Bata India

Bata India, the Indian arm of global shoe major, Bata Shoe Organization, trades at Rs 115.7, 12 times its trailing four quarter earnings, at a premium to retail as well as footwear peers. It stands at an enterprise value of 0.8 times its trailing four quarter sales, and 0.7 times estimated sales for the year ending December 2009.

Having firmly established itself as a footwear retailer with a sizeable market share, Bata has moved on to designing footgear for institutions, wholesale trade of footwear and, recently, protective industrial shoes. In a largely unorganised fragmented market, Bata has a sizeable brand advantage and a presence across a range of price points.

However, Bata faces competition from imports and the unorganised sector, which also has a cost advantage. Majority of the consumers, too, are not yet brand-conscious when it comes to footwear. With valuations being comparatively on the high side, exposure to the stock need not be taken at this level, but investors may hold the stock.
Varied footprint

Primarily a footwear retailer, Bata holds 35 per cent of the organised footwear market; its retail footprint spans more than 1,250 stores.

Bata has licensed brands (Hush Puppies and Dr Scholl, licensed respectively from Wolverine Worldwide and Dr Scholl’s) besides those of its parent (such as Power, Marie Claire and Bubblegummers).

With the men’s segment hogging more than half the market, women’s footwear remains largely untapped. Bata aims to capitalize on this by focussing on designer women’s footwear.

Bata’s institutional division caters to corporates, designing footwear according to industry specifics such as hospitals. Other divisions are the wholesale urban and branding divisions.

Under the former, it supplies retail stores through 150 distributors while the latter uses 15 distributors in major cities, concentrating on Bata’s brands alone. Bata is targeting a 15 per cent contribution from these divisions.

The latest sales stream explored is Bata Industrials, offering protective footwear to industries, backed by the expertise of its parent’s own industrial footwear division.

To better utilise its surplus land, Bata is developing, via joint ventures, a 262-acre township at its Batanagar premises with commercial and residential zones, including a 25-acre IT SEZ (notified). Funding for this foray will be undertaken by the respective developers and Bata’s own capital investment here has been minimal.
Turnaround story

Bata has had a prolonged period of poor performance; it posted net losses between 2002 and 2004, slipping into operating level losses in 2004. During this period, the company had a troubled relationship with its labour, with lock-outs and suspension of employees and high staff costs. Leaving out raw material, the biggest contributor to expenditure was staff costs, taking up more than 25 per cent of sales .

Recovery from troubles has taken time, but the company managed a complete write-off of losses by 2007 (utilizing part of its securities premium following an approved scheme of reduction of the account). Number of unviable stores was cut by 105 ; a further 74 may be on the block. About 118 stores were remodelled, manufacturing and staff costs were brought under control.

New stores were opened on a franchise model thus limiting the capital required. Currently, franchise stores number 143.
Expansion on the cards

After the above restructuring efforts, Bata remains ambitious about its network expansion; it plans to open 240 stores in a span of three years calling for a minimum investment of Rs 400 crore.

With a low leverage at 0.3 times, and an improving interest cover from 2.1 times in 2005 to the present 12.1 times it may not run into funding roadblocks.
Financials holding up

Bata India’s three-year sales growth has been at 13 per cent while profits have grown at a CAGR of 51 per cent largely due to a lower base. Since turning profitable in 2005, net margins have improved steadily from 1.5 per cent to 6.1 per cent in 2008.

In its financial year ending December 2008, Bata posted a 13 per cent growth in sales and a 28 per cent growth in profits. Interest costs actually declined on the backs of retirement of long-term debt. Staff costs, too, fell by 5.5 per cent on a year-on-year basis.

With debt-equity being on the low side from the start, interest costs do not significantly impact margins. Bata has been positive on cash flows for the past two years.

It plans to restrict credit period to a maximum of 45 days; debtors turnover has increased from 19 to 40 times in a three-year span.

With streamlining of costs still being actively pursued along with new streams of revenue, margin expansion may yet continue.

via BL