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Bata India Ltd is putting its best foot forward during the pandemic. Its Q4 performance shows that the company has been working hard to control costs, given the tepid sales growth. This has impressed the Street considerably with the stock gaining about 5% on Thursday.

Bata’s Q4 revenues were marginally behind the estimates, declining by about 5% year-on-year (y-o-y). Sales were lower sequentially as the second wave of covid-19 infections played spoilsport. But note that Q3 was also buoyed by festive season sales. In that context, Bata India’s Q4 sales weren’t all that bad. Schools and offices were also closed, which has led to a dip in sales of the formal category.

Some of this had an impact on margins as gross margins slipped due to the unfavourable product mix, which did impact operating margins. However, staff costs were lower. Bata tried to make up for the slack in sales with other cost controls. Savings in discretionary spending and rentals helped reduce other expenses by 18% y-o-y. Much of this could be sustainable and help earnings growth when the recovery kicks in over the coming quarters, investors seem to be betting.

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“While both revenue/Ebitda was 6%/15% below our estimate, we wouldn’t read too much into the miss given high volatility in underlying retail demand in the current environment and consequent operational impact given high fixed cost nature of Bata’s business," pointed out analysts at Axis Capital in a client note.

Bata India is expanding its branch network by appointing new distributors. Last quarter’s addition of 10 new franchise partners in smaller towns is a good step forward despite the lockdown. Besides, it plans to scale up online presence through own channels, as well as other online marketplaces. A new chief executive officer, with experience in the fast-moving consumer goods space, was appointed .

“We note several initiatives to accelerate recovery such as ramping up sales from new channels (ChatShop), Home Delivery, Store on Wheels, capturing rural demand through franchisee stores and restarting promotional campaigns and new launches," said analysts at ICICI Securities Ltd.

While the stock has done well recently, it’s still about 13% away from last year’s pre-covid highs. The second wave of covid could impact revenues in FY21. But driven by some of its premium products and new launches, the Street is pencilling in a good recovery in FY23. However, investors are likely paying a high price for now. The stock trades at 65 times FY20 earnings, which reflects steady-state performance before the impact of covid.

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