Bata India’s stock valuations prompt investors to tread slowly1 min read . Updated: 04 Dec 2019, 07:00 AM IST
- For Bata India investors, the stock price run-up suggests a good share of the optimism is factored in
- For investors, the stock price run-up suggests a good share of the optimism is factored in the price
Investors of Bata India Ltd, which makes footwear, have had a good run so far this fiscal year. The stock has appreciated by 20% in FY20, looking fabulous in comparison to the 1% increase in the Nifty 500 index.
Valuations are pricey, say analysts. After all, the Bata India stock is trading at about 45 times estimated earnings for FY21, based on Bloomberg data.
Investors would therefore do well to tread cautiously hereon. The outlook on revenue growth doesn’t appear too promising for the company.
“With the December quarter being seasonally the strongest quarter, it is critical that we get a strong performance, for double-digit growth to be delivered in FY20," analysts at Nirmal Bang Institutional Equities wrote in a report on 15 November.
“While sequentially, the December quarter may have got off to a good start, the extremely strong performance in base quarter (15.5%/47%/ 51% growth in revenue/Ebitda/profit after tax in 3QFY19) may pose a challenge," said the report. Ebitda stands for earnings before interest, taxes, depreciation and amortisation.
For the half-year ended 30 September, Bata India’s revenues increased by 9% over the same period last year. Revenue growth dropped sequentially to 7.3%. “We have reduced our FY20 and FY21 revenue estimates to factor in high base," said analysts at Dolat Capital Market Pvt. Ltd in Bata India’s September quarter results review. However, the broking firm increased earnings estimates to factor in the reduction in corporate tax rates.
Note that despite revenue growth moderation, the company’s profitability remained strong. Gross profit margin had improved sequentially as well as on a year-on-year basis. Premiumisation of its product portfolio supports margin improvement, say analysts.
To be sure, Bata India has done well to increase its efforts to appeal to the younger consumer. It has increased advertising spends and focused on renovating its stores. Last quarter, the company rolled out a campaign, “New Arrivals Every Friday", featuring designs to attract new consumers, and pull the old consumers back to stores and its online platform.
For investors, the stock price run-up suggests a good share of the optimism is factored in the price.