Buy Bata India; target Rs 730: PINC Research

“Bata India (Bata), after recording a successful turnaround story in 2005, has consolidated its position as a leader in the country's organised footwear segment with a 14-15% market share. We like Bata primarily because (1) growth of the organised Indian footwear industry and increase in per capita footwear consumption to help show a revenue CAGR of 18% over CY11-13E, (2) expansion of retail stores to improve geographical reach (especially in Tier II and III cities) along with increase in per store sales from Rs 9.5mn in CY10 to Rs 15mn in CY13E, (3) focus on outsourcing model to rationalise employee cost and improve working capital (4) expected margin expansion by 335bps over CY11- 13E on account of improvement in value mix and outsourcing and (5) expected RoE and RoCE of 29% and 27.1% respectively in CY13E.”

“Over CY06-CY10, Bata added 343 new stores, closed down 277 stores and remodeled over 196 outlets maintaining a constant store count of ~1200-1300. It now plans to open 70-100 new stores/year with a focus on new locations as more than 85% of its existing stores are renovated and less than 2-5% remain cash drain stores. We expect per store sale to increase from Rs 9.5mn in CY10 to Rs 15mn in CY13E. Over the last 5-6 years, Bata started outsourcing labour intensive operations while retaining machine related operations. This led to (1)reduced employee cost as labour intensive jobs were out sourced and (2) increased third party purchases from 38% of sales in CY06 to 52% in CY10. We expect employee costs to reduce further and third party purchases to be 65% by CY13E which will improve margins and return ratios.”

“Post restructuring, margins improved by 690bps to 12.6% over CY06-10. Going forward we expect further improvement in margin from 12.6% to 18.8 % over CY10-13E due to (1) improving value mix by increasing revenue pie of leather business and focus on women and kids segment, (2)increased outsourcing ,(3)focus on industrial and institutional business where margins are 300bps higher than the retail business, (4)improving store efficiency, sales/store and cost rationalisation and (5)increasing revenue pie of accessories.”

“We value Bata using the PE methodology and assigning a 1-year forward P/E multiple of 19.0x and initiate coverage with a 'BUY' rating on the stock and a target price of Rs 730. At CMP of Rs601, the stock discounts CY12 and CY13 EPS of Rs 29.0 and Rs38.3 by 20.7x and 15.7x respectively,” says PINC Research report.

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