Bata India Ltd hasn’t had it easy.
In the last few quarters, weaker spending trends, supply chain issues and fierce competition from the online platform have weighed on the company’s performance.
But valuations at about 32 times next year’s estimated earnings are not cheap and the stock has risen 12% from its January lows.
In the near future, therefore, there are few reasons for further appreciation.
According to Ambit Capital Pvt. Ltd, under-investment in brand (Rs.110 crore over FY09-15) and over-investment in stores (Rs.500 crore over the same period) will mar asset turns (2.4 times in FY17 from 3.1 times in CY09), with increasing competition fuelled by e-commerce.
Additionally, “foreign brands pose a direct threat to 12-15% of Bata’s portfolio and can impede growth of the ‘Power’ brand”, pointed out Ambit, adding that every 5% fall in Power’s revenues alone will impact earnings per share by 3%.
Power is a sports shoes brand.
It goes without saying that the impact on earnings will be greater if online competition eats into other parts of the product portfolio as well.
In any case, the subdued macroeconomy means that substantial improvement in same-store sales growth will be at bay for some time.
The company’s performance for the year so far is not encouraging. For the nine months to December, Bata India’s revenue increased about 10%, compared with last year. However, a faster pace of growth in costs and a decline in other income meant pre-tax and exceptional items earnings declined nearly 10%.
What can offer some comfort?
Store rationalization is one factor. “We understand that replacing its earlier aggressive store expansion strategy, Bata is adopting a calibrated approach in widening its retail footprint,” wrote analysts from Spark Capital Advisors (India) Pvt. Ltd in a note to clients on 26 February.
Secondly, optimizing rent expenses will be helpful in boosting earnings growth.
“We realize that not only are rental leases being re-negotiated to take advantage of the subdued real estate environment, but store sizes are also being optimized to drive efficiency,” the Spark note said.
According to the brokerage, Bata’s rental cost has grown at a compounded annual growth rate of ~24% versus ~14% revenue growth in CY10-FY16E, pegging rental at ~13.9% of sales in FY15 versus ~9% in CY10. The company changed its fiscal year to April-March from January-December last year.
But, given its valuations, it does look like the market has already priced in quite a bit of the optimism.