Stock Review: Bata India

Bata India was in focus last week, with its stock touching a 52-week high of `416 on the back of an announcement of major expansion plans and the development of its land bank. Though the stock has corrected 11 per cent since then amid weak market conditions (the Sensex is down 5.3 per cent), analysts are bullish about its revenue and earning prospects.

Improving margins

Bata is expected to report a robust performance in the December quarter and maintain its past few years' compounded annual sales growth rate of 15 per cent in the calendar year 2010. The largest footwear retailer in the country saw a steady financial performance in the nine months ended September. It reported a substantial improvement in profitability, though the sales growth was stable at 12 per cent year-on-year (y-o-y) to roughly `900 crore.

The operating profit margin and net profit margin of the company shot up 200 basis points (bps) and 160 bps, to 11.6 per cent and 6.8 per cent, respectively, in the same period. Margins are improving due to benefits from the restructuring initiatives of the past, resulting in an improvement in employee productivity and overall efficiency, which is expected to continue.

Expansions to boost volume growth

The company, which has over 1,200 stores, plans to add 70 stores annually for the next fourfive years. However, analysts are more impressed with the company's new future growth strategy, wherein tier-II and III cities will garner a higher share in total investments (from 30 per cent currently to 50 per cent) as the demand potential is huge and the costs (both overhead as well as investment) are less as compared to the urban areas.

Another important strategy is to have new stores primarily in large formats (over 4,000 square feet, involving an investment of `50 lakh each) in order to provide a one-stop shop for the whole family with more brands and designs. The company plans to double its existing 180 large-format stores in the next four years. Among the existing stores, it is working on relocating and increasing the size of most outlets.

All these initiatives augur well for the volume growth and margins of the retail business, which form 70 per cent of the total revenues. In addition, other factors such as strong growth in the wholesale and institutional business, higher proportion of leather-based products (currently 67 per cent of total sales) and focus on achieving a higher price point for each pair will lead to strong and profitable growth in the long term.

Above all, the company's cash rich position — with almost zero debt and strong operating cash flows — makes it an attractive bet despite a slightly high valuation of 24 times the 201011 estimated earnings.