Bata India sprints as margin expansion springs a surprise in Q32 min read . Updated: 15 Feb 2019, 03:59 AM IST
- Bata India's strategy of introducing many high-end and premium brands are clearly bearing fruit
- Bata India stores are seeing greater walk-ins, with more millennials increasingly opting to purchase its merchandise
Lately, the image of Bata India Ltd has changed from one of sauntering to that of sprinting. The firm’s strong Q3 results sparked a rally, taking its share price to an all-time high of ₹1,283 on Wednesday.
A fleet of initiatives undertaken in the recent past are bearing fruit. A key strategy has been to introduce many high-end and premium brands. This has not only helped increase same-store sales, but also helped the brand increase visibility. Analysts contend that Bata India stores are seeing greater walk-ins, with more millennials and youngsters increasingly opting to purchase its merchandise.
In fact, the revenue mix is now further tilting from wholesale sales towards retail. Retail sales rose to 88% of revenue, and registered strong 18% growth, year-on-year. Little surprise then, that third quarter revenue increased 15.5% to ₹778.7 crore.
Also, the company topped the high revenue growth with an expansion in Ebitda (earnings before interest, tax, depreciation and amortization) margin, even surpassing many analysts’ estimates. While analysts were anticipating about a 90-200 basis point Ebitda margin increase, Bata India delivered a stellar 450 basis point increase year-on-year in margins to a decade-high of 21% in Q3.
One hundred basis points equal percentage point.
There were several reasons for this. The company kept a tight leash on rental costs, which have held in the same range for about two years. It negotiated six-month contracts with its suppliers, against three-month contracts earlier. This shaved off about 200-250 basis points in input costs.
In terms of geographic spread, Bata India has been increasing the number of stores, adding retail outlets in malls and high-street locations. The management expects to add about 150 stores in FY19 to take its total reach to about 1,525 outlets.
“We anticipate the healthy revenue trajectory for Bata to sustain, driven by its enhanced focus on fast-growing categories such as sports, youth and women, and the swift pace of store additions. Furthermore, the scaling-up of premium products, which are now 30%, and controlled operational cost structure are key triggers for steady margin expansion," said analysts at ICICI Direct in a note to clients.
It is worth noting that a significant price rise in the Bata India stock has stretched valuations. The stock has, in fact, zoomed 72% this past year. Even assuming that the company meets its future growth estimates, stock valuations are stretched to quite high levels. At the ruling price of ₹1,260, it is quoting at what seems to be a lofty price-earnings multiple of 35 times FY21 earnings. If Bata India’s profits keep on sprinting, perhaps the valuations make sense.