ICICI Direct recommended hold rating on Bata India with a target price of Rs 1430 in its research report dated May 26, 2020.
ICICI Direct's research report on Bata India
The Covid-19 pandemic had an unprecedented impact on the retail industry, forcing temporary closure of physical stores from mid-March onwards in India. The same materially impacted Bata’s performance in Q4FY20. Revenues de-grew 8.8% YoY to Rs 619.7 crore (I-direct estimate: Rs 629.6 crore). The management highlighted that for January-February, revenue grew steadily by 8.0% YoY (implying revenue de-growth ~42% YoY in March). Gross margins continued their positive trajectory and expanded 170 bps YoY to 58.8% owing to increased share of premium products. However, due to negative operating leverage (employee & other expenses up 235 bps each), EBITDA margins contracted 360 bps YoY to 10.3% (I-direct estimate: 11.0%). Absolute EBITDA de-grew 32.3% YoY to Rs 64.0 crore. Lower other income (down 39% YoY to Rs 17.1 crore) and higher effective tax rate (33% vs. 16.1% in Q4FY19) further impacted PAT (down 50% YoY to Rs 44 crore).
Owing to a weak Q4, Bata exited FY20 with moderate revenue growth rate of 4.3% YoY. Strategy of premiumising product portfolio has yielded positive results for Bata with gross margins expanding 430 bps to 57.6% in FY17-20. Unfavourable product mix (shift towards mass category) may deteriorate gross margins for FY21E. The company has re-negotiated rental agreement with ~50% of high street landlords for the next nine months and is in constant engagement with others for the same. We bake in revenue and PAT CAGR of 7% and 18%, respectively, over FY20-22E. Bata has a debt free balance sheet with surplus cash at ~Rs 960 crore and a capital efficient business model with a negative working capital cycle. We believe that with its strong brand patronage and pan-India retail reach, Bata India should be able to revive its revenue growth trajectory as and when the impact of the Covid-19 is phased out. We have a HOLD recommendation on the stock with a revised target price of Rs 1430 (40x FY22E EPS).
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