Bata India Ltd - Q3CY10 Flash Note

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Bata India Ltd– Q3CY11 Flash Note

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Q3CY10 results – Growth story intact

Q3 earnings highlights

Earnings growth was in line with expectations: Bata’s PAT grew 58% to INR207mn,

in line with our forecast. EBITDA margin rose 330bp, led by the company’s stringent

cost control measures, a favourable product mix, and restructuring of retail formats.

Revenue growth supported by expansion of store network: Bata opened more than

15 large format stores across India in Q3, taking the total count to ~100; this

underpinned its revenue growth during a lean Q3.

Key catalysts Expanding retail footprint in franchisee model: Expansion of the retail network (60

stores each year on a base of 1,200 stores), primarily in the revenue sharing/franchisee

model, should bring about reduction in rental costs, providing upside risk to our

estimates.

Ringing cash bells: Bata will receive INR1bn (INR16/share) and 640,000 sq ft of

constructed space for transfer of certain share in Riverbank Holding Pvt Ltd (RHPL – its

JV with CMG) to Calcutta Metropolitan Group (CMG), to develop 262 acres land at

Batanagar, West Bengal. We do not factor this into our estimates due to an uncertain

timeline.

Outlook and Valuation

Considering improving demand, increasing footfalls, and the ongoing festive/wedding

season, we remain positive on growth of Indian organised retailers. Bata’s cost-cutting

measures and shift to a revenue-sharing/franchisee model for store openings should

drive expansion in margins and earnings CAGR of 21% over CY09-CY12E. We have a

positive growth outlook for Bata given its almost debt-free balance sheet (D/E of 0.07x)

and expectation of strong cash flows. We believe that its high return ratios, compared

with peers, and a product portfolio, which caters to a wider consumer base, would drive

its valuation. Hence, we have a Buy recommendation on the stock with a target price of

INR419, based on SOTP methodology. We arrive at our target price by valuing CY11

core earnings of INR15.8 at 25x and expected cash per share by end-CY11 at INR25.

Key Risks

Competition from international retail players, which have either entered or plan to enter

the Indian market in a big way, and from cheaper imports and small regional players.

Bata India Ltd

Consumer Durable l India Research

Reco: BUY Target Price: INR419 Upside: 21%

CMP : INR 346

Nifty 5,988

Sensex 19,941

Stock data

Sector Consumer Durable

Reuters Code BATA.BO

Bloomberg Code BATA IN

No. of shares (mn) 66

Market Cap (INRbn) 22

Market Cap (USDmn) 497

Avg 6m Vol. 370,048

Stock performance (%)

52-week high / low INR363/163

1 M 3 M 12 M

Absolute (%) 0 23 88

Relative (%) 1 12 67

Shareholding pattern

Nifty and stock movement

28 October 2010

Ankit Jain

Research Analyst

+91 22 42208930

[email protected]

Promoters51%

FIIs13%

DIIs17%

Public & others19%

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Bata India Nifty

Key financials (Y/e Dec) CY09 CY10E CY11E CY12E

Revenues (INR mn) 10,917 12,283 13,919 15,564

EBITDA (INR mn) 1,238 1,558 1,800 1,990

EPS (INR) 10.5 13.7 16.3 18.4

Growth (%) 10.7 30.8 19.3 12.4

RoE (%) 21.8 24.2 24.3 23.2

RoCE (%) 32.4 37.1 37.8 35.8

PE (x) 33.1 25.3 21.2 18.8

P / BV (x) 7.5 6.2 5.1 4.3

Source : Company, PUG Research

28 October 2010 l PUG Institutional Research

Bata India Ltd– Q3CY11 Flash Note

2

Key result highlights

Q3 revenue grew 12.7% on a high base in Q3CY09 (during when Dussehra fell last year), mainly driven by

addition of large format stores during 9MCY10.

Measures adopted to reduce employee expenses and savings on rentals resulted in EBITDA margin

expansion of 330bp in Q3.

Increase of 183.9% in other income, negligible interest cost, and trickle-down impact of EBITDA led to

robust 57.6% growth in adjusted PAT.

Quarterly financial highlights

(INR mn) Q3CY10 Q3CY09 YoY (%) 9MCY10 9MCY09 YoY (%)

Net Sales 2,942 2,611 12.7 9,070 8,028 13.0

EBITDA 374 245 52.5 1,100 779 41.3

EBITDA Margin (%) 12.7 9.4

12.1 9.7

Interest (1) (8) (85.0) (6) (32) (79.9)

Depreciation (89) (64) 40.0 (227) (183) 24.3

Other Income 25 9 183.9 48 52 (6.0)

PBT 308 182 69.4 915 616 48.6

Tax (101) (50) 100.0 (306) (198) 54.5

Adjusted PAT 207 131 57.6 610 418 45.7

EPS (INR.) 3.2 2.0 57.6 9.5 6.5 45.7


Peer comparison

Company Share price

(INR) Mkt Cap (Rs mn)

PE (x) Yield (%) RoE (%) EPS growth (%)

CY10E CY11E CY10E CY11E CY10E CY11E CY10E CY11E

Bata India 337 21,669 21.2 18.8 1.0 1.2 24.2 24.3 56.1 12.4

Pantaloon Retail* 480 95,910 32.5 28.7 0.2 0.2 9.9 10.8 57.6 13.1

Titan Industries* 3,579 158,916 45.8 36.6 0.6 0.8 42.4 39.6 33.2 25.0

Shoppers Stop* 685 23,908 36.7 27.8 0.3 0.4 23.1 24.1 87.5 32.1

*numbers are adjusted to match the calendar year Source: PUG Research, Reuters

Bata India has a strong brand value with ~35% market share in the Indian branded footwear market. The

company is focusing on expanding its retail presence and improving product quality, its collection as well as

customer service. With a product portfolio across mass and premium consumer segments, we believe Bata is

best placed, compared with other footwear players such as Liberty India, Relaxo Footwear and Mirza

International. The management is also focusing on expanding its non-retail (wholesale and institutional)

operations to drive volume growth while it adds 60 new stores annually in its retail operations.

Considering growth in Bata’s retail network through large format franchisee stores and focused retailing of

higher-margin footwear and accessories products, we expect the company’s return ratios to be higher than

those of most other organised retailers. We estimate Bata to generate free cash flows of INR1bn each in CY11

and CY12, driven by lower interest cost and less capex and working capital requirements.

Furthermore, according to the revised agreement with Calcutta Metropolitan Group in April 2010, Bata would

receive INR1bn in cash and 640,000 sq ft of constructed space at Batanagar for dilution of its stake in its JV

with CMG. Although the timeline for this is not yet clear, it would engender potential upside to our estimates and

add substantially to shareholder value.

3 Bata India Ltd– Q3CY11 Flash Note


Valuations

We expect Bata’s revenue and earnings to grow in double-digit over CY09-CY12. A debt-free balance sheet

and robust cash generation should result in expansion of return ratios. We expect ROE and ROCE to increase

130bp and 340bp to 23.2% and 35.8% respectively over CY09-CY12. We believe that high return ratios

compared with peers, the company’s focus on retailing, and a product portfolio catering to wider consumer base

should drive its valuation. Hence, we have a Buy recommendation on the stock with a target price of INR419,

based on SOTP methodology (core business: 25x CY11E earnings of INR15.8, which yields INR394; and

expected cash per share at end-CY11E: INR25).

Bata India Ltd - Valuation (SOTP)

Core EPS CY11(E) INR 15.8

P/E CY11(E) assumed (x) 25.0

Per share value for Bata shareholders INR

394

Cash on books at the end of CY11E INR mn 1,618

Per share cash value INR 25

SOTP (Target price) INR 419

Source : PUG Research

One-year forward PE band based on core EPS

Source: Company, Reuters, PUG Research

Risks to our call

Bata India faces stiff competition from foreign retail players that have either entered or are planning to enter

the Indian footwear market in a big way. This could be a risk to our revenue growth estimates.

Cheap Chinese, Korean and Taiwanese footwear imports and small-medium domestic enterprises (with low

cost of production and price advantage) also pose some competition.

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Price (INR) 7.0x 14.5x 22.0x 29.5x 37.0x 44.5x



About Bata India

Bata India (Bata) manufactures and markets footwear and accessories. The company is promoted by Bata B N

B V, which holds 51% stake in the Indian arm. Bata manufactures leather, rubber, canvas, and PVC shoes. It

offers a selection of men, ladies, children, schools, sports, canvas, and Hawaii footwear. It also offers

accessories such as socks, polishes, belts, brushes, and school bags. The company’s production units are in

Batanagar (West Bengal), Faridabad (Haryana), Bataganj (Bihar), Mokamehghat (Bihar), Peenya (Karnataka),

and Hosur (Tamil Nadu). It also has two tanneries for leather supply in Mokamehghat (Bihar) and Batanagar

(West Bengal).

Bata is the largest footwear retailer (with 35% market share) in India with 1,200 stores across the country. It has

licensed brands (Hush Puppies and Dr Scholl, licensed respectively from Wolverine Worldwide and Dr Scholl’s)

besides those of its parent (such as Power, Marie Claire and Bubble gummers).

The company has a 50:50 JV with CMG, RHPL, to develop 262 acres of land at Batanagar, West Bengal. Bata

has the legal title over the land at Batanagar, which has been split into two parts — the IT SEZ of 25 acres will

be developed by RHPL and the remaining 237 acres will be developed by Riverbank Developers Pvt. Ltd.

Bata’s subsidiaries include Bata (Australia), Bata (New Zealand), Bata (UK) and Bata (France), Bata Properties

and Coastal Commercial & Exim.

Projects under RHPL and RDPL

Project Residential Units to be

developed Expected start

Tentative pricing (Rs/sq ft)*

Expected completion

The Princep 1400

Work can start only after completion of employee rehabilitation, may be by

2011.

2,600 – 4,900 + PLC

Three years post start of project.

Lake Town 900 2,200 – 4,400 + PLC Post 2014

Golf Greens 900 2011 - 2012 2,400 – 4,600 + PLC 2014 - 2015

Mandeville 100 2011 - 2012 3,600 – 7,300 + PLC 2014 - 2015

SEZ

(Est. cost – Rs 5.5 bn) 2011 - 2012 ~35 (average rentals) 2014 - 2015

Esplanade 2011 - 2012 ~30 (average rentals) 2014 - 2015

Hotel (D:E::60:40) 2012 - 2013 Rental annuity, no

definite amount fixed yet




Financial Summary

Profit and loss statement (INR mn)

Year ending 31 Dec CY09 CY10E CY11E CY12E

Income from operations 10,917 12,283 13,919 15,564

Total operating expenses (9,678) (10,725) (12,119) (13,573)

EBITDA 1,238 1,558 1,800 1,990

Depreciation (279) (328) (353) (378)

EBIT 959 1,230 1,447 1,612

Interest expenses (41) (8) (7) (7)

Other income 84 91 126 156

Profit before tax and extraordinary 1,003 1,313 1,566 1,761

Extraordinary income

Profit before tax 1,003 1,313 1,566 1,761

Provision for tax (330) (433) (517) (581)

Net profit 672 880 1,049 1,180

Preference dividend 0 0 0 0

Reported PAT 672 880 1,049 1,180

Adjusted Profit 672 880 1,049 1,180

Balance sheet (INR mn)


Equity Capital 643 643 643 643

Reserves and surplus 2,700 3,317 4,065 4,869

Shareholders funds 3,343 3,959 4,708 5,511

Minorities

Borrowings 250 75 100 75

Others (256) (256) (256) (256)

Total Liabilities 3,337 3,778 4,551 5,330

Goodwill

Gross block 3,749 3,949 4,149 4,349

Depreciation (2,446) (2,773) (3,126) (3,504)

Net block 1,303 1,175 1,023 844

Capital WIP 6 6 6 6

Total fixed assets 1,309 1,181 1,029 850

Investments 172 172 172 172

Other non-current assets

Inventories 2,775 2,985 3,230 3,610

Sundry debtors 252 282 315 348

Cash equivalents 562 754 1,618 2,469

Other current assets 558 581 658 736

Total current assets 4,147 4,601 5,821 7,163

Sundry creditors 1,805 1,938 2,215 2,537

Other current liabilities 487 239 256 319

Total current liabilities 2,291 2,177 2,471 2,856

Net current assets 1,855 2,424 3,350 4,307

Total Assets 3,337 3,778 4,551 5,330

Cash flow statement (INR mn)


Profit before tax 1,003 1,313 1,566 1,761

Depreciation, Amortisation etc. 118 328 353 378

Less: Changes in W.C. 81 (113) (54) (146)

Tax (320) (735) (563) (616)

Net Operating Cash Flow 881 793 1,302 1,377

Capex (248) (200) (200) (200)

Investments (83) 0 0 (0)

Investing cash flows (331) (200) (200) (200)

Increase in equity 61 0 0 0

Debt raised/ (repaid) (196) (175) 25 (25)

Dividends (188) (226) (263) (301)

Others 67 0 0 0

Financing cash flow (255) (401) (238) (326)

Net change in cash 295 192 864 851

Closing cash balance 562 754 1,618 2,469

Key ratios (%)


Diluted EPS (INR) 10.5 13.7 16.3 18.4

Dividend per share (INR) 3.0 3.5 4.0 5.0

Book value per share (INR) 46.1 55.7 67.4 79.9

ROE 21.8 24.2 24.3 23.2

ROCE 32.4 37.1 37.8 35.8

Net debt/Equity (9.4) (17.2) (32.3) (43.6)

Dividend payout 33.6 29.9 28.7 31.9

Growth

Revenues 10.6 12.5 13.3 11.8

EBITDA 43.7 25.8 15.5 10.6

EBIT 33.2 26.6 19.1 12.4

Net profit 10.7 30.8 19.3 12.4

Diluted EPS 10.7 30.8 19.3 12.4

Margins

EBITDA 11.3 12.7 12.9 12.8

EBIT 9.6 10.8 11.3 11.4

Net profit 6.4 7.2 7.6 7.6

Valuation ratios


Diluted P/E (x) 33.1 25.3 21.2 18.8

Price/BV(x) 7.5 6.2 5.1 4.3

Market cap/sales (x) 2.0 1.8 1.6 1.4

EV/sales (x) 2.0 1.8 1.5 1.3

EV/EBITDA (x) 17.7 13.8 11.5 10.0

Dividend yield (%) 0.9 1.0 1.2 1.4



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Bata India Ltd - Q3CY10 Flash Note