Company Name – Bata India Limited (Bata) Current Share Price – INR 1,826 (December 24, 2021) Market Cap – INR 23,465 cr |
1. What is interesting about the stock?
Before Indians knew of Nike, Adidas, Reebok and Puma, Bata was the premier shoe brand in India. Every Indian has probably worn a Bata shoe at least once in their lifetime. So omnipresent was the brand that a lot of people mistake Bata to be an Indian company. Bata Corporation is a Czech multinational company that was founded in late 19th century and now has its headquarters in Switzerland. In India, Bata set up its production unit in 1932 near Kolkata. Soon after, the production site was doubled in size due to the high demand for Bata shoes and the region became a township, known as Batanagar. Bata India is majority owned by Bata Shoe Organization.
Today, the Company has a pan-India presence with the largest network of retail stores in the footwear industry with 1,550+ stores, including franchise stores and over 30,000 dealers. Products are also available online on the company’s web portal and e-commerce platforms, enabling the company to reach customers in over 1,400 cities. The list of shoe brands it retails include – Bata, Disney, Power, Hush Puppies, Comfit, Bubblegummers, CAT, Marie Claire, Scholl etc.
Bata is aiming to add ~240 stores in FY22-24E thereby raising the total store count to approximately 1,800 stores. Further, it is adopting the franchise route for Tier III-V cities and has added 35+ stores in Q2FY22, thereby increasing total franchisee store count to over 270. The target is to increase franchisee stores to ~ 30% of total Bata stores. Even though traditional and organized retail contribute to over 90% of all footwear sales in the country, Bata’s management has begun giving impetus to digital initiatives considering growing contribution of online sales. In Q2FY22, e-commerce contributed ~14% to Bata’s sales, up from low single digit share in FY20. On its own web portal, the company has ~5,000 new products.
Key competitive advantages of the Company are:
Large product portfolio across multiple brands which caters to men, women, and children, both in leather and non-leather segments and across various price points catering to cost conscious as well as discerning customers.
Far reaching store network and ability to grow the number of stores further and penetrate even Tier III-V markets.
Association of brand with longevity and reliability.
2. Key Historical Financials
Between FY15 and FY19, Bata grew its store count by a mere 15, from 1,400 to 1,415. This resulted in sales growing by less than 10% in 4 years.
However, in FY20, Bata grew its stores by~150, the single largest absolute growth since 2013. Also, the company focused on marketing high margin products which pushed operating margin to 28% from 12-17% historically.
Unfortunately, COVID-19 had a debilitating effect on FY21 and Q1FY22 performance due to drastic decline in footfalls in stores and marked decline in demand for formal wear.
3. What is my view on company valuation?
As a result of FY21 and Q1FY22 returning outlier performance due to COVID-19, Bata’s TTM ratios are currently skewed. With TTM EBITDA down to INR 318 cr and TTM PAT down to a very low INR 24 cr, EV/EBITDA (TTM) and P/E (TTM) ratios are astronomically high at 74x and 973x respectively. To get a fairer sense of company valuation, it may be worthwhile to compute these ratios based on FY20 numbers with the assumption that the company will return to these numbers once the pandemic end. EV/EBITDA and P/E based on company’s FY20 numbers are 28x and 71x respectively. As the Company grew its PAT by a very attractive 17.5% CAGR between Dec 2009 and March 2020, Bata is certainly an attractive stock. However, given the uncertainty around business recovery and high multiples even based on FY20 numbers, it currently seems to be an expensive purchase at the current price (long term PE ratio of the Company is around 40x).
4. What are the risks to the investment analysis?
Risks to the analysis are:
Permanent change of customer behavior to work from home will have a severe impact on demand for formal footwear.
Strong brand name in a stock market flushed with liquidity may push the price higher in short/medium term
About the Author
I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.