Shares of Bata India Ltd are sprinting and are trading close to their all-time high of 1,554.80 apiece. The rally has been supported by the company’s steady revenue growth and margin expansion over the years.

As a result, the stock has been among the top gainers in the past year among the Nifty 500 companies, gaining 47%. Comparatively, the Nifty 500 index has fallen 9% in the same period.

A shift in sales towards high-end products has been a key driver of Bata India’s revenues recently. It seems the slowdown in consumption demand, which has hurt many industries, hasn’t affected footwear purchases.

Bata India’s volumes have been steady at about 47 million pieces in FY19. Hence, much of the growth is not due to greater volumes, but because of the increase in the average selling price, as a result of an increase in sales of premium brands.

The average spends over FY17-19 have increased 17% to 620 a pair.

Such premium products also have greater pricing power and, hence, better margins. The company’s Ebitda margin rose from 16.5% in Q1 FY19 to about 18% in Q1 FY20. Ebitda is earnings before interest, taxes, depreciation and amortization.

A positive is that Bata India has been consistently expanding its margins over the years. In Q1 FY17, for instance, the company’s Ebitda margin was 12.8%.

While all this is good, some of the future growth for Bata India will have to come from greater volumes and growing revenues rather than expanding margins.

“After having increased its Ebitda margin from 11.3% in FY17 to a likely 18% level in FY20, we think the heavy lifting from now on to drive earnings growth would have to come from sustained revenue expansion," said analysts at Nirmal Bang Equities Pvt. Ltd in a note to clients.

After its strong run, the Bata India stock’s valuation has zoomed to about 57 times its 12-month trailing earnings per share. Given the high valuations, it looks like a good time for a pause.

So, if investors plan to play catch-up, by buying into the stock now, they’d better gear up with shoes that serve for the very long term.

Close