supply chain (as SAP implementation is still in progress), unavailability of right size of footwear of particular design and lower footfalls impacted sales. BIL, at the store level, went for a price hike of ~5%-10%. Volume growth was negative to flat, at best, for the full year. BIL has improved its designs/collections and also ramped up the share of its products in women/kid segments. Store managers are targeting to increase the sales of high-ticket items compared to low-priced ones, which will improve the revenue/sqft going forward. We found that BIL is addressing core problems like a weak supply chain, higher product complaints and less aggressive sales staff in a much more structural way. It has appointed Accenture as its business consultant and started implementing SAP, is modernising its plants and also setting up sales training centres. With high operating leverage, BIL is likely to post a healthy net profit growth once these problems are resolved, which will also coincide with the recovery in urban areas. With high operating leverage, BIL is likely to post 18.8%/34.0% revenue/net profit CAGR, respectively, over CY14-CY16E against 9.3%/2.1% CAGR over CY12-CY14 as all the problems are being resolved, which will also coincide with recovery in urban areas. We have retained our Buy rating on BIL with a revised TP of Rs1,499 (Rs1,502 earlier) based on 30x (29x earlier) CY16E earnings. Key highlights of our interactions are given below: The main problem faced by BIL is unavailability of right size of footwear in designs preferred by customers. Many of the outlets contacted by us stated that demand is weak, but there are severe problems on the supply front as SAP implementation is still in progress, which they expect to be completed in a month s time. An outlet at R City mall in Ghatkopar, Mumbai, stated that it has not received supplies for the past one month. BIL has been facing supply chain problems for the past three years and has finally started addressing it by installing SAP. Most of the outlets stated that their sales can increase if the supply problem, particularly in premium brands like Hush Puppies, is resolved and can result in a higher SSG. Most outlets stated that BIL went for a price hike of ~5%-10% in CY14. The outlets, on an average, witnessed a flat to negative 5%-10% volume growth. Only ~20% outlets witnessed some growth in volume, while 80%registered poor sales following low footfalls and supply chain problem. However, following the price hike, negative revenue growth was capped. We found that the frequency of price hike has increased compared to the past three years. As BIL is widening its target audience, price hike/premiumisation will improve its gross margin. However, due to higher price points and frequent price hikes, affordability of some of its target audience has reduced. If BIL is not able to widen its target audience at a faster pace, its sales can get impacted. In order to do that, BIL has started an advertisement campaign in CY14 on a trial basis. It was very effective in widening the target audience. With its successful performance, BIL will turn aggressive in advertisement spending from CY15 onwards. Demand during the recent Diwali festival was weak, posting around 10% negative growth compared to a year ago. However, some of the outlets witnessed flat to decent demand post Diwali. Customers are buying BIL products for the comfort, value for money and perceived better quality. In addition, some customers have started viewing BIL as a trendy company coming out with better designs. 12 February 2015 BUY Sector: Retail CMP: Rs1,291 Target Price: Rs1,499 Upside: 16% Jignesh Kamani, CFA jignesh.kamani@nirmalbang.com Ruchita Maheshwari ruchita.maheshwari@nirmalbang.com Key Data Current Shares O/S (mn) 64.3 Mkt Cap (Rsbn/US$bn) 83.0/ Wk H / L (Rs) 1,496/990 Daily Vol. (3M NSE Avg.) 187,300 One Year Indexed Stock Performance Apr-14 Jun-14 Oct-14 Dec-14 BATA INDIA LTD Price Performance (%) 1 M 6 M 1 Yr Bata India (4.9) Nifty Index Source: Bloomberg NSE CNX NIFTY INDEX Please refer to the disclaimer towards the end of the document.

2 Exhibit 1: Financial summary Y/E December (Rsmn) CY11 CY12 CY13 CY14 CY15E CY16E Revenue 15,425 18,425 20,652 22,027 25,353 31,094 YoY (%) EBITDA 2,305 2,744 3,220 2,955 3,868 5,237 EBITDA margin (%) Reported PAT 2,258 1,716 1,909 1,728 2,367 3,212 Adj. PAT 1,421 1,716 1,976 1,789 2,367 3,212 EPS (Rs) YoY (%) (9.5) RoE (%) RoCE (%) RoIC (%) P/E (x) Price/sales (x) EV/ EBITDA (x) Source: Company, Nirmal Bang Research Less aggressive sales staff is one of the biggest problems faced by BIL compared to competitors like Metro etc. To improve sales staff service at its outlets, BIL has set up training centres in Gurgaon and Bangalore and plans to set up such centres in Mumbai, Kolkata etc. Some outlets stated that their staff received training from BIL and witnessed double-digit improvement in staff productivity. Many outlets are getting customer complaints regarding the quality. However, they also stated that following a strong legacy, Bata brand value is very high and hence the demand for BIL products is good. Major complaint is the footwear s sole tearing off from the upper portion in less than two months of making a purchase, and sometimes the sole gets divided into two pieces. Stitch finishing is weak in premium brands like Marie Clair, Hush Puppies Women etc. Our channel checks indicate that these brands/products are manufactured by BIL in-house. However, it imports or outsources products like Naturalizer footwear for women. Stitch finishing of outsourced Naturalizer is very good and far superior than Marie Clair footwear for women that are manufactured in-house. Depending on the offerings, quality problem ranged from 1%-5% of sales at various stores. Many a times, customers raised quality complaints with BIL s customer care centre and therefore a store manager may or may not be aware about the quality problem, thereby understating the quantum of complaints. As BIL is modernising three out of its five plants, including its largest plant at Batanagar, the inhouse quality problem is expected to moderate. Modernisation will improve productivity by 10%. Average lease rentals, as a percentage of sales, for mature outlets is ~8.2%, compared to company average of 13.4%. For some outlets, lease rentals are as high as 16.8%, while for some others they are as low as 3%. As BIL is very aggressive in closing/remodelling loss-making outlets, lease rentals, as a percentage of sales, will reduce, although in absolute terms they may increase because of higher rentals/sqft. On an average, lease rentals increase 10%-15% every three years. According to store managers, the strategy for them is to push for high-ticket size products instead of low-value items, so as to boost the revenue. All the outlets contacted by us stated that the design varieties/collections improved this year. An outlet of 850sqftt stated that number of designs increased from 400 in December 2013 to 575 in December Generally, a small outlet of ~800sqft has ~650 designs, a large store of 2,000sqft has ~1,200-1,500 designs while a still larger outlet of 5,000sqft has ~1,900 designs. As the number of designs has improved, BIL is being perceived as a trendy company. Store managers stated that BIL is not able to cater to the wedding season demand properly as it lacks designs/styles. The customers first choice is BIL and so they visit the company s stores and search for the wedding collection, but walk out empty handed and then meet their requirement from other stores. This has a larger implication on BIL outlets, as apart from their wedding requirement, customers prefer to meet the entire needs of their families as well from competitors outlets. Our interaction with the management indicated that BIL will launch its wedding collection in select markets. BIL is getting average annual revenue/sqft of Rs9,633 from the outlets contacted by us. A strong point in favour of BIL is that the company is not facing strong competition from any national-level players. Currently, the competition is from local cobblers, regional players like Khadims, Metro, Mochi, Relaxo, Lakhani, and vertical-specific competitors like Woodland, Nike, Reebok, Adidas etc. Therefore, if BIL is able to resolve the problems cited above, it can significantly increase the revenue from existing stores. 2 Bata India

3 Many of the stores have been in operation since a long time, while some are even years old and therefore the lease rentals are low for these stores. However, since the past four years, BIL is also setting up outlets at prime locations where the lease rentals are high. To cite an example, the lease rental for a 1,400sqft outlet set up in 2011 at S.V. Road, Andheri (West), Mumbai, is ~Rs350/sqft and an outlet in Infinity Malad, Mumbai, set up in 2012, with an area of just 700sqft, the lease rental is as high as ~Rs429/sqft. On account of such outlets, lease rentals have increased. However, BIL is getting higher revenue/sqft of Rs23,800 (for Andheri outlet) compared to an average revenue/sqft of Rs9,633. Therefore, as revenue from such outlets improve, lease rentals, as a percentage of sales, will come under control. Unlike the usual notion of a win-win situation for a K-store (commission store) and a K-store agent of BIL, we received varying feedback. BIL provided healthy commission to K-store agent initially for a few years, but as revenue from that store increase beyond the threshold level, the company cut the commission, which reduced the motivation level. There were some incidences where K-store agents lost all motivation and became employees of BIL to get an assured salary. K-store agents which are paid well by BIL and their commissions not cut at a later stage are happy and are driving healthy revenue per sqft. We found employees of such K- stores more proactive and aggressive, leading to healthy revenue growth. The men s segment dominates the revenue generated by an outlet, but its share has reduced following better growth/varieties witnessed in women and kid segments. On an average, the women s segment contributes 30%-35% to a store s revenue, while in case of many outlets it is as high as 50%-60% and in a few outlets it is as low as 15%-20%.The kid segment contributes ~15% to revenue, with the lower/upper range at 10%/20%, respectively. The sports segment is yet to pick up for BIL. While in some outlets this segment contributes 12%- 20% to revenue, in case of others it is not significant. Pricing of products in kid segment is very attractive with a decent variety. As a result, kid segment is growing at a healthy pace for BIL. We believe it is good strategy adopted by BIL, as kids are accompanied by their parents while making purchases, and therefore increase the chances of converting the parents into consumers. Hush Puppies, Bata, Mocassino, Comfit, Dr. Scholls, Marie Claire, Power, etc are key selling brands. Revenue from some of these brands is as follows: Hush Puppies: ~10%-20%, Bata:~50%-60%, Mocassino:~4%-9%, Comfit:~4%-9%, Dr.Scholls:5%-10%. Exhibit 2: One-year forward P/E (Rs) 1,600 35x 1,400 30x 1,200 1,000 25x 20x x (x) Median 21.7x Source: Nirmal Bang Research Exhibit 3: One-year forward EV/EBITDA (Rsmn) 90,000 20x 80,000 70,000 17x 60,000 14x 50,000 11x 40,000 8x 30,000 20,000 10,000 0 (x) Median 12.9x Source: Nirmal Bang Research 3 Bata India

4 Financials (standalone) Exhibit 4: Income statement Y/E December (Rsmn) CY11 CY12 CY13 CY14 CY15E CY16E Net sales 15,425 18,425 20,652 22,027 25,353 31,094 Growth (%) Raw material costs 7,265 8,680 9,488 10,150 11,650 14,072 Staff costs 1,859 1,959 2,133 2,486 2,535 3,016 Rentals 1,453 2,154 2,619 2,959 3,193 3,731 Freight costs Commission ,026 Others 1,723 1,915 2,121 2,334 2,713 3,327 Total expenditure 13,121 15,680 17,432 19,071 21,485 25,857 EBITDA 2,305 2,744 3,220 2,955 3,868 5,237 Growth (%) (8.2) EBITDA margin (%) Other income Extra-ordinary items 1,094 - (101) (92) - - Interest costs Gross profit 3,605 3,033 3,421 3,189 4,228 5,548 Growth (%) (15.9) 12.8 (6.8) Depreciation Profit before tax 3,194 2,520 2,829 2,558 3,507 4,758 Growth (%) (21.1) 12.3 (9.6) Tax ,140 1,546 Effective tax rate (%) Net profit 2,258 1,716 1,909 1,728 2,367 3,212 Growth (%) (24.0) 11.2 (9.5) Extra-ordinary items (67) (61) - - Reported net profit 1,421 1,716 1,976 1,789 2,367 3,212 Growth (%) (9.5) Source: Company, Nirmal Bang Research Exhibit 6: Balance sheet Y/E December (Rsmn) CY11 CY12 CY13 CY14E CY15E CY16E Equity Reserves 5,100 6,361 7,756 8,884 10,539 12,777 Net worth 5,743 7,003 8,399 9,527 11,182 13,419 Short-term loans Long-term loans Total loans Deferred tax liability (342) (444) (681) (650) (615) (567) Liabilities 5,595 6,827 7,718 8,876 10,567 12,852 Gross block 5,003 5,611 6,035 7,172 8,172 8,972 Depreciation 2,813 3,198 3,552 4,183 4,904 5,694 Net block 2,190 2,413 2,483 2,989 3,268 3,279 Capital work-in-progress Long-term Investments Inventories 3,913 4,621 5,827 5,827 6,565 7,901 Debtors Cash 1,229 1,871 2,558 3,187 4,242 5,911 Other current assets 1,124 1,276 1,526 1,652 1,901 2,332 Total current assets 6,581 8,218 10,419 11,225 13,352 16,933 Creditors 2,346 2,941 3,654 3,708 4,178 5,028 Other current liabilities 959 1,093 1,767 1,630 1,876 2,332 Total current liabilities 3,305 4,034 5,421 5,338 6,054 7,360 Net current assets 3,276 4,184 4,998 5,887 7,298 9,573 Total assets 5,595 6,827 7,718 8,876 10,567 12,852 Source: Company, Nirmal Bang Research Exhibit 5: Cash flow Y/E December (Rsmn) CY11 CY12 CY13 CY14E CY15E CY16E EBIT 1,894 2,230 2,627 2,325 3,147 4,448 (Inc.)/dec. in working capital (1,300) (267) (127) (260) (356) (606) Cash flow from operations 594 1,964 2,500 2,065 2,792 3,841 Other income Depreciation Deferred liabilities (31) (101) (237) Interest paid (-) (9) (10) (13) (14) - - Tax paid (-) (680) (804) (920) (830) (1,140) (1,546) Dividend paid (-) (447) (448) (489) (600) (712) (975) Extraordinary items Net cash from operations 54 1,414 1,749 1,622 2,055 2,468 Capital expenditure (-) (1,198) (838) (718) (900) (1,000) (800) Net cash after capex (1,144) 576 1, ,055 1,668 Inc./(dec.) in short-term borrowing (267) Inc./(dec.) in borrowings (Inc.)/dec. in investments Cash from financial activities (219) Others / extraordinary income 838 (8) (126) (92) - - Opening cash 1,356 1,229 1,871 2,558 3,187 4,242 Closing cash 1,229 1,871 2,558 3,187 4,242 5,911 Change in cash (126) ,055 1,668 Source: Company, Nirmal Bang Research Exhibit 7: Key ratios Y/E December CY11 CY12 CY13 CY14E CY15E CY16E Per share (Rs) EPS Book value Valuation (x) P/E P/sales P/BV EV/EBITDA EV/sales Return ratios (%) RoIC RoCE RoE Margins (%) EBITDA margin PBIT margin PBT margin PAT margin Turnover ratio Asset turnover ratio (x) Avg. inventory period (days) Avg. collection period (days) Avg. payment period (days) Solvency ratios (x) Debt-equity Interest coverage Growth (%) Sales EBITDA (8.2) PAT (9.5) Source: Company, Nirmal Bang Research 4 Bata India

5 Rating track Date Rating Market price (Rs) Target price (Rs) 26 September 2011 Buy November 2011 Buy January 2012 Buy March 2012 Buy March 2012 Buy April 2012 Buy 844 1, April 2012 Buy 855 1,008 2 May 2012 Buy 878 1, June 2012 Buy 847 1, July 2012 Buy 872 1, July 2012 Hold 896 1, August 2012 Hold 914 1,008 4 October 2012 Hold 982 1,008 1 November 2012 Sell February 2013 Buy 784 1, February 2013 Buy 758 1, April 2013 Buy May 2013 Hold May 2013 Hold June 2013 Hold July 2013 Buy 876 1, July 2013 Buy 908 1,064 7 October 2013 Buy 862 1, October 2013 Buy 888 1, December 2013 Buy 1,010 1,310 7 January 2014 Buy 1,026 1, January 2014 Buy 974 1, February 2014 Buy 1,000 1, March 2014 Buy 1,130 1, March 2014 Buy 1,076 1,310 2 May 2014 Buy 1,068 1, May 2014 Buy 1,091 1,255 4 July 2014 Buy 1,343 1,592 6 August 2014 Buy 1,253 1, August 2014 Buy 1,252 1, October 2014 Buy 1,337 1,507 7 November 2014 Buy 1,274 1, December 2014 Buy 1,312 1, February 2015 Buy 1,291 1,499 5 Bata India

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