Bata stumbles in road to recovery

Market


Bata India Ltd’s recovery in the September quarter (Q2FY23) has been disappointing. The company’s revenue at nearly 830 crore is up 35% year-on-year (y-o-y) and 15% above Q2 levels of FY20, which was a pre-covid quarter. This translates into a three-year compound annual growth rate (CAGR) of just 4.7%.

“Bata has underperformed on net sales and margins front compared to its peers in branded footwear segment in Q2FY23,” said Archana Gude, analyst at IDBI Capital Markets and Securities. For perspective: Metro Brands Ltd has seen around 19% three-year CAGR in revenues in Q2

Bouncing bank

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Bouncing bank

Bata’s profitability in Q2 was uninspiring, too. Gross margin expanded by 210 basis points (bps) y-o-y to 55%. One basis point is 0.01%. However, this was about 140 bps lower than in Q2FY20. High other operating expenses in Q2 weighed on earnings before interest, tax, depreciation, and amortization (Ebitda) margin, which was 19.4%, much below Q2FY20 levels.

Unsurprisingly, post Q2 results, many analysts have cut earnings estimates for FY23 and FY24. Bata’s sneaker segment is expected to be a key driver of growth, progress on which is a monitorable for investors. The company has increased the number of its sneaker studios to 250 across India and maintains that continued growth of the category led the growth recovery in Q2. Online sneaker sales rose by 126% last quarter.

Overall, premium categories are seeing better traction and are on a stronger footing. Bata intends to increase its franchise store count to 500 by FY24 from 353 at the end of September. It also aims to boost sales through its online and multi-brand outlet networks. Investors will closely watch execution on various fronts.

The outlook isn’t rosy and recovery is expected to be slow given rising competition and changing consumer preferences. “Treading the growth-margin equation while pivoting to different growth channels (wholesale, franchise) and realigning assortment isn’t a walk in the park,” said analysts from HDFC Securities Ltd.

Investors have taken note of the concerns. In the past one year, shares of Bata India have fallen by more than 20%. It’s also not as if valuations offer comfort. Bata’s shares trade at nearly 42 times FY24 estimated earnings, Bloomberg data showed. “The Street expects the weakness in numbers to continue given the cost inflation scenario. Though we like Bata among branded footwear companies, we anticipate earnings recovery to be slow and weigh on stock price in the near-term,” said Gude.

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