Bata India. Institutional Equities. Re-Initiating Coverage. Sleeping Giant Ready To Take Strides BUY

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1 Re-Initiating Coverage Bata India 13 February 217 Reuters: BATA.BO; Bloomberg: BATA IN Sleeping Giant Ready To Take Strides Bata India (BIL) did phenomenally well during the period CY1-CY13 (December year-end) before faltering from its high-growth path. During CY1-CY13, BIL clocked sales/ebitda/pat growth of 17%/26%/31%, respectively. FY15 marked the year of faulty SAP implementation, leading to severe supply chain problems. As a result, the performance took a hit and sales grew by a meager 4.4%. Although sales in FY16 improved 12.2% (on account of a low base and scrapping of SAP), they remained subdued for the first nine months of FY17. We believe the company should be able to post moderate sales CAGR of 8% over FY16-FY19E. Sales growth will mostly be led by improvement in realisation with a minor growth in volume. Our belief is based on the management s stance to focus on the youth (which was not the case earlier) and concentrating on a more trendy and fashionable shoe-line with better price realisation. Improved sales growth supplemented with a slight improvement in gross margin (2bps), decline in rental costs as a percentage of sales (7bps), and moderate growth in employee costs (CAGR 5%) are expected to result in a rise in operating margin - from 11.2% in FY16 to 13.4% by FY19E. We expect sales/ebitda/pat to grow 8%/15%/19%, respectively, over FY16- FY19E. BIL stock has traded at 32x one-year forward earnings in the past 1 quarters. We have valued BIL at 3x FY19E earnings (EPS of Rs2.4) at Rs612, up 23% from the CMP. Better product mix will lead to improved margins: Currently, BIL s high-end brands such as Hush Puppies, Power, Marie Clarie and accessories account for ~3% of BIL s total sales. The product development team is coming up with a new shoe line targeting the youth who prefer trendy and fashionable shoes and don t mind shedding a few extra bucks for the quality. The management expects the new shoe line to have an average selling price or ASP of Rs3,-Rs5,/pair in the men s category and Rs2,-Rs,3/pair in the women s category. We also believe that Hush Puppies (ASP Rs2,5/pair) will continue registering good volume (growth of 1% in the past three years) supplemented by the growth in Power brand. With rising contribution from high-end products, BIL s overall ASP will increase by ~4%. With rising ASP, we expect the operating margin to improve by 23bps over FY16-FY19E. Goods and Services Tax or GST implementation to be volume-kicker: Indian footwear industry is largely dominated by the unorganised players, accounting for ~7% of the total shoes manufactured. India is the second-largest manufacturer of footwear after China and third-biggest consumer of footwear globally. India s per capita footwear is way below that of developed economies and stands at 1.7 pair per person. With GST implementation, BIL will have to pass on the tax benefit, if any, to customers. However, we believe that volume growth coming from an unorganised player will be unprecedented. With ~1.5bn pairs of footwear being manufactured by unorganised players, we believe that post GST these players will become financially unviable. However, we haven t factored in any volume growth because of GST implementation. Any incremental benefits from GST will only make our estimate look dwarfed. Bata is still a strong and most trusted household brand: Despite rising competition from online stores and fancy international brands such as Nike, Puma, Steve Madden, etc, Bata continues to be India s most trusted brand as per the Brand Trust Report. Bata brand is the perfect embodiment of value for money, high quality, comfort and footwear for the entire family. We do not see any reason for the Bata brand to erode despite having real competition from foreign brands. We continue to believe that Bata will keep capturing the mind share of its customers in India. Y/E March CY12 CY13 FY15 (15M) FY16 FY17E FY18E FY19E Revenues 18,425 2,652 26,94 24,181 24,932 27,55 3,755 YoY (%) EBITDA 2,744 3,218 3,349 2,76 2,772 3,47 4,127 EBITDA (%) Adjusted PAT 1,716 1,994 2,44 1,552 1,828 2,221 2,623 Reported PAT 1,716 1,98 2,312 2,187 2,12 2,221 2,623 FDEPS (Rs) YoY (%) RoE (%) RoCE (%) RoIC (%) P/E (x) Price/sales (x) EV/EBITDA (x) BUY Sector: Retail CMP: Rs499 Target Price: Rs612 Upside: 23% Akhil Parekh Research Analyst Akhil.parekh@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$mn) 63.8/ Wk H / L (Rs) 614/399 Daily Vol. (3M NSE Avg.) 524,822 Shareholding (%) 3QFY17 2QFY17 1QFY17 Promoter Public Others - - One-Year Indexed Stock Performance Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Price Performance (%) 1 M 6 M 1 Yr Bata India 6.5 (6.9) 1.8 Nifty Index Source: Bloomberg BATA INDIA LTD Nifty 5

2 Jan-8 Jul-8 Feb-9 Sep-9 Apr-1 Nov-1 Jun-11 Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Nov-14 May-15 Dec-15 Jul-16 Feb-17 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 Valuation We have assigned Buy rating to BIL with a 12-month target price of Rs612, up 23% from the current market price. Our growth estimates are driven by the following key factors: 1) Introduction of new shoe line with higher price realisation leading to increased ASP, and 2) Improved product mix expected to improve blended margins. Other factors that are important to our estimates are: 1) Improvement in gross margin because of increased contribution from high-end products, 2) Decline in rental costs as a percentage of sales, and 3) GST implementation leading to higher volume growth and offsetting any possible negatives that may spring up in case our thesis does not pan out. BIL is expected to clock revenue/ebitda/pat CAGR of 8%/15%/19%, respectively, over FY16-FY19E. BIL stock currently trades at P/E of 35x FY17E, 29x FY18E earnings, and 24x FY19E earnings. We have valued the stock based on 3x FY19E earnings (one-year forward P/E for the past 1 quarters is 32x). Exhibit 1: One-year forward EV/EBITDA Exhibit 2: One-year forward P/E 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, 24x 2x 16x 12x 8x (Rs) x 35x 3x 25x 2x 15x Source: Nirmal Bang Research 2 Bata India

3 CY5 CY6 CY7 CY8 CY9 CY1 CY11 CY12 CY13 FY15(15M) FY16 Investment rationale Better price realisation to improve operating margin Youth segment was not a key focus area for BIL in the past. However, the management now believes that with a growing youth population and rising disposable income, this segment will be key driver for growth. The company hired an Italian designer, Mr. Mateo Lambert, in late 215 who is currently head of the product development team comprising 25 designers based in Gurgaon and 7 designers based in Kolkata. Since the past two months, BIL has introduced many trendy and fashionable shoe designs targeting the youth segment. The trendy shoe line has been launched under Power brand and currently is being rolled out in 5 cities. The management expects rollout of the high-end shoe line in 2 cities during the year. ASP of these Italian designer shoes is ~Rs3,-Rs5,/pair for men and Rs2,-Rs3,/pair for women. BIL has been introducing better designs to improve its ASP. Rising sales of these products will help BIL to climb the value chain. Currently, ASP for BIL s shoes across segments is ~Rs47/pair. ASP posted a CAGR of ~11% over CY5 FY16. The rise in ASP was mainly on account of: 1) Scrapping of low-end products from its product line, 2). Increased share from high-end brands such as Hush Puppies (1%-11% of total sales), Power brand (8%-9% of total sales), Marie Clarie, etc. The rise in ASP of Bata s core brand is by going for certain value addition in footwear. Exhibit 3: Growth in price realisation 45% 4% 35% 3% 25% 2% 15% 1% 5% % -5% 25% 2% 15% 1% 5% % Repositioning of Bata brand Leather Foot Wear Footwear-Rubber/Canvas Footwear-Plastic Average With a history of more than 8 years in India, BIL has come a long way. Bata has survived major financial crisis during the past two decades to emerge as a strong footwear brand. Bata was initially positioned as a family store for all footwear and related products. Bata became a need brand as it positioned itself as a provider of products to meet the needs of the middle class section of society. The brand has something for every member of the household. Then it came up with new brands like Marie Claire, Hush Puppies and North Star. BIL was known as a manufacturing company which produced footwear and sold them. Over the years, BIL changed its image from a manufacturing company to a marketing company. Bata placed itself in the market as a fashion conscious and lifestyle brand. It became more visible in shopping malls and created a shop-in-shop experience in multi-branded stores. Later, BIL also introduced international brands like Scholl, Marie Claire, Bubble gummers, Power, and North Star. Over the past few years, BIL has removed its low-end line-up of shoes and come up with high value brands of shoes. As a result, its operating profit per pair improved over CY1 FY15 before dropping in FY16 (mainly because of the failure in SAP leading to supply chain problems). However, we are confident that with improved operational efficiency, rising contribution from high-end brands and voluntary retirement scheme or VRS expenses now a thing of the past, EBITDA/pair will improve going forward. 3 Bata India

4 1,679 2,35 2,744 3,218 3,349 2,76 2,772 3,47 4,127 Exhibit 4: Rising EBITDA per shoe pair 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 - CY1 CY11 CY12 CY13 FY15 FY16 FY17E FY18E FY19E EBITDA EBITDA/pair (Rs) Bata has established itself as a strong household brand in India BIL more than 1,25 stores across 5 cities, 2,5 designs, 3 distributors and 15, independent footwear dealers across India. BIL now sells ~5mn pairs annually. Men s shoes contribute 5%-55%to total sales, women s shoes account for 3%-32% of total sales; kids shoes contribute 7%-8% to sales, while the rest is contributed by accessories. Over the past few years, BIL has been able to change the consumer perception that Bata shoes are only meant for school kids (school shoes) and for elderly. By introducing young brands such as Hush Puppies, Weibrenner, Northstar, Power, Mocassino and Bubblegummers, BIL has been able to change its perception among customers. One of the most popular brands of BIL, Hush Puppies, contribute 1%-11% to total sales with ASP of Rs2,5-Rs3,/pair. Hush Puppies completed 2 years of its presence in India. Hush Puppies continue to live up to its brand image of comfort, quality and style. FY16 was a milestone year for Hush Puppies as BIL sold over 1mn pairs in 215 itself. In addition to being available through retail stores, wholesale network and e-commerce channel of the company, the brand has been expanding its presence through 68 exclusive stores and 37 shop in-shops in premium departmental stores. In FY16, Hush Puppies embarked on a journey of repositioning itself as an international premium lifestyle casual footwear brand. Power brand is BIL s premium brand in the sportswear segment. Power brand competes against some of the best global sportswear brands such as Nike, Adidas and Puma. However, prices of Power shoes are less then at least 3%-4% when compared with peers. Power brand contributes 8%-9% to total sales. In order to cater to the children category, BIL introduced many new designs and innovative footwear under Bubblegummers and Disney brands. Through Bubblegummers, BIL strived to make quality shoes with uncompromising comfort and features that safeguard their little feet. With 18% of the population below the age of 1, the potential for growth in the children category of footwear is huge. Therefore, it is one of the key focus areas for BIL. With a revamped collection, a dedicated team to drive this brand, experience of being associations with brands like Angry Birds in the past and Walt Disney at present, BIL has robust plans to make Bubblegummers the best children s footwear brand in India. Bubblegummers contribute ~3% to total sales of the company. BIL has established an association with The Walt Disney Company India and is working with a set of designers from the latter to create a complete collection covering all types of footwear ranging from casual shoes, canvas shoes and ballerinas to everyday-wear sandals and chappals. BIL has been exploring the possibility to create exclusive Disney Corners in some key retail stores across major cities in India to highlight the collection and add value to the children category of footwear. BIL is confident that its young little customers will be excited and thrilled to see their favourite characters in their favourite shoes. 4 Bata India

5 Exhibit 5: Bata brands Men Women Kids Ambassador Bata Bata Bata Comfit Bubblegummers Bata Life Hush Puppies Disney Comfit Marie Claire Power Hush Puppies Mocassino North Star Patapata Power Scholl Sunshine Weinbrenner Naturalizer North Star Power Sandak Scholl BIL has a far wider audience because of the number of brands it offers and varied price range. International brands such as Nike, Puma and Adidas cater to the high-end segment with their ASP more than Rs3,/pair. Domestic brands such as Relaxo mainly cater to the mass segment where their ASP is ~Rs25/pair. Relaxo has mainly four brands Bahamas, Flite, Sparx and Schoolmate. Metro shoes, although it offers a wide price range, has only four brands Metro, Da Vinchi (premium brand), Mochi and MSL. ASP of Metro shoes is much on the higher side when compared to BIL and Relaxo. Metro s ASP is ~Rs1,5/pair (MSL shoes at Rs5/pair, Mochi and Metro at Rs1,6/pair and Crocs at Rs2,3/pair. Exhibit 6: Number of brands owned by the companies (Nos.) Bata Relaxo Metro Liberty 5 Bata India

6 Exhibit 7: Retail reach through CoCo stores (Nos.) 1,4 1,2 1, ,25 Strong retail distribution network BIL has a retail network comprising 1,265 stores in India spread across 5 cities. Around 5% of its stores are in Tier-I cities, mainly metros. The balance 5% stores are spread in Tier-II and Tier-III cities. Of the 1,265 stores, 1,121 stores are of Bata brand, 12 are of Hush Puppies and 42 are foot-in stores. Pan India, BIL has a presence of 2,65, sq.ft. in the retail space. The company also operates a large non-retail distribution network through its urban wholesale division and caters to millions of customers through more than 3, dealers Bata Relaxo Metro Liberty Exhibit 8: New store additions - Bata In the past, BIL expanded its stores at an average run-rate of more than 1 stores every year. However, with demonetisation the company turned a bit cautious and wants to be careful in terms of store expansion. With rising store reach, we believe the Bata brand will continue capturing the mind share of its customers. Exhibit 9: Rising sales revenues per store (Nos.) CY1 CY11 CY12 CY13 FY (Rsmn/Nos) 3, 25 25, , 15, 1, , 5 CY7 CY8 CY9 CY1 CY11 CY12 CY13 FY15 FY16 No. of stores Sales Sales/store 6 Bata India

7 Implementation of GST to give a major kick to volume With GST implementation likely from 1 July 217, we believe that organised players in the footwear industry will be major beneficiaries. Indian footwear industry is dominated by unorganised players who account for 7% of the total industry. Indian players, on an annual basis, manufacture ~2.1bn pairs of footwear annually, of which ~1.5bn pairs are manufactured by small unorganised manufacturers and the rest ~.6bn pairs are made by organised players such as BIL, Relaxo Footwear, Metro Shoes, Liberty, Action, Khadims, Paragon, Nike, Puma etc. Of the 6mn pairs of footwear manufactured by organised players, BIL manufactures ~5mn pairs every year i.e. ~9% of pairs. BIL pays ~17.5% in indirect taxes. There is a good chance that post GST, shoe manufacturers will come under the 18% tax bracket. Even though BIL won t be able to save anything on the tax front, we believe it will be a major beneficiary in terms of increased volume. With GST, we believe small unorganised players will not be able to sustain financially. This will greatly benefit players like BIL. As a result, we believe that volume growth post GST implementation can be unprecedented. Exhibit 1: Market segmentation Market segmentation 6 Bata share: 9% of organized segment at ~5mn pairs 15 Organized Unorganized Exhibit 11: Assumption sheet Even though we are confident of strong volume growth for organised players post GST implementation, we have not factored in strong volume growth in our estimates. FY16 FY17E FY18E FY19E Growth(%) Comments Sales 24,181 24,932 27,55 3,755 8% We believe that sales growth of 8% will come mainly on account of increase in price realizations and minuscle growth in volumes Gross Profit 12,62 12,949 14,381 16, Gross Margins (%) 52.2% 51.9% 52.2% 52.4% 2bps Small incremental improvement in gross margins will come due improvement in ASP EBITDA 2,76 2,772 3,47 4,127 15% - EBITDA Margins (%) 11.2% 11.1% 12.6% 13.4% 23bps PAT % Improvement in operating margins will come on account of - betterment in gross margins, decline in rental cost by 7bps over FY16-FY19E and moderate growth in employee cost Moderate sales growth complemented with better operating margins will led to healthy PAT growth of 19% PAT Margins (%) 6.4% 7.3% 8.1% 8.5% 21bps - 7 Bata India

8 4,539 1CY13 1CY13 5,725 2CY13 2CY13 4,844 3CY13 3CY13 5,544 4CY13 4CY13 4,954 1CY14 1CY14 6,221 2CY14 2CY14 5,48 3CY14 3CY14 5,372 4CY14 4CY14 4,913 5CY14 5CY14 6,849 1QFY16 1QFY16 5,754 2QFY16 2QFY16 6,254 3QFY16 3QFY16 5,447 4QFY16 4QFY16 6,746 1QFY17 1QFY17 5,837 2QFY17 2QFY17 6,48 3QFY17 3QFY17 Financial performance YTD Sales and sales growth BIL s sales have posted a CAGR of 14% over CY1 FY16. Sales growth mainly was because of the rise in ASP over the years. Increase in ASP has been mainly on account of rising contribution from high-end brands such as Hush Puppies and increase in value-added products. Of the 14% sales growth, ~12% came from the rise in price realisation over CY1 FY16. We believe this trend will continue going forward. We expect moderate sales growth of 8% over FY16-FY19E. We have assumed moderate volume growth of 1.5% while the remaining portion of sales growth will be taken care of by the rise in price realisation. Exhibit 12: Sales & sales growth - Annual Exhibit 13: Sales Quarterly (%) 35, , , , , 1, (1.2) (5) 5, (1) - (15) CY1 CY11 CY12 CY13 FY15 FY16 FY17E FY18E FY19E Net Sales Growth (%) 8, 7, 6, 5, 4, 3, 2, 1, - Note: FY15 includes 15 months of sales. Growth normalized to 12 months. Gross margin BIL s gross margin remained range-bound in the range of 52% to 54%. Margins peaked out during CY13 and FY15 at 54.1%. Margins bottomed out in 1QFY17 at 5% and have been on the rise since then. We believe that with the launch of trendy shoes under Power and Weinbrenner brands, ASP will increase and thereby pushing gross margin up by at least 5bps from 51.9% to 52.4% over FY17E-FY19E. Exhibit 14: Gross margin Annual Exhibit 15: Gross margin Quarterly % 56% 54% 52% 5% 48% 46% 56% 56% 55% 54% 54% 54% 54% 55% 53% 52% 52% 51% 48% 5% 53% 53% % % 5.5 CY1 CY11 CY12 CY13 FY15 FY16 FY17E FY18E FY19E EBITDA and EBITDA growth BIL s operating profit posted a CAGR of 8% over CY1 FY16. With the exception of FY16, BIL reported healthy EBITDA growth. We expect operating profit to post a CAGR of 15% (15% over CY1 FY15) over FY16 FY19E. Healthy growth in operating profit will come on account of sales growth supplemented by improvement in operating margin from 11.2% in FY16 to 13.4% by FY19E. 8 Bata India

9 1CY13 2CY13 3CY13 4CY13 1CY14 2CY14 1CY13 3CY14 2CY13 4CY14 3CY13 5CY14 4CY13 1CY14 1QFY16 2CY14 2QFY16 3CY14 3QFY16 4CY14 4QFY16 5CY14 1QFY16 1QFY17 2QFY16 2QFY17 3QFY16 3QFY17 4QFY16 1QFY17 2QFY17 3QFY17 Exhibit 16: EBITDA - Quarterly 1,2 1, EBITDA margin steadily increased from 13.3% to 15.6% over CY1 to CY13 before declining to 12.4% in FY15. FY15 was exceptionally challenging for BIL as sales growth moderated to 4% followed by a sharp rise in employee and rental expenses by 17% and 14%, respectively. We believe that operating margin should improve from here onwards (11.1 in FY17E to 13.4% in FY19E) mainly on account of improved product mix, improvement in operational efficiency because of plant modernisation and slightly reduced employee strength (~Rs22mn spent on VRS to let go employees at Faridabad unit in Haryana). Exhibit 17: EBITDA margin Yearly Exhibit 18: EBITDA margin - Quarterly (%) CY1 CY11 CY12 CY13 FY15 FY16 FY17E FY18E FY19E PAT and PAT growth With sales growth of 8% and EBITDA growth of 15% over FY16 FY19E, the company s PAT is expected to grow at a healthy pace of 19% over the same period. 9 Bata India

10 1CY13 2CY13 3CY13 4CY13 1CY14 2CY14 3CY14 4CY14 5CY14 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Exhibit 19: PAT - Quarterly 1, Return on equity and capital employed BIL s RoE and RoCE stayed at over 25% till CY13 before slipping to to sub-2% level in FY15. Last three years have been challenging for BIL because of a couple of mistakes, mainly implementation and then scrapping of SAP and aggressive store expansion. As a result, the company delivered poor returns on equity and capital. However, we expect the return ratios to improve from 14% in FY17E to 17.2% in FY19E. Exhibit 2: Return on Equity (RoE) (%) FY15 FY16 FY17E FY18E FY19E Exhibit 21: Return on Capital Employed (RoCE) (%) FY15 FY16 FY17E FY18E FY19E Free cash flow and cash from operations BIL has been a cash guzzler mainly because of its better working capital cycle and lower capital expenditure requirement. The company generated cash flow from operations of ~Rs1,mn over CY1 to FY16 and free cash flow of ~Rs4,7mn. We expect BIL to generate ~Rs9,mn of Cash Flow from Operations (CFO) and ~Rs6,3mn of free cash flow or FCF cumulatively over FY17E FY19E. 1 Bata India

11 1, (22) 1,165 1,414 1,716 1,661 1,994 1,196 2,44 1,756 1,552 2,819 1,828 1,456 1, ,221 2,144 (22) 2,623 (1,4) 1, , ,196 (445) 1,756 1,341 2,819 2,19 1, ,144 1,144 Exhibit 22: FCF and CFO 3,5 3, 2,5 2, 1,5 1, 5 - (5) (1,) (1,5) (2,) CY1 CY11 CY12 CY13 FY15 FY16 FY17E FY18E FY19E CFO FCF Exhibit 23: CFO versus PAT 3, 2,5 2, 1,5 1, 5 - (5) CY1 CY11 CY12 CY13 FY15 FY16 FY17E FY18E FY19E CFO PAT Exhibit 24: Working capital cycle (Days) CY1 CY11 CY12 CY13 FY15 FY16 FY17E FY18E FY19E Avg inventory period (days) Avg collection period (days) Avg payment period (days) Cash conversion cycle (Days) Indian footwear market Indian footwear market, like its international counterpart, can broadly be classified into men, women and kids. Indian footwear segment is dominated by men who account for 6% of the industry while women and kids contribute 3% and 1%, respectively. Men s footwear segment is growing at 1% whereas women s footwear segment is growing at almost twice the rate of men s, at 2%. Exhibit 25: Market segmentation (%) Exhibit 26 : Market segmentation (mn pairs) 3% 1% 6% (mn pairs) 1,4 1,2 1, 8 6 1,26 63 Men Women Kids Men Women Kids 11 Bata India

12 China USA India Japan Brazil Indonesia France Germany UK Footwear market can broadly be classified into two categories based on usage regular (includes daily and sports footwear for which material used can be leather/rubber/plastic and occasional (consists of premium and luxury shoes made mostly of leather and sometimes non-leather). Exhibit 27: Market segmentation based on pricing 7% 7% 3% 22% 61% Casuals Mass Sports/active Premium Leather Premium non-leather India is the second-largest producer of footwear globally after China, although the difference between annual productions between the two countries is huge. India currently accounts for ~9% of total global shoe production. Global volume of footwear stands at 22bn pairs per year of which ~2bn are produced in India. 9% of the footwear produced in India is consumed within the country while the rest 1% is exported primarily to European markets such as the UK, Germany, Italy and France and some shipped to North America. Exhibit 28: Main footwear consumption countries mn pairs Source: ICRA, Nirmal Bang Research 12 Bata India

13 Changing trend in Indian footwear Industry Increase trust in branded footwear Today, ~6% of Indian population falls under the age group of years. With a growing youth population and rising middle-class, the thrust has been on branded products. A fast-growing economy and a rising number of affluent consumers pushed India into the league of most brand-conscious countries globally. However, there is growing consumer preference for footwear with price point ranging between Rs999 Rs4,999/pair with regard to national as well as international brands. We believe this growing thrust on highpriced range of products will assist companies like BIL, Mochi (Metro Shoes) and Red Tape (Mirza International) in increasing the ASP of their products. Thus, growth will come not only from rising volume but also from increased price realisation. Rising trend towards casual shoes and sports shoes Even though comfort is the first criteria for most customers, there has been a rising trend where customers prefer more casual footwear such as sneakers. There is a surge in demand for designer footwear. Last year, there was an upsurge in casual category men s and women s footwear and there is rising customer preference for bright colours and quirkier patterns. BIL has appointed Mr. Mateo Lambert who heads the product development team comprising 7 designers who have been of late working on bringing more fashionable and trendy footwear catering to the youth. The new shoe line is sold under its own Bata brand at ASP of Rs2,5 Rs3,/pair. BIL has launched the new shoe line at 5 stores and plans to expand it further to 2 stores, mainly in metro and Tier-I cities. We believe that given BIL s increased focus on the youth segment and trendy footwear, this changing trend will hugely benefit the company going forward. BIL introduces more than 5 new designs every year (from close to 2, proposed internally by its design team). The management believes that the success rate with its new designs is 75%. Growing opportunities in women s segment: Women s footwear constitutes only 3% of Indian market share currently. But the growth rate of this segment is double than that of the men s segment. While the men s footwear market has registered 1% CAGR in the last financial year, it is 2% in case of the women s segment. In case of BIL, women s footwear account for 3%-32% of total sales with popular brands such as Bata, Comfit, Hush Puppies, Marie Clarie, Naturalizer, North Star, Power, Sandak and Sholl. Omni-channel retailing: Retailers have started venturing into omni-channel retailing and trying in-store marketing solutions such as beacons to enrich the shopping experience and finding out ways to bridge the gap between offline and digital channels. In addition to engaging users on the digital platform, and even influence their merchandising decisions, many retailers are using the platform not just to showcase products but also to actually sell them. The same goes for mobiles. Companies won t just use the small screen to get in front of customers (i.e. through geo-fencing and mobile-enabled sites). In 216, retailers incorporated mobile phones into other parts of the customer journey, including order fulfilment, payment, and loyalty. BIL has tie-ups with major e-commerce portals mainly Amazon, Myntra, Jabong, Flipkart, etc. The company sold more than 3,8, pairs of footwear through online channels and achieved a turnover of around Rs36mn. BIL s e-commerce presence is in more than 2, cities across India. 8% of the shoes sold through e-commerce portals are exclusive, while 2% overlaps with its brick and mortar stores shoe line. Currently, there are 5 exclusive designs sold through the e-commerce route. BIL has also launched Click and Collect service for its stores in the Delhi NCR region. The customers can now shop the entire range of products available online with the click of a button and have their preferred footwear or accessories delivered to the local BIL retail store of their choice. 13 Bata India

14 Exhibit 29: Leading footwear brands in India Brand Year of Establishment Segment Presence Product Portfolio Retailing Format Bata 1931 Mass/Economy/Active Sports/Premium Men s, women s, kid s footwear with international brands such as Hush Puppies, Marie Claire, Scholls etc. 1,25 stores across 5 cities, wholesale division, dealer-distribution network, own website and other e-commerce portals. Metro 1947 Liberty 1954 Mass/Economy/Active Sports/Premium Mass/Economy/Active Sports/Premium Men s, women s, kid s footwear with international brands like Clarks, Steve Madden, Crocs etc. Men s, women s and kid s footwear. INC Economy/Premium Women s footwear. Ajanta 1956 Mass/Economy Khadims Action (wholesale & distribution) 1993 (Retail journey) Mass/Economy/Active/ Sports Mass/Economy/Active/ Sports Rubber, PU, PVC, EVA, canvas and leather footwear for men, women and kids. Men s, women s & kid s footwear. Men s, women s, kid s footwear 31+ EBOs in 9 cities and online retailing through brand website and other e-commerce portals. 4 EBOs & 6, multi-brand outlets. 225 shop in shops and 32 stand-alone stores across the country. 2 showrooms in eastern part of the country, MBOs and distributors. 6 retail outlets in 21 states. Franchised EBOs, brand website, leading e- commerce portals. Paragon 1975 Mass/Economy Rubber, PU, PVC, EVA and TPR footwear for men, women and kids. Distributed through 8 depots and more than 45 distributors across India. Relaxo 1976 Mass/Economy/ Active/Sports Men s, women s, kid s footwear. EBOs, franchised outlets, own website and e- commerce portals Sreeleathers 1987 (in Kolkata) Mass/Economy/Active Men s, women s, kid s footwear. 6 EBO s and dealer network. Catwalk 199 Economy/Premium Men s & women s footwear. Mochi 2 Economy/Premium Men s, women s and kid s footwear. 15 stores in 31 cities, in partnership with retail chains like Pantaloons, Globus, Central, Hypercity, Mega Mart, Lifestyle, Reliance Footprint, Shoppers Stop etc. Footprint in more than 35 cities through 7 retail outlets. 14 Bata India

15 Financials (standalone) Exhibit 3: Income statement Y/E March CY13 FY15 (15m) FY16 FY17E FY18E FY19E Net Sales 2,652 26,94 24,181 24,932 27,55 3,755 % growth Raw Material 9,488 12,378 11,56 11,984 13,169 14,64 Staff 2,133 3,119 2,627 2,64 2,812 3,8 Rent 2,62 3,743 3,363 3,451 3,692 4,6 Freight Commission Others 2,121 2,991 2,679 2,766 3,31 3,383 Total Expenditure 17,433 23,591 21,475 22,161 24,81 26,629 EBITDA 3,218 3,349 2,76 2,772 3,47 4,127 % growth 17.3 (16.8) EBITDA margin (%) Other income Interest Depreciation Profit Before Tax 2,927 2,971 2,237 2,611 3,242 3,857 % growth 16.2 (18.8) (5.9) Tax ,21 1,234 Effective tax rate (%) Adjusted Net Profit 1,992 2,44 1,552 1,828 2,221 2,623 % growth 16.1 (17.9) (5.1) Extraordinaries (86) Reported Net Profit 1,96 2,312 2,187 2,12 2,221 2,623 % growth 11.1 (3.) 18.3 (8.) Dividends Carried over to BS 1,53 1,555 1,9 1,246 1,445 1,731 EPS (Rs) % growth 16.2 (34.4) DPS (Rs) Payout (%) Exhibit 32: Balance sheet Y/E March CY13 FY15 (15m) FY16 FY17E FY18E FY19E Equity Reserves 7,767 9,579 11,188 12,654 14,99 15,83 Net worth 8,41 1,221 11,83 13,296 14,742 16,473 Deferred Tax Liability (681) (876) (1,19) (1,19) (1,19) (1,19) Liabilities 7,729 9,345 1,811 12,277 13,723 15,453 Gross Block 6,94 7,265 7,656 8,646 9,646 1,646 Depreciation 3,549 3,883 4,635 5,284 6,7 6,86 Net Block 2,544 3,383 3,21 3,363 3,639 3,841 Capital work-in-progress Long-term Investments Inventories 5,827 7,47 6,789 6,771 7,358 8,137 Debtors Cash 2,557 2,1 3,45 5,644 6,514 7,659 Other Current assets 1,55 2,169 2,294 1,995 2,24 2,46 Total Current assets 1,399 11,9 13,184 15,12 16,841 19,11 Creditors 3,654 4,545 4,277 4,617 5,17 5,548 Other current liabilities 1,763 1,68 1,357 1,621 1,791 1,999 Total current liabilities 5,417 6,153 5,634 6,237 6,88 7,547 Net current assets 4,981 5,747 7,55 8,865 1,34 11,563 Total Assets 7,729 9,345 1,811 12,277 13,723 15,453 Exhibit 31: Cash flow Y/E March CY13 FY15 (15m) FY16 FY17E FY18E FY19E EBIT 2,626 2,557 1,953 2,123 2,746 3,328 (Inc.)/Dec in working capital (111) (1,223) (497) 924 (299) (385) Cash flow from operations 2,515 1,333 1,456 3,48 2,447 2,943 Other income Depreciation Deffered Liabilities (237) (195) (143) Interest paid (-) (13) (18) (17) (26) (4) (4) Tax paid (-) (935) (928) (685) (783) (1,21) (1,234) Dividends paid (-) (489) (489) (543) (582) (776) (892) Extraordinary Items (86) (184) - - Net cash from operations 1,661 1,196 1,756 2,635 1,87 2,144 Capital expenditure (-) (697) (1,641) (415) (8) (1,) (1,) Net cash after capex 964 (445) 1,341 1, ,144 Inc./(Dec.) in short-term borrowing (267) Inc./(dec.) in long-term borrowing (Inc.)/Dec. in investments - (1) Cash from Financial Activities (267) (1) Others / Extraordinary income (1) (11) (36) Opening cash 1,871 2,557 2,1 3,45 5,644 6,514 Closing cash 2,557 2,1 3,45 5,644 6,514 7,659 Change in cash 686 (458) 1,35 2, ,144 Exhibit 33: Key ratios Y/E March CY13 FY15 (15m) FY16 FY17E FY18E FY19E Per share (Rs) EPS Book value Valuation (x) P/E P/sales P/BV EV/EBITDA EV/sales Return ratio (%) RoIC RoCE RoE Margin ratio (%) 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 Growth (%) Sales EBITDA 17.3 (16.8) PAT 11.2 (3.1) 18.3 (8.) Bata India

16 Rating track Date Rating Market price (Rs) Target price (Rs) 26 September 211 Buy November 211 Buy January 212 Buy March 212 Buy March 212 Buy April 212 Buy April 212 Buy May 212 Buy June 212 Buy July 212 Buy July 212 Hold August 212 Hold October 212 Hold November 212 Sell February 213 Buy February 213 Buy April 213 Buy May 213 Hold May 213 Hold June 213 Hold July 213 Buy July 213 Buy October 213 Buy October 213 Buy December 213 Buy January 214 Buy January 214 Buy February 214 Buy March 214 Buy March 214 Buy May 214 Buy May 214 Buy July 214 Buy August 214 Buy August 214 Buy October 214 Buy November 214 Buy December 214 Buy February 215 Buy April 215 Buy May 215 Buy May 215 Buy July 215 Buy August 215 Accumulate October 215 Accumulate November 215 Accumulate February 216 Accumulate May 216 Accumulate August 216 Accumulate February 217 Buy Note: BIL reduced its stock face value from Rs1 to Rs5 with effect from 8 October 215. Earlier market prices and target prices have been adjusted accordingly. * Coverage shifted to Akhil Parekh w.e.f. 13 February Bata India

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