Recommendations from Footwear Sectors

Recommendations from Footwear Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

Bata India Ltd 

STEP INTO BETTER RETURNS 

HERE IS WHY
Strong financial performance
Good growth prospects
Focussed management 

Bata India Limited (BIL) has the largest range of footwear in the Indian market. The parent company Bata is the world’s leading shoemaker by volumes. Despite being a household name in Indian footwear, the brand always had a problem of being local and meant especially for the old generation. The focus of the new BIL management has been to reposition the brand so that, it appeals to the young generation and they willingly pay a premium for its products.

This is done with more investment on advertisement, for example, the ‘surprisingly Bata’ ads campaign, more focus on its wholesale channel, which can be easily expanded, a special focus on premiumisation of footwear. Bata has launched an internationally-designed ‘Red Label’ collection of shoes in India. Bringing in new designs to the market is part of the attempt to cater to young consumers who are more brand and fashion-conscious. Interestingly, this all is being funded through better gross margin and also, through a tighter control on non-direct costs like rent. This could potentially create a virtuous cycle wherein, a greater advertisement spending could push up footfalls and that coupled with premiumisation, would drive revenue growth.


India still has lower footwear consumption per head of 1.7, as compared to around 3 in China. Moreover, the per-pair spent is also on the lower side. The organised part of this industry is approximately 40 per cent. Of the organised part, BIL commands a share of 15 per cent. The market is extremely fragmented with the presence of both domestic and foreign players. Bulk of the market is in the value segment. The management believes that it can capitalise and get more share of the organised market. The company is gradually reducing the entry level footwear production and replacing it with higher margin premium footwear. This has resulted in better gross sales numbers and a better PAT as well as PAT margin, since the premium footwear are priced with higher margin per pair.

BIL has also decided to focus on franchising after a 20-year gap. This two-year old initiative has added 160 plus stores by Q2FY20. To reach out to more regions of India, the company also stepped up the focus on entering new towns through Franchise stores, thereby, helping the management take Bata to more than 45 new towns in this year, with many more in the pipeline.

The Indian footwear industry has been witnessing a change from a need-based industry to fashion, style and fitnessoriented industry and it has also got the potential to increase its global market share in footwear export. With changing lifestyles and increasing affluence, the domestic demand for footwear is projected to grow exponentially and Bata is poised to benefit from this change.

On a year-on-year consolidated basis, net sales increased by 7.26 per cent to Rs 721 crore in Q2FY20. EBITDA (excluding other income) rose 113.86 per cent to Rs 185.35 crore and EBITDA margin was 25.67 per cent as against 12.88 per cent in Q2FY19. Net profit in Q2FY20 jumped from 29.97 per cent to Rs 71.30 crore. Currently, the company is trading at a PE of 61x. Based on the strong financial performance, good growth prospects and focussed management plans, we recommend our reader-investors to BUY this stock.


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