Initiating Coverage | 3 June 2013 Bata Indiabsmedia.business-standard.com/_media/bs/data/...Bata India (BATAIN) trades at a PE of 26.4x/20.8x/16.5x CY13E/14E/15E EPS. We value the

All the right steps

Bata India

Initiating Coverage | 3 June 2013

Sector: Consumer

Investors are advised to refer through disclosures made at the end of the Research Report.

Niket Shah ([email protected]); +91 22 3982 5426

Bata India

3 June 2013 2

Bata India: All the right steps

Page No.

Summary ........................................................................................................ 3-4

Story in charts .................................................................................................... 5

A foreign brand's success story in India ........................................................... 6

Massive restructuring - Bata's recipe for success ........................................ 7-8

Post restructuring, focus on aggressive growth ........................................ 9-10

Strong retail presence set to strengthen further .................................... 11-12

Outsourcing, K Stores expansion to check employee cost ..................... 13-16

Gross margin expansion on the cards ...................................................... 17-19

Strong brand, to scale up with focused branding ................................... 20-21

Indian footwear industry .......................................................................... 22-24

Global footwear industry .......................................................................... 25-26

Financial outlook ....................................................................................... 27-28

Valuation and view .......................................................................................... 29

Key risks ............................................................................................................ 30

Management details ........................................................................................ 31

Financials and valuation ........................................................................... 32-33

Bata IndiaCMP: INR811 TP:INR975 Buy

3 June 2013

Update | Sector: Consumer

BSE SENSEX S&P CNX

19,610 5,939

All the right stepsExpect 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.

Strong brand + aggressive store expansion to drive market shareBacked 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 forwardBata 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 growthTo 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.

3

Stock performance (1 year)

Shareholding pattern (%)As on Mar-13 Dec-12 Mar-12

Promoter 52.01 52.01 52.01

Dom. Inst 10.24 10.19 14.02

Foreign 20.2 20.43 17.12

Others 17.56 17.37 16.85

Bloomberg BATA IN

Equity Shares (m) 64.3

M.Cap. (INR b)/(USD b) 52.1/0.9

52-Week Range (INR) 989/688

1,6,12 Rel. Perf. (%) 5/-13/-29

Financial summary (INR b)

Y/E December 2013E 2014E 2015E

Sa les 21.1 25.0 29.6

EBITDA 3.1 3.8 4.7

NP 2.0 2.5 3.2

EPS (INR) 30.7 39.0 49.2

EPS Gr. (%) 14.8 26.8 26.2

BV/Sh.(INR) 131.4 161.1 199.8

EV/Sales (x) 2.3 1.9 1.5

RoE (%) 25.6 26.7 27.3

RoCE (%) 37.8 39.3 40.1

Valuation

P/E (x) 26.4 20.8 16.5

P/BV (x) 6.2 5.0 4.1

EV/EBITDA (x) 15.9 12.5 9.8

Divid. Yield (%) 0.9 1.0 1.1

Bata India

3 June 2013 4

Premiumization to drive sales per storeCompany 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 cardsTo 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 footingBata 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 viewWe 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.

Bata India

3 June 2013 5

Story in charts All the right steps

#1 Segment-wise realizations #2 Employee cost percentage sales to improve further

#3 Outsourcing in leather to continue going forward #4 Outsourcing in rubber and canvas to increase going forward

#5 Revenue per store on an increasing trend (INR m) #6 Outsourcing v/s inhouse

Source: Company/MOSL

#1 Realization across segment on uptrend driven by

price increases and change in product mix.

#2 Increase in outsourcing to reduce employee cost

percentage sales further.

#3 Incremental demand in leather footwear to be

met through outsourcing.

#4 Increase in rubber segment outsourcing to

improve margins going forward.

#5 Focus to improve revenue/store to lead to

operating leverage and better margins.

#6 Outsourcing in volume terms expected to

increase further, thereby improving margins.

Bata India

3 June 2013 6

A foreign brand's success story in India

Bata, a 51% subsidiary, is the largest company for BSO for sales pairs and the second

largest in revenue (15% of BSO revenues).

It has cornered ~16% market share in the organized sector and almost 99% of revenue is

from the domestic market, with exports accounting for the balance.

Bata sells 50m pair of shoes every year serving 1.5lac customers everyday.

Bata Shoe Organization (BSO) is a large shoemaker that traces its history back to 1894

and a Czech cobbler named Tomas Bata. With more than 30,000 employees, 5,000

international retail stores and a presence in over 90 countries and five continents.

Bata, a 51% subsidiary, is the largest company for BSO for sales pairs and the second

largest in revenue (15% of BSO revenues). Company went public in 1973 and changed

its name to Bata India Ltd. It has cornered ~16% market share in the organized sector

and almost 99% of revenue is from the domestic market, with exports accounting for

the balance. Company receives guidance and managerial support for its functions

including purchase, manufacturing and training of managers from BSO for a technical

fee of 1.5% of gross revenue.

Bata India has a retail network of 1,388 stores spread across 500 cities, which gives it

a reach/coverage that no other footwear company can match, and employs more

than 7,000 people. Company also has 16 wholesale depots spread across the country,

with more than 30,000 dealers. It sells more than 50m pairs of shoes every year and

also serves 150,000 customers every day. Bata has the widest footwear retail network

in India, with 40% exposure in South India and 20% each in other three regions.

Company has capacity to manufacture 64m pairs of shoes across five plants located at

Batanagar, Faridabad, Bangalore, Patna and Hosur supported by two tanneries for

leather supply in Bihar and West Bengal. Although global brands such as Adidas and

Reebok are trying to catch up with India's young urban population, Bata figures as the

first choice for footwear across India for all age groups.

Bata's brands in IndiaBata sells a wide range of footwear in canvas, rubber, leather and plastic catering to

masses. Company has licensed brands (Hush Puppies and Dr Scholl, licensed

respectively from Wolverine Worldwide and Dr Scholl's) besides those of its parent

(Power, Marie Claire and Bubblegummers).

It has also built brands like Weinbrenner, North Star, Bubblegummers, Ambassador,

Comfit, Mocassino and Wind India. For the women's segment, Bata's popularity

continues to grow with the trendy Marie Claire range. The youth focused brand North

Star and specialty outdoor brand Weinbrenner present new trendy designs with an

increased focus on casual styles. The new dress shoe collection under its famous

Ambassador and Mocassino brands has seen significant demand.

Bata India

3 June 2013 7

Extensive retail restructuring...As part of the retail restructuring plan of CY04, Bata opened new stores, remodeled

existing outlets and closed cash-drain stores to offer a graded choice of products to

diverse consumer segments. At the top were flagship stores situated in upmarket

locations in metro cities, with a product line targeted at the higher income groups.

The next in line, city stores, covering metros and mini-metros, cater to the needs of

the middle and high income groups. In the third tier are family stores in high traffic,

commercial locations, displaying basic and middle range footwear.

Massive restructuring - Bata's recipe for successRestructuring helps to post sales CAGR of 14.7% over CY05-12, with EBITDAand PAT growth of 47.6% and 51.6%

A comprehensive revamp of retail operations by remodeling existing outlets and closing

down cash-drain stores. During CY05-12, Bata added 718 stores, closed down 524 and

remodeled 296, thus taking the total count to 1,388 stores from 1,174 in CY05.

Extended working hours from 10am to 9pm, instead of 10am to 7pm, and keeping stores

open on Sundays lead to sales improvement and better inventory management.

Drastic reduction in employee headcount from 9,631 in CY05 to 5,162 in CY12.

Outsourcing labor-intensive operations to prune costs.

...extended working hours lead to sales improvement and inventorymanagement...Most Bata stores were closed on Sundays and functioned from 10am-7pm on

weekdays. As buyers prefer to buy on a Sunday or post office hours on weekdays,

company lost on sales, which led to higher inventory build-up. Hence, it extended

the shopping hours and augmented its shoe line, including women and children's

collection. These initiatives enabled Bata to revitalize the brand and establish as one

of the largest footwear retail plays in India.

…complimented by mega store facelift led to turnaroundDuring CY05-12, Bata added 718 stores, closed down 524 and remodeled 296, thus

taking the total stores count to 1,388 from 1,174 in CY05. Hence, the share of revenue

from retail segment also increased from 67.3% in CY05 to 85% in CY12. The restructuring

helped it to post sales CAGR of 14.7% over CY05-12, with EBITDA and PAT growth of

47.6% and 51.6% respectively.

Retail structure

Parameter Flagship stores City stores Family stores

Location Metros Metros and mini metros Commercial locations, high traffic

Target customers Higher income groups Fashion oriented upper Low to middle class income groups

middle class groups

Product profile Top of the line brands, Targeted at buyers with Basic and middle range, mass product

fashionable shoe line high aspirations

Store design Air-conditioned, well Non air-conditioned Non air-conditioned with a commercial look

appointed with an

international look

Source: Company, MOSL

Bata India

3 June 2013 8

Revamping operations from CY05-CY09

CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12

No of stores 1,174 1,172 1,173 1,165 1,161 1,209 1,259 1,388

New stores 40 37 67 62 69 108 146 189

Closed 60 39 66 70 73 60 96 60

Remodelled 78 40 38 40 20 30 50


Bata India

3 June 2013 9

Post restructuring, focus on aggressive growthTo expand presence in Tier II, III cities and rural India

Bata has a strong distribution network of 1,388 stores comprising of 250 MEP stores, 450

K Schemes, 31 exclusive Hush Puppies, 28 SIS, 10 exclusive Footin and balance being

company-owned stores.

Over the last three to four years, Bata focused to open large format stores with an

international layout and size of 3,000 sq ft and close down stores with less than 1,000 sq

ft area or turnover below INR5m.

It plans 100 new large format stores (3,000 sq ft) every year over the next two years,

which include adding 15-20 exclusive Hush Puppies and 10-15 Footin stores. Around 70-

75% of new openings will be in K Stores format.

Company realizes 40% of its revenue from South India, while the North, East and Western

regions contribute 20% each.

Large format stores - mantra for aggressive growth going forwardWith the company on a strong footing, we believe management plans to focus on

aggressive growth. Over the last three to four years, Bata increased its focus to open

large format stores with international layout and a size of 3,000 sq ft and also close

down shops with less than 1,000 sq ft area or turnover below INR5m. Over the last

four years, it closed smaller shops and relocated to a larger format in the same locality.

We believe the large format stores will help display the shoe line collection across

segments and various brands. This not only helps to be a one-stop solution for brands

like Bata, Hush Puppies, Marie Claire, Ambassador, Power etc, but leads to efficient

inventory management.

What are K Stores?K Stores denote commission stores. To encourage entrepreneurship, Bata introduced

K Stores two to three years ago. Under this scheme, existing employees are encouraged

to become entrepreneurs by enrolling for franchisee operations. Company provides

support for location, retail space, rent, furniture, stocks and promotional materials,

while the agent bears all employee costs associated with it. In return, the K Store

agent gets a commission of 7-8% depending on the turnover, which is much lower

than the cost of employee for a company-owned store which stands at 10-12%, thereby

leading to ~200bp margin improvement. Of the 100 new store additions planned over

next two years, management guided that 70-75% would be K Stores, which should

help to improve margins.

Strong distribution network…Bata has 1,388 stores comprising of 250 MEPs, which is akin to the franchisee model

where dealers buy from Bata on cash-and-carry basis and no inventory is owned by

the company, 450 K Stores, 31 exclusive Hush Puppies, 28 SIS, 10 exclusive Footin and

the balance being company-owned stores. It also sells over 15m pair of shoes through

16 depots and 150 large distributors, thus catering to more than 30,000 wholesale

dealers.

Bata India

3 June 2013 10

…to improve through aggressive store expansionsCompany plans to open 100 new stores every year over the next two years, which

include adding 15-20 exclusive Hush Puppies and 10-15 Footin stores. Around 70-75%

will be under K Stores format. Management guided that all new Bata stores will be in

the large format of 3,000 sq ft, with mapping of high street location to increase market

share. It also plans to open flagship stores of 1,000 sq ft in major metros and expand

the concept, store-in-store for Hush Puppies and aggressively add Footin stores

(significant success in Thailand) in the affordable fashion category targeted for youth.

It will focus on footwear with price points of INR400-1,000 with new inventory every

three to four months, thereby improving asset turnover.

Bata has a 10,000 sq ft store in Ahmedabad and Mumbai and plans to expand, going

forward. These stores have a premium ambience, wide variety of footwear and

accessories and elements like child play area. Company plans to open a 20,000 sq ft

store in Mumbai and other metros, going forward. A 20,000 sq ft store in Dhaka

(Bangladesh) is delivering annual revenue in excess of USD5m.

To expand presence in Tier II, Tier III cities and rural IndiaBata increased brand penetration in smaller markets such as Ahmedabad, Coimbatore,

Jaipur, Trichy, Lucknow, Ujjain, Dhanbad, Nagpur, Hubli and Patiala among others. So

far it was present in towns with a population of 500,000 and above. Company 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. This will not only improve

penetration but also reduce rent cost as Tier II and III markets would have a lower

rent compared to Tier I. Bata plans to penetrate smaller cities and rural markets

through its dealer network, which is currently at over 30,000. Company realizes 40%

of revenue from South India, while North, East and Western regions contribute 20%

each.

Bata India

3 June 2013 11

Strong retail presence set to strengthen furtherNon-retail segment, a scalable business model

Bata derives ~85% of its revenue through retail networks, 14.2% from non-retail channels

(dealers/institutional/industrial sales) and the balance through exports.

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.

Plan to increase sales per store by improving value mix by focusing more on the high-

margin leather segment that includes accessories such as ladies bags, caps and belts

among others.

With BSO enjoying 20% market share worldwide in the industrial shoes segment, Bata

plans to leverage on the expertise and technology in India for industrial and defence

shoes.

Strong retail presence - a sustainable growth modelBata derives ~85% of its revenue through retail networks, 14.2% from non-retail

channels (dealers/institutional/industrial sales) and balance through exports. About

80-90% of the retail revenue is generated from Tier I and II cities, presenting a huge

opportunity to tap rural and semi urban markets, which are mainly serviced through

dealer networks. We believe with increased penetration in Tier II and III segments,

Bata will be able to grow in excess of 20% over the next three to four years in the

retail segment, which contributes 85% to its revenue.

Retail continues to drive growth

Bata CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12

Retai l 4,769 5,301 6,164 7,138 9,020 10,400 12,860 15,660

Exports 69 108 94 101 78 118 169 150

Wholesale 2,245 2,293 2,417 2,631 1,826 2,070 2,393 2,615

Total revenues 7,083 7,702 8,675 9,870 10,924 12,588 15,422 18,425

% of sales

Retai l 67.3 68.8 71.1 72.3 82.6 82.6 83.4 85.0

Exports 1.0 1.4 1.1 1.0 0.7 0.9 1.1 0.8

Wholesa le 31.7 29.8 27.9 26.7 16.7 16.4 15.5 14.2

% growth

Retai l 11.2 16.3 15.8 26.4 15.3 23.7 21.8

Exports 56.5 -13.0 7.4 -23.1 51.5 43.9 -11.5

Wholesa le 2.1 5.4 8.9 -30.6 13.3 15.6 9.3

Source: MOSL

Focus to increase sales per store to drive top line growthWith plans to open 100 large format stores over CY13-14, the focus is to increase

revenue per store, going forward. Management expects to achieve it by improving

the value mix of stores, with more focus on the high margin leather segment that

includes accessories such as ladies bags, caps and belts among others. Company's

thrust on Hush Puppies is a part of this strategy. Bata plans to increase the display of

women and child footwear across all stores given these segments are growing at a

faster rate. All these measures would lead to an increase in sales per store, thus

driving growth and margins.

Bata India

3 June 2013 12

Non-retail segment - scalable business modelBata's non-retail segment comprises of urban wholesale, industrial and safety,

institutional sales and e- commerce.

Urban wholesale: The division sells over 15m pair of shoes through 16 depots, 180

large distributors, with more than 30,000 dealers on pan India basis. Bata sells more

than 49m pairs of shoes every year and also serves 150,000 customers per day. It plans

to add more direct dealers in this segment to increase penetration in Tier III and rural

areas.

Industrial and safety segment: The division caters to industries like construction,

steel, power etc, with special product features like impact and heat resistance, oil

resistance and use of lightweight materials. With BSO enjoying 20% market share

worldwide in the industrial shoes segment, Bata plans to leverage on the expertise

and technology in India. A first time launch of a product with PU-rubber sole for

chemicals and smelter industry in 1QCY13 has been well-received.

Institutional sales: Institutional sales focus on the special requirements of defense

and paramilitary forces, hospitality, airlines, retail, construction, hospitals, mining

and other industries. Based on the expertise and technical knowhow from BSO, Bata

has installed new machines at its Batanagar plant to manufacture safety footwear

required by defence, mining and other industries. It recently got a large order from

Indian Air Force. The defence sector requires 12m footwear a year, which is supplied

by unorganized players, thus providing greater scope for an organized player like

Bata.

Store level performance measurementBata keeps a strict vigil on performance of each store. It sets a target of 10% PBT in the

first year from a new large format store. The finance team meets the retail operations

team on a monthly basis to determine the list of stores that consistently underperform.

A remedial plan is devised for such stores, which includes renegotiating with the

concerned landlord for store rentals or reorganization of merchandise within the

store. The store is kept under observation for a few months and is closed if there is no

satisfactory improvement.

Revenue per store on an increasing trend (INR m)


Bata India

3 June 2013 13

Outsourcing, K Stores expansion to check employee costExpect capacity utilization to fall but margins to increase

With employee expenses up to 25.6% of sales in CY05, Bata took the twin steps to

rationalize costs by closing certain businesses which were more labor-intensive and

increase outsourcing.

Employee headcount was pruned from 9,631 in CY05 to 5,162 in CY12 by providing VRS,

translating to significant savings in employee cost from 25.6% in CY05 to 10.6% in CY12.

Launch of K Stores 3.5 years ago for ex-Bata employees helped to reduce employee cost

as a K Store agent is paid 6-8% of turnover as commission, compared to 11-12% of sales as

employee cost if taken by the company on its books, thus leading to a saving of 300bp.

Contribution from outsourcing increased from 23.2% of sales and 46.7% of cost of goods

sold (COGS) in CY05 to 32.7% and 69.4% in CY12. This mix is likely to improve as incremental

demand going forward will be met through outsourcing, thus improving margins.

Employee cost to remain under checkA key cost component for footwear manufacturers is employee cost, given the labor-

intensive nature of the business. With employee expenses mounting to 25.6% of

sales in CY05, management took the twin steps to rationalize costs. Company closed

certain lines of business which were more labor-intensive and had limited scope for

automation and began to outsource them. It outsourced labor-intensive lines of

operation such as cutting, threading and stitching, and only critical manufacturing

processes were retained in-house, including leather selection, sole manufacture,

design, cutting and finishing. The jobs retained by Bata were machine work and less

labor-intensive. To facilitate these changes, management offered a VRS to affected

blue collar and white collar employees. Hence, the headcount was pruned from 9,631

in CY05 to 5,162 in CY12, translating to significant savings in employee cost, which

reduced to 10.6% in CY12.

Focus to open more K Stores to reduce employee costTo reduce employee cost further, Bata is setting up more outlets in the form of K

Stores since the past 3.5 years. Given that a K Store agent is paid 6-8% of turnover as

commission, compared to 11-12% of sales as employee cost if taken by Bata on its

books, the savings on this count can improve margin by ~2% per K Store.

Hence, we expect employee cost to further reduce from 10.6% of sales in CY12 to

9.4% in CY15E as outsourcing as a percentage of sales increases and management's

guidance to open 70-75% of 100 large format stores over the next two years in K

format stores.

Bata India

3 June 2013 14


Increase presence through online salesTo improve customer service, company introduced home delivery of shoes. Customers

can now place orders for any footwear which they are unable to find in a store and get

it home delivered at no extra cost. Bata derives less than 1% of its sales online.

Company recently tied up with online portals like Jabong, Snapdeal, India Times,

Rediff, Junglee, etc., to attract potential customers online. etc. Any significant increase

in the contribution of online sales will lead to meaningful improvement in margins

due to negligible cost, as compared to sales through retail stores.

Outsourcing - a key fitness mantraOutsourcing of certain manufacturing operations has been a key component of Bata's

business reorganization strategy. As mentioned earlier, outsourcing increased

significantly from 23.2% of sales and 46.7% of COGS in CY05 to 32.7% and 69.4% in

CY12. We expect outsourcing to increase significantly, thereby lowering the cost of

production and improving margins. From CY05, it outsourced labor-intensive jobs

and retained machine operation, thus utilizing installed capacity to the fullest. This

implies the incremental increase in volume was met through outsourcing.

Outsourced percentage of total volumes sold on an increasing trend


Reduction in employee count Expect further improvement in employee cost % of sales

Bata India

3 June 2013 15

Outsourcing as a percentage of sales for leather increased from 23% in CY05 to 45% in

CY11, while outsourced proportion for rubber and canvas increased from 9% in CY05

to 59% in CY11 in volume terms. Bata outsources 100% of its plastic footwear and

accessories requirements. The strategy going forward is to raise outsourcing of cheaper

items such as rubber, canvas and plastic footwear and manufacture high value-added

leather footwear in-house. Hence, we expect capacity utilization to further reduce

across segments as most employees will shift to K Stores format, albeit leading to

higher margins.

Company guided that with the likely opening of 100 stores every year, the incremental

demand for footwear will be met through increased outsourcing across segments.

We believe this move will not only help Bata to increase margins but also focus on its

brand strategy and improve the mix of women and child segment.

Falling capacity utilization suggests increase in outsourcing

CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11

Installed capacity (m pairs)

Leather and other footwear 20.3 20.3 20.3 20.3 20.3 20.3 20.3 20.3 20.3 20.3 20.3

Rubber and canvas footwear 42.5 42.5 42.5 42.5 42.5 42.5 42.5 42.5 42.5 42.5 42.5

Finished Leather from hides 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6

Total installed capacity 64.4 64.4 64.4 64.4 64.4 64.4 64.4 64.4 64.4 64.4 64.4

Production (m pairs)




Total production 31.7 37.5 33.2 31.0 31.6 26.6 25.9 25.4 26.3 22.6 20.3

Capacity utilization (%)




Total 49.3 58.2 51.5 48.2 49.1 41.4 40.3 39.4 40.9 35.0 31.6

Quantative details (m pairs)

Rubber/Canvas Footwear

Opening 7.9 6.2 7.0 6.2 5.6 6.0 6.1 5.6 4.9 5.1 5.0

Purchase 8.9 2.5 0.2 1.8 2.5 0.1 3.2 2.6 4.2 7.7 9.6

Production 20.2 24.9 21.7 20.9 20.5 16.8 16.4 15.7 12.6 8.0 6.6

Sa les 30.9 26.7 22.8 20.3 22.6 16.9 20.0 19.0 16.6 15.8 16.2

Closing Stock 6.2 7.0 6.2 8.6 6.0 6.1 5.6 4.9 5.1 5.0 5.1

Leather & Leather Look alike Footwear

Opening 6.9 5.9 8.7 10.1 8.1 9.4 9.1 10.1 8.2 8.0 7.5

Purchase 4.9 4.6 9.0 6.2 4.4 5.9 6.4 6.8 5.9 8.8 12.2

Production 10.7 11.8 10.8 9.6 10.6 9.5 9.3 9.5 13.5 14.4 13.6

Sa les 16.6 13.7 18.4 20.8 13.7 15.7 14.7 18.2 19.6 23.7 24.6

Closing Stock 5.9 8.7 10.1 5.1 9.4 9.1 10.1 8.2 8.0 7.5 8.7

Plastic Footwear

Opening 2.1 2.1 2.4 2.0 2.4 2.5 2.0 2.8 2.3 2.4 2.2

Purchase 12.2 12.2 10.5 10.4 10.6 10.3 9.7 9.8 9.4 8.6 7.3

Sa les 12.2 11.9 10.9 10.0 10.6 10.7 9.0 10.3 9.3 8.8 8.1

Closing Stock 2.1 2.4 2.0 2.4 2.5 2.0 2.8 2.3 2.4 2.2 1.4


Bata India

3 June 2013 16

Segment-wise outsourcing contribution (m pairs)

CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11

Leather

Opening stock 6.9 5.9 8.7 10.1 8.1 9.4 9.1 10.1 8.2 8.0 7.5

Add :- Purchases 4.9 4.6 9.0 6.2 4.4 5.9 6.4 6.8 5.9 8.8 12.2

Less :- Closing stock 5.9 8.7 10.1 5.1 9.4 9.1 10.1 8.2 8.0 7.5 8.7

Total purchase of traded goods (Leather) 5.9 1.9 7.6 11.2 3.1 6.2 5.4 8.7 6.0 9.3 11.0

Leather sales 16.6 13.7 18.4 20.8 13.7 15.7 14.7 18.2 19.6 23.7 24.6

Outsourced (%) 35 14 41 54 23 40 37 48 31 39 45

Rubber and canvas

Opening stock 7.9 6.2 7.0 6.2 5.6 6.0 6.1 5.6 4.9 5.1 5.0

Add :- Purchases 8.9 2.5 0.2 1.8 2.5 0.1 3.2 2.6 4.2 7.7 9.6


Total purchase of traded goods 10.6 1.8 1.0 -0.7 2.0 0.1 3.6 3.3 4.0 7.7 9.5

(rubber and canvas)

Rubber and canvas sales 30.9 26.7 22.8 20.3 22.6 16.9 20.0 19.0 16.6 15.8 16.2

Outsourced (%) 34 7 5 -3 9 0 18 18 24 49 59

Plastic

Opening stock 2.1 2.1 2.4 2.0 2.4 2.5 2.0 2.8 2.3 2.4 2.2

Add :- Purchases 12.2 12.2 10.5 10.4 10.6 10.3 9.7 9.8 9.4 8.6 7.3


Total purchase of traded goods 12.2 11.9 10.9 10.0 10.6 10.7 9.0 10.3 9.3 8.8 8.1

Plastic sales 12.2 11.9 10.9 10.0 10.6 10.7 9.0 10.3 9.3 8.8 8.1

Outsourced (%) 100 100 100 100 100 100 100 100 100 100 100



Outsourcing in leather to continue going forward (m pairs) Outsourcing in rubber, canvas to rise going forward (m pairs)

Bata India

3 June 2013 17

Gross margin expansion on the cardsBetting big on women and child segment

To increase the contribution from women and children footwear segment, Bata enhanced

the display area at all stores and launched trendy designs under various brands. Thus,

women's segment contribution rose from 25% in CY08 to ~35% in CY12.

It increased focus on high-value products in the leather segment with a thrust on Hush

Puppies (growing at 40%), thereby improving its mix from 62.8% of sales in CY05 to 72%

in CY12. The mix is likely to improve to 76% of sales, thus improving margins.

Bata plans to increase the contribution from accessories (belts, ladies bag, wallets, caps)

segment from 5% in CY12 to 10% over the next few years. Accessories segment has the

highest gross margin of 60%, with 100% outsourcing model.

Company launched a programme from FY13 to modernize three factories (Patna, Batanagar

and Bangalore) over FY13-15, with a total capex of INR500m. This is likely to improve

gross margin by 500bp, according to the management.

Betting big on women and child segmentThe women's category is largely unorganized in India. As per industry data, close to

86% is unorganized, compared to the organized global nature of the segment. Thus,

seizing the opportunity and with BSO's technical expertise, Bata over the last four

years improved its designs and collections. To increase the contribution from women

and child footwear segment, it enhanced the display area for the segment across all

stores and launched trendy designs under brands like Marie Claire, Hush Puppies,

North Star etc. Management stated that the designs/collections for women at its

Indian stores match those at its stores in Singapore, Thailand or the US.

These measures improved the contribution of high margin women's segment from

25% in CY08 to ~35% in CY12. To increase the contribution from children's segment

from 8-10% of sales to 12-13% over the next few years, Bata recently in-licensed the

Angry Birds trade mark from Rovio, which is selling 10,000 pairs a week. The collection

is an assortment of rubber thongs, slippers range along with school shoes and socks.

Management expects the women and child segment to grow at a faster pace (25%-

30% growth) than men's footwear, thereby increasing gross margin.

Revenue break-up - CY12


Bata India

3 June 2013 18

Lower margin products discontinued...In CY05, ~65.4% of volumes was driven by low margin rubber/canvas and plastic

footwear segment, mainly low value slippers, where lower price point was the main

driver for demand compared to brand pull. Thus, realization within rubber/canvas

and plastic stood at INR86 and INR96 respectively in CY05, compared to INR309 for

leather footwear. Company phased out the INR69/pair rubber Hawaiians', where it

incurred a small loss and shifted to the Sunshine range (INR199-399) with colorful

designs. Now, these account for better margins and are sold throughout the year,

compared to earlier monsoon sales.

Segment-wise realizations (INR/per pair)


...Focus on premiumizationPost CY05, however, Bata focused to increase the share of higher value products. The

leather segment had higher margins, compared to rubber/canvas and plastic segment.

Within leather segment, thrust was on Hush Puppies (growing at 40%), thereby

improving its mix from 34.5% of total volumes and 62.8% in value in CY05 to 55.1% and

72% respectively in CY12. We expect the mix to improve to 74% of revenue in CY15E,

thus increasing gross margin.


Increase in mix of high value leather segment Plastic segment gross margin

Bata India

3 June 2013 19

Greater focus on high margin accessories segmentOver the last three years, Bata focused to increase the proportion of revenue from

accessories segment. This segment has the highest gross margin of 60%, with 100%

outsourcing model. Revenue pie for accessories (belts, ladies bag, wallets, caps)

increased from 2.7% in CY05 to 5% in CY12. We expect revenue from accessories to

increase to 7.5% by CY15E, thus driving gross margin. Management plans to increase

the share of non-footwear segment from 5% in CY12 to 10% over the next few years.

Benefit from plant modernization - icing on the cakeThe technology in Bata's factories is relatively obsolete and hence it makes higher

gross margin through outsourced manufacturing, compared to in-house. Company

launched a programme from FY13 to modernize three factories over FY13-15, with a

total capex of INR500m. In the first year, it will focus on the Patna facility, Batanagar in

West Bengal (sports wear and sandals) in the second year, and lastly Bangalore (school

shoes, Hush Puppies). Under the modernization programme the company has plans

to install state of art plant and machinery and plans to improve throughput and

productivity and hence, management expects overall gross margin to improve by

500bp over the next three years.

Global support gives an edge over peersBata has seamless access to the benefits of technical research and innovative

programmes of BSO from the Global Footwear Services for which it paid a fee of

INR179m during CY12. Company continues to receive guidance and managerial support

for functions, including store layout, marketing, shoe line, upgradation of factories,

training of managers and guidance from senior-most managers of the group. The

technical collaboration, which expired on December 31, 2010, has been renewed for

10 years.

GST, a game changerAs per the Financial Budget 2012, the rate of excise duty has been increased to 12%.

The concessional rate of excise at 5% for footwear with retail price exceeding INR250

and up to INR750 per pair has been withdrawn and the abatement has been reduced

from 40% to 35%. The effective rate is one of the highest and puts the footwear

industry almost at par with luxury goods and products where the government expects

to curb consumption, such as tobacco. Footwear industry is paying maximum taxes

amounting to 24% (excise 8%, VAT 13% (average) and service tax and others 3%). We

believe with the introduction of Goods and Services Tax (GST) (both central and state),

overall cost will decline to 16-18% and result in significant savings.

Bata India

3 June 2013 20

Strong brand, to scale up with focused brandingPresence across price points to hedge against recessionary environment

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.

Company's ad spends as percentage of sales fell from 1.7% in CY08 to 0.8% in CY12.

However, to increase brand recall and educate consumers on the new offerings, it has

hired DDB Mudra for advertisement and marketing initiatives.

Bata is present across price points starting INR199 to INR7,000. With a presence across

price points and brands, we believe Bata is hedged against the risk of down-trading in a

recessionary environment.

Strong brand franchise and market leaderBacked 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. Due to a

business restructuring, it lost market share over the last few years. However, with the

company on a strong footing and focus on aggressive growth, we believe it is poised

to gain a significant market share, going forward.

Focus on advertisement to enhance brand pullBata traditionally advertised through local stores, and as it was well-known, did not

advertise nationally. Ad spends as a percentage of sales declined from 1.8% in CY08 to

0.9% in CY12. To increase brand recall and educate consumers on the new offerings,

company has hired DDB Mudra for advertisement and marketing initiatives. Bata plans

to do a prime time television, radio and print campaign in 2HCY13 and expects to

spend ~1.5-2% of sales on advertisements, going forward.

Ad spends as percentage of sales to increase (INR m)


Presence across price points to hedge against recessionary environmentWith the growth of premium segment, Indian footwear market, that traditionally has

been price driven, is slowly evolving into a quality and fashion conscious industry.

Bata straddles at both ends of this spectrum and in between (comfort and value-to-

premium). Among them, it covers all metros, mini metros and every town with a

population of half a million or more. Company sells footwear from price points of

INR199-7,000. We believe the presence across price points and brands hedges it against

the risk of down-trading in a recessionary environment.

Bata India

3 June 2013 21

Portfolio pyramid


Improvement in inventory days to improve working capital going forwardBata over the years has been focusing to improve its working capital days, especially

on the inventory front. It had increased stores timings on weekdays and also on

Sundays, thereby leading to an increase in footfalls. Currently, company has a well

organized logistics team at Gurgaon which controls the distribution process and ensures

that footwear of the right size is available at the right time and place across the

country. Due to these, inventory days improved from 266 in CY08 to 179 in CY12.

To support and deliver growth projections, company is strengthening its supply chain

through restructuring and consolidation of the regional distribution centre space,

introduction of modern infrastructure and new technologies, reduction in product

transit lead-times and faster and more frequent deliveries to stores. We expect an

improvement in the distribution process through greater use of technology inputs to

track the changes in consumer tastes, preferences and shopping trends. Bata has

already restructured five regional distribution centers (RDCs) and expects benefits of

the same going forward, thus leading to an improvement in inventory days by

additional 15 days.

Cashing out of real estate to focus on core businessBata had a cumulative 309 acres of land in Batanagar, Kolkata. It transferred the excess

262 acres to a special purpose vehicle (SPV) called Riverbank Developers Pvt Ltd (RDPL)

to build an integrated township. SPV was owned equally by Bata and Calcutta

Metropolitan Group (CMGL). In 1QCY10, company restructured the agreements with

revised terms for development of the modern integrated township at Batanagar to

ensure faster development of the project and maintain its focus only on core business.

The revision was completed in 1QCY11 and as part of the restructuring, Bata sold its

investment and rights in the joint development agreement and made a gain of

INR1.09b. Also, it would receive 0.324m sq ft (~160 flats) from the JV amounting to

~INR1.3-1.5b. We have not factored any gain from real estate in our target price.

Bata India

3 June 2013 22

Indian footwear industryPer capita consumption of footwear in India on the rise

According to Assocham, the Indian footwear industry is pegged at INR240b and is expected

to reach ~INR387b by 2015, marking a CAGR of 17.3% over CY12-15.

While Indian footwear industry is dominated by men's segment comprising of 55%, women

at 30% and child at 15% respectively, globally women's segment comprises of 60% of the

overall market.

Women's footwear market in Indian remains mostly untapped, with nearly 80-90% sales

in the unorganized market, thus providing huge opportunity for organized players like

Bata.

The men's segment is growing at 10-12%, while women and child segments are increasing

at 20% per annum.

According to Assocham, the Indian footwear industry is pegged at INR240b and is

expected to reach ~INR387b by 2015, marking a CAGR of 17.3% over CY12-15. Online

shoe shopping is a significant segment that is fast emerging and accounts for ~8% of

the overall industry and is expected to reach ~20% by 2015. Globally, women's segment

comprises of 60% of the overall footwear market, and the Indian footwear industry is

dominated by men's segment comprising of 55%, women at 30% and child at 15%

respectively. Women's footwear market in Indian remains mostly untapped with 80-

90% sales being in the unorganized market, with a focus on colors and designs than on

comfort and durability.

Women's footwear segment growing at a faster rate than menThe men's segment is growing at 10-12%, while women and child segments are growing

at 20% per annum. Thus, share of men's footwear is likely to decline to 48% and

women and child footwear segments' contribution is likely to increase to 35% and

17% respectively. Casuals comprise of 60% of the footwear market, with the balance

contributed by sports, formal and semi formal footwear.

Average annual spend on men's footwear higher than womenAs per Images-AC Neilson study, the average annual spending on men's footwear is

~INR2,300 (with 29% of the household spend on an average or below INR1,000 and

another 36% of the purchases are in the range of INR1,001-2,000). Average annual

spending on women footwear is ~INR1,300 (with more than 50% of purchases at or

below INR1,000 and another 40% of purchases in the range of INR1,001-2,000).

Indian footwear market is categorized in Economy - prices below INR750 (USD17),

Value - prices between INR750 and INR1,500 (USD17-34), Premium - prices between

INR1,500 and INR3,000 (USD34-70), Super Premium - prices more than INR3,000 (USD70

and above). The share of Economy and Value segments up to INR1,500 (USD34) is

~INR230b (USD5.1b).

Bata India

3 June 2013 23

Per capita consumption of footwear in India on the riseIndia is the world's second largest footwear producing country, second to China and

the third largest market. Even though the per capita shoe consumption in India has

risen from 1.4 pairs a year in 2004 to 2.5 pairs per year in 2012, it is still much below the

average per capita pair consumption of 5.5 in developed countries. With increasing

consumption, growing popularity of online shopping, higher affordability and rising

income level, per capita footwear consumption is expected to rise to 3.5 from the

present 2.5 by FY15E.

Driven by larger penetration to Tier II and III cities and a growing rural market, various

premium footwear brands are foraying into India's non-metro markets that hold

growth potential and account for ~55% of the overall footwear industry. With changing

lifestyles and increasing affluence, domestic demand for footwear in Tier II and III is

expected to grow at a faster pace than urban India.

In the non-leather footwear segment, there is huge demand for slippers as it is cheap,

convenient and suits the needs of rural consumer as it can be used as multi purpose

footwear. Rural India accounts for ~60% of slippers manufactured in the Indian footwear

market.

Source: Assocham, MOSL

Note: Assumed currency rate at INR50/USD for 2010 and

INR55/USD for 2012 and 2015.

Share of verticals in overall and organized retail

Total retail FY12 Organized retail FY12

Verticals Market size share Market size share

(INR b) (%) (INR b) (%)

Food and grocery 16,342 66.2 390 2.4

Apparel 2,727 11.1 563 20.6

Consumer durables, mobile and IT 1,358 5.5 320 23.6

home décor and furnishing 1,014 4.1 60 5.9

beauty , personal and healthcare 1,238 5.0 160 12.9

Pharmacy 298 1.2 30 10.1

Jewellery, watches and eye care 940 3.8 130 13.8

Footwear 605 2.5 98 16.2

Books and music 149 0.6 16 10.7

Total 24,671 1,767

Source: CSO, NSSO, Assocham

Organized v/s unorganized footwear Total retail market size

Bata India

3 June 2013 24

Organized footwear retailing, comprises 16% of the industry, is growing at double the

industry growth rate on account of : 1) growing presence of organized players in Tier

I and II cities where consumption power remains high, 2) expanding and continuously

growing women and child sections (women at 40% and child 10% of industry

respectively). With rising urbanization and better education levels among women,

there has been a marked increase in women workforce, thus creating demand for

branded footwear, 3) rising online shopping (8% of industry at INR20b) among 20-35

age group. Market leaders Bata and Relaxo are even looking at opening dedicated

stores for women/children in the future. Bata's e-commerce business is less than 1%

of its total revenue, which it intends to grow faster. Company recently tied up with

online portals like Jabong, Snapdeal, India Times, Rediff, Junglee etc to attract potential

customers online.

Segment-wise breakup of footwear industry Geographical-wise contribution to footwear industry


Transforming from manual to automated manufacturing systemsThe footwear sector has matured from the level of manual manufacturing methods

to automated systems. Many units are equipped with in-house design studios

incorporating state-of-the-art CAD systems having 3D shoe design packages that are

intuitive and easy to use. Many Indian factories have also acquired the ISO 9000, ISO

14000 and SA 8000 certifications.

Bata India

3 June 2013 25

Global footwear industryAsia continues to be the powerhouse of footwear industry

The global footwear market was worth ~USD182.2b in 2011 and is expected to reach

USD223.6b in 2015, clocking a CAGR of 5% from 2011 to 2015.

Worldwide production of footwear reached 21b pairs in 2011, with India's share pegged

~13%.

Asia pacific region holds ~42% of overall market share in value terms.

The worldwide production of footwear reached 21b pairs in 2011, with India's share

pegged ~13%. Asia continues to be the powerhouse of footwear industry, with an

overall share close to 90%. Seven Asian countries figure among the world's top 10

producers, a list in which China's leadership is undisputable. Brazil is the only non-

Asian country among the top five producers. China is the world's largest market for

footwear in terms of quantity, closely followed by the US and India. Low cost of

production, abundant availability of raw material, ever evolving retail ecosystem,

buying patterns and a huge consumption market are certain basic features that set

apart the Indian footwear market. According to Assocham, the global footwear market

was worth ~USD182.2b in 2011 and is expected to reach USD223.6b in 2015 (USD211.5b

in 2018), clocking a CAGR of 5% from 2011 to 2015. Asia pacific region holds ~42% of the

overall market share in value terms.

Global footwear market share breakup production-wise

Global footwear market share breakup consumption-wise

Source: World footwear year book 2012

Bata India

3 June 2013 26

Source: World footwear yearbook 2102, MOSL

World share percentage of top 10 countries in production World share percentage of top 10 countries in consumption ofof footwear footwear

Bata India

3 June 2013 27

Financial outlook

Top line to post 17% CAGR over CY12-15EWe estimate Bata's sales will increase from ~INR18.4b in CY12 to INR29.6b by CY15E, a

CAGR of 17%, primarily driven by strong growth in women, children and accessories

segment. Also, retail (contributes 85% to revenue) has been posting a CAGR of 20%

over CY06-12 and is likely to grow at 20% over CY13-15E primarily driven by 100 new

large format stores addition.

Margins to improve going forwardWe assume Bata's EBITDA will increase from ~INR2.7b in CY12 to INR4.74b by CY15E, a

CAGR of 20%. We expect margins to improve from 14.9% in CY12 to 16% in CY15E

primarily driven by an increase in value-added products in favor of high-end leather

products, increased share of higher margin women, child and accessories segment,

increase in outsourcing as a percentage of revenue and modernization of plants.

Revenue growth trend (INR m)


EBITDA margins set to improve going forward (INR m)


PAT CAGR of 22.5% over CY12-15EGiven top line of 17% CAGR over CY12-15E driven by 100bp margin expansion, we

expect PAT to post 22.5% CAGR over CY12-15E. We also expect depreciation and interest

to remain subdued as the company focuses on outsourcing model and generates free

cash flow of INR5.7b over CY13-15E.

Bata India

3 June 2013 28

PAT growth to be higher driven by better margins (INR m)



Bata India: 1-year going forward P/E Bata India: 1-year going forward P/BV

Bata India

3 June 2013 29

Valuation and view

We estimate Bata's revenue would increase by 17% and net profit by 22.5% over CY13-

15E. Given the strong brand with 16% market share in the organized footwear market,

strong distribution network, focus on aggressive growth, improvement in margin

profile, transformation into fashion footwear retailer, we believe Bata has strong

earnings and growth visibility. It has a strong balance sheet, with cash of INR1.9b and

healthy return ratios of 27.1% RoE and 39.3% ROCE in CY12. With limited capex of

INR2b over CY13-15E, 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

INR810, 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.

Key assumptions

Sales (Volumes) CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E

Leather and other footwear 15.7 14.7 18.2 19.6 23.7 24.6 27.0 28.9 31.6 34.5

Rubber and canvas footwear 16.9 20.0 19.0 16.6 15.8 16.2 15.0 14.3 13.9 13.5

Plastic footwear 10.7 9.0 10.3 9.3 8.8 8.1 7.0 6.3 6.0 5.8

Total 43.3 43.7 47.5 45.5 48.3 48.8 49.0 49.4 51.5 53.9

Volume Growth (%)

Leather and other footwear -2.7 -6.4 23.6 7.7 20.9 3.6 10.0 7.0 9.5 9.0

Rubber and canvas footwear -16.0 18.6 -5.0 -12.6 -5.1 2.5 -7.2 -5.0 -2.5 -2.5

Plastic footwear 1.5 -16.4 14.7 -9.4 -5.6 -8.2 -13.3 -10.0 -5.0 -2.5

Total -7.5 0.9 8.7 -4.1 6.0 1.1 0.4 0.9 4.2 4.6

Realization (INR/Pair)

Leather and other footwear 318 363 355 382 377 444 500 550 605 666

Rubber and canvas footwear 103 119 124 138 153 186 218 229 252 277

Plastic footwear 91 100 100 108 116 138 148 157 166 176

Average 178 197 207 237 256 308 363 407 459 515

Realization Growth (%)

Leather and other footwear 2.8 14.4 -2.3 7.7 -1.3 17.7 12.7 10.0 10.0 10.0

Rubber and canvas footwear 19.0 15.5 4.5 11.5 10.3 22.0 17.1 5.0 10.0 10.0

Plastic footwear -1.4 10.3 0.0 7.7 7.9 19.0 7.0 6.0 6.0 6.0

Average 8.1 11.0 5.1 14.3 8.1 20.2 18.1 12.1 12.6 12.2

Gross sales (INR m)

Leather and other footwear 4,992 5,345 6,454 7,486 8,933 10,891 13,500 15,890 19,139 22,948

Rubber and canvas footwear 1,736 2,378 2,360 2,300 2,406 3,008 3,270 3,262 3,498 3,752

Plastic footwear 974 897 1,029 1,004 1,023 1,117 1,036 988 995 1,029

Accessories, Garments & Others 214 253 233 313 393 619 938 1,313 1,773 2,304

Sale -Sundry Store/R.M./Scrap 16 20 34 15 13 11 14 18 22 28

Income from Repair Shop/Chiro. 16 14 13 9 2 0 1 1 1 1

Total gross sales 7,948 8,908 10,123 11,126 12,771 15,646 18,759 21,471 25,428 30,061

Growth (%)

Leather and other footwear 0.0 7.1 20.8 16.0 19.3 21.9 24.0 17.7 20.5 19.9

Rubber and canvas footwear 0.0 37.0 -0.8 -2.6 4.6 25.0 8.7 -0.2 7.3 7.3

Plastic footwear 0.0 -7.8 14.7 -2.5 1.9 9.2 -7.3 -4.6 0.7 3.3

Accessories,Garments & Others 0.0 18.5 -7.8 34.1 25.7 57.4 51.5 40.0 35.0 30.0

Total top line growth 0.0 12.1 13.6 9.9 14.8 22.5 19.9 14.5 18.4 18.2

Bata India

3 June 2013 30

Key risks

Volatility in raw material pricesHide skin, leather and chemicals are key inputs for footwear and play an important

role in its pricing. Any sharp increase in raw material prices might affect margins in

the short term as it is passed on with a lag period of two to three months.

Availability of skilled laborFootwear industry is labor-intensive and involves manual work to carry out stitching,

fitting, finishing, stamping etc. The organized footwear industry is growing at a robust

20% and may fall short of skilled labor with more than 30% of the workforce comprising

of women.

Slowdown in economyAny significant slowdown in the economy is likely to affect Bata's growth prospects.

But in case of any down-trading in the industry, it should not materially affect due to

its presence across price points.

Increased competitive intensityThe Indian organized footwear industry faces stiff competition from unorganized

players, especially in the mass segment. There will also be competition from countries

like China, Indonesia, Thailand, Vietnam and Brazil as products are more competitive

compared with India.

Increase in lease rentalsLease rentals form 9% of the company's revenue and have posted a CAGR of 30% over

CY05-10. Within the retail vertical, the main distribution channel, steep escalation in

lease rentals can erode margins and also deter new store roll-outs, thus affecting

revenue growth and operating leverage.

Sparx litigationBSO owns the Sparx footwear brand, which is available in 27 countries. Bata registered

the brand in India in 1978 but never used it. Relaxo Footwear started using the Sparx

brand since 2004-05 and since then has been making continued investments in it. Of

late, Bata started to sell footwear under the Sparx brand at its outlets. Relaxo moved

court in 2009 on Bata's rights on Sparx and the outcome is still pending. Sparx brand's

contribution to revenue is very low for Bata and hence the impact would be

insignificant if the court's verdict goes in favor of Relaxo.

Bata India

3 June 2013 31

Management details

Mr Uday Khanna - Chairman & Independent DirectorMr Uday Khanna is currently the President of the Bombay Chamber of Commerce &

Industry and non-executive Chairman of Lafarge India and Bata India. He also serves

on the boards of Castrol India Ltd, Pfizer Ltd and Coromandel International Ltd. Mr

Khanna was the Managing Director & CEO of Lafarge India from July 1, 2005 to July

2011.

Mr Rajeev Gopalakrishnan - Managing DirectorHe joined Bata Shoe Organization (BSO) in 1990 and has since been associated till

date. Mr Gopalakrishnan has an experience of 22 years in retail/wholesale and running

company operations and has been the Director - Wholesale Channels, Sales &

Marketing with Bata International - Canada and Vice-President of Bata India in Retail

Operations and Wholesale Division. Prior to that he was working as the Managing

Director of Bata Bangladesh for a year and before that as Managing Director for Bata

Thailand for three years when he turned around the company to a healthy position.

Mr Ranjit Mathur - Director FinanceMr Ranjit Mathur is a finance professional with over 19 years of experience. Most of

his experience has been with Unilever, where the last position he held was of Category

Finance Director for Foods in Asia and Africa based out of South Africa. Before joining

Bata India, Mr Mathur was the Head of Finance at Dow Corning in India.

Mr Jack G. N. Clemons - Non-Executive DirectorMr Jack Clemons is the Group Chief Executive Officer (CEO) of Bata Shoe Organization

(BSO). Mr Clemons joined Bata in 2006 and served for a number of years as Group

Chief Financial Officer (CFO) and President of Bata brands. Mr Clemons has lived and

worked in Europe, Asia, North America and Australia and currently teaches strategic

finance and corporate governance at various European Business Schools, including

EPFL and HEC Geneva.

Mr Jorge Carbajal - Non-Executive DirectorMr Jorge Carbajal is the President of Bata Emerging Markets (BEM), responsible for

the overall business operations in Asia, Africa and Latin America regions. He has held

various senior positions in different Bata companies in Latin America starting with

Chief Finance Officer and Group Finance Officer (Mexico, Bolivia & Ecuador) and in

Asia Pacific regions (Sri Lanka and Malaysia as Managing Director).

Bata India

3 June 2013 32

Financials and Valuation

Consolidated - Income Statement (INR Million)

Y/E December CY11 CY12 CY13E CY14E CY15E

Net Sales 15,422 18,425 21,149 25,047 29,611

Change (%) 22.5 19.5 14.8 18.4 18.2

Total Expenditure 13,040 15,675 18,040 21,207 24,873

EBITDA 2,382 2,750 3,109 3,840 4,738

Margin (%) 15.4 14.9 14.7 15.3 16.0

Depreciation 412 514 571 619 672

EBIT 1,969 2,236 2,538 3,221 4,066

Int. and Finance Charges 103 10 8 7 5

Other Income - Rec. 1,654 301 376 470 587

PBT bef. EO Exp. 3,520 2,526 2,905 3,684 4,648

PBT after EO Exp. 3,520 2,526 2,905 3,684 4,648

Current Tax 967 907 930 1,179 1,487

Deferred Tax -31 -101 0 0 0

Tax Rate (%) 26.6 31.9 32.0 32.0 32.0

Reported PAT 2,584 1,721 1,976 2,505 3,160

PAT Adj for EO items 2,584 1,721 1,976 2,505 3,160

Change (%) 189.2 -33.4 14.8 26.8 26.2

Net Profit 2,584 1,721 1,976 2,505 3,160

No of fully diluted sh. (Mn - FV: INR10) 64.3 64.3 64.3 64.3 64.3

Adj EPS 40.2 26.8 30.7 39.0 49.2

Equity Dividend 386 386 450 514 578

Corporate Dividend Tax 62 62 72 82 93

Corp Div Tax (%) 16.0 16.0 16.0 16.0 16.0

Dividend per Share 6 6 7 8 9

Total Div Payout (INR m) 447.1 447.1 521.8 596.4 670.9

Payout (%) 17.3 26.0 26.4 23.8 21.2

Consolidated - Income Statement (INR Million)


Equity Share Capital 643 643 643 643 643

Total Reserves 5,083 6,348 7,802 9,710 12,200

Net Worth 5,725 6,990 8,444 10,353 12,843

Total Loans 194 0 0 0 0

Capital Employed 5,919 6,990 8,444 10,353 12,843

Gross Block 5,028 5,636 6,136 6,886 7,636

Less: Accum. Deprn. 2,817 3,202 3,773 4,392 5,063

Net Fixed Assets 2,211 2,434 2,363 2,495 2,573

Capital WIP 81 181 127 150 178

Curr. Assets, Loans&Adv. 7,203 8,236 9,857 12,199 15,421

Inventory 3,913 4,621 5,022 5,714 6,531

Account Receivables 314 449 579 618 730

Cash and Bank Balance 1,240 1,877 2,712 4,021 5,775

Loans and Advances 1,736 1,289 1,543 1,847 2,385

Curr. Liability & Prov. 3,917 4,305 4,346 4,935 5,773

Account Payables 2,588 3,507 3,780 4,285 5,038

Provisions 1,329 798 566 650 735

Net Current Assets 3,285 3,931 5,510 7,264 9,648

Appl. of Funds 5,919 6,990 8,444 10,353 12,843

E: MOSL Estimates; * Adjusted for treasury stocks

Bata India

3 June 2013 33

Financials and Valuation

Ratios


Basic (INR) *

EPS 40.2 26.8 30.7 39.0 49.2

Cash EPS 46.6 34.8 39.6 48.6 59.6

BV/Share 89.1 108.8 131.4 161.1 199.8

DPS 6.0 6.0 7.0 8.0 9.0

Payout (%) 17.3 26.0 26.4 23.8 21.2

Valuation (x) *

P/E 30.3 26.4 20.8 16.5

Cash P/E 23.3 20.5 16.7 13.6

P/BV 7.5 6.2 5.0 4.1

EV/Sales 2.7 2.3 1.9 1.6

EV/EBITDA 18.3 15.9 12.5 9.8

Dividend Yield (%) 0.7 0.9 1.0 1.1

Return Ratios (%)

RoE 53.5 27.1 25.6 26.7 27.3

RoCE 68.3 39.3 37.8 39.3 40.1

Working Capital Ratios

Asset Turnover (x) 2.6 2.6 2.5 2.4 2.3

Inventory (Days) 92.6 91.5 86.7 83.3 80.5

Debtor (Days) 7 9 10 9 9

Leverage Ratio (x)

Current Ratio 1.8 1.9 2.3 2.5 2.7

Debt/Equity 0.0 0.0 0.0 0.0 0.0

* Adjusted for treasury stocks

Consolidated - Cash Flow Statement (INR Million)


Net Profit / (Loss) Before Tax 3,525 2,526 2,905 3,684 4,648

Depreciation 412 514 571 619 672

Interest & Finance Charges 16 10 8 7 5

Direct Taxes Paid -908 -788 -930 -1,179 -1,487

(Inc)/Dec in WC -1,421 -441 -744 -445 -630

CF from Operations 1,624 1,822 1,811 2,685 3,208

EO Expense -1,427 23 0 0 0

CF from Operating incl EO 197 1,845 1,811 2,685 3,208

(inc)/dec in FA -764 -833 -446 -773 -777

(Pur)/Sale of Investments 200 -540 0 0 0

Others 615 91 0 0 0

CF from Investments 51 -1,282 -446 -773 -777

Interest Paid -14 -10 -8 -7 -5

Dividend Paid -256 -446 -522 -596 -671

Others -163 531 0 0 0

CF from Fin. Activity -398 75 -530 -603 -676

Inc/Dec of Cash -149 637 836 1,309 1,754

Add: Beginning Balance 1,389 1,240 1,877 2,712 4,021

Closing Balance 1,239 1,877 2,712 4,021 5,775

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Documents

Initiating Coverage | 3 June 2013 Bata Indiabsmedia.business-standard.com/_media/bs/data/...Bata India (BATAIN) trades at a PE of 26.4x/20.8x/16.5x CY13E/14E/15E EPS. We value the