Bata India - TP:INR975 Buy :: Motilal Oswal

All the right steps
Expect strong earnings and growth visibility
 Restructuring leads to sales CAGR of 14.7% over CY05-12, with EBITDA and PAT growth
of 47.6% and 51.6%.
 Focus on aggressive growth by expanding presence in Tier II, III cities and rural India.
 Outsourcing, K Stores expansion to contain employee cost; Margins set to increase.
 Bata India (BATAIN) trades at a PE of 26.4x/20.8x/16.5x CY13E/14E/15E EPS. We value
the stock at 25x CY14E EPS and arrive at a target price of INR975, with a Buy rating.

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Strong brand + aggressive store expansion to drive market share
Backed by eight decades of operation, Bata enjoys strong brand equity in India
and is the market leader with ~16% share in the organized footwear segment. It
has a strong distribution network of 1,388 stores comprising of 250 MEP stores
(Market Extension Programme), 450 K Stores, 31 exclusive Hush Puppies, 28 SIS
stores, 10 exclusive Footin stores and balance being company-owned stores. It
also serves the non-retail segment (institutional and defence through its urban
wholesale division with 180 large distributors and 30,000 direct dealers spread
across India. It plans to open 100 new large format stores (3,000 sq ft) every year
over the next two years (75% to be K stores), which include adding 15-20 exclusive
Hush Puppies stores and 10-15 Footin stores which will drive growth and market
share gain.
Focus on retail segment - the right strategy going forward
Bata derives ~85% of revenue through retail networks, 14.2% from non-retail
channels (dealers/institutional/industrial sales) and balance 0.8% through
exports. Over the last six years, retail segment posted 20% CAGR, exports 5.6%
and the wholesale business growing at 2.2% over CY06-12. Company realizes 40%
of revenue from South India and the North, East and Western regions contribute
20% each. About 80-90% of the retail revenue is from Tier I and II cities, presenting
a huge opportunity to tap rural and semi-urban markets, which are mainly serviced
through dealer networks. Bata has been present in towns with a population of
500,000 and above and plans to expand to 400 plus cities, with a population of
more than 100,000, to improve presence in Tier III and rural markets through the
wholesale division.
Increased contribution from women and child segment to drive growth
To increase the contribution from women and child footwear segments, Bata
increased the display area for both segments across all stores, complimented by
launching newer trendy designs under brands like Marie Claire, Hush Puppies,
North Star etc. This improved the contribution of high margin women's segment
from 25% in CY08 to ~35% in CY12. Also, to increase child segment contribution
from 8-9% of sales to 12-13% over the next few years, it recently in-licensed the
Angry Birds trade mark from Rovio and is selling 10,000 pieces a week.

Premiumization to drive sales per store
Company intends to increase sales per store by improving value mix with a focus on
the high margin leather segment that includes accessories such as ladies bags, caps,
belts among others. With parent Bata Shoe Organization (BSO) enjoying 20% market
share worldwide in the industrial shoes segment, Bata plans to leverage the expertise
and technology in India for industrial and defence shoes. The defence sector requires
12m footwear every year, which is supplied by unorganized players, thus providing
greater scope for an organized player like Bata. Company recently got a large order
from the Indian Air Force.
Gross margin expansion on the cards
To improve margins, Bata phased out INR69/pair rubber Hawaiians' (a low margin)
and shifted to Sunshine range (INR199-399) with better margins. It increased focus
on high value products within the leather segment such as Hush Puppies (growing at
40%). Leather contribution is set to increase from 72% of sales in CY12 to 76% going
forward, thereby improving margins. Bata's plans to increase contribution from
accessories segment (60% gross margin) comprising of belts, ladies bag, wallets,
caps from 5% in CY12 to 10% over few years. It launched a programme from FY13 to
modernize three factories (Patna, Batanagar and Bangalore) over FY13-15, with a
total capex of INR500m, and expects to improve gross margin by 500bp.
Massive restructuring places Bata on a strong footing
Bata scripted a successful turnaround story in 2005, post three consecutive years of
losses. Key initiatives were: 1) revamp of retail operations from CY05-12 by opening
718 new large format stores, remodeling of 296 stores and closure of 524 cash-drain
stores, 2) extended working hours and keeping stores open on Sundays lead to sales
improvement, 3) drastic reduction in employee headcount (9,631 in CY05 to 5,162 in
CY12) by providing voluntary retirement and option to move to K Stores format and
4) outsourcing labor-intensive operations to prune costs.
Valuation and view
We estimate Bata's revenue would increase by ~17% and net profit by ~22.5% over
CY12-15E. It has a strong balance sheet, with cash of INR1.9b and healthy return
ratios of 27% RoE and 39% RoCE in CY12. With limited capex of INR2b over the next
three years, we believe the company will generate free cash flow in excess of INR5.9b
over CY13-15E. All these factors make a strong case for re-rating. At CMP of INR811,
Bata trades at a PE of 26.4x/20.8x/16.5x CY13E/14E/15E EPS. We value the stock at 25x
CY14E EPS and arrive at a target price of INR975, with a Buy rating.