Markets
Can this market leader reclaim its past glory in the ₹1 trillion sector?
Summary
- As India's footwear industry undergoes a transformation, Bata is striving to reinvent itself amid rising competition and changing consumer preferences
Once a budget brand, this company is now focusing on premiumization. It's also expanding its store network and e-commerce presence. While the journey has started, the benefits will be seen in the future. If the plan works out, the opportunity could be potentially lucrative.
Saurabh Mukherjea of Marcellus Investment Managers, once holding a pair of slippers worth ₹103 in his hand, said, “This slipper is a monopoly" and added, “This chappal is an instrument of enormous wealth creation."
The slippers he mentioned were manufactured by Relaxo Footwear, a company Marcellus owned shares in. Saurabh is known to be very vocal and promotional for his company. However, he ended his love affair with Relaxo at the beginning of 2023.
Rising raw material prices, increasing competition, and declining profits due to a loss of market share were cited as reasons for the exit. Valuation at 112x that time didn’t leave much comfort for investors either.
But, in over 18 years, Relaxo delivered a whopping 900x returns before topping out in late 2021. Not surprisingly, it has delivered no returns since and is down a little over 50% from the peak.
Relaxo is not the only footwear company that made its all-time high (ATH) three years ago. Campus Activewear also crashed over 50% from ATH. Bata also topped out simultaneously and is down 33% from ATH.
One thing common among them is that they all cater to the mid-range and affordable segment, which is witnessing a slowdown.
This is evident because Metro Brands, which caters to the premium segment, has not been affected much. Its stock price, which is trading near ATH levels, has returned 163% since its initial public offering in 2021.
Given this huge disparity, what’s next for Bata, the market leader. Can it reclaim its past glory? Well, the company’s plan is afoot, and if it executes well, the opportunity could be potentially lucrative.
Let’s dig deeper…
India’s footwear industry
The Indian footwear industry is valued at around ₹ ₹1 trillion and has grown at a compound annual growth rate (CAGR) of 8% from ₹72,000 crore in FY20. According to IIFL Research, it is expected to grow at a CAGR of round 12% over the next decade.
However, the organized market's current share is just 35%, which is expected to grow to 45% by FY34. This shift towards organized channels could help it grow at a rate of 15% CAGR over the next decade. This growth is expected to be fueled by consumers' leaning towards branded and premium products, driven by rising per capita incomes.
Organized Footwear Industry Market Share Expected to Grow to 45% in FY34
At the same time, the average selling price (ASP) has grown at around 5% CAGR during FY20-FY25E and is expected to grow at a similar rate of around 5% CAGR going forward.
Moreover, India's footwear consumption is still below the global average. It consumes only 1.9 pairs of shoes per person, much less than the global average of 3.2 per DAM Capital.
This is despite being the world's second-largest consumer after China, which consumes 2.9 pairs of shoes per person. Other developed countries like the US, the UK, and Japan consume 7.2, 6.2, and 5.7 pairs of shoes per person, respectively.
India’s Footwear Consumption is Even Lower Than Brazil's and Indonesia
Low footwear penetration can act as a tailwind for the sector's growth in terms of value and volume. This growth is expected to be driven by increases in gross domestic product (GDP), per capita income, disposable income, and aspirations of the middle class.
Also Read: Metro Brands is treading slowly on the growth track
Premiumization in the footwear sector
The industry is broadly divided into three segments as per pricing:
- Premium ( ₹2,001-3,000) and Premium Plus ( ₹3,000+): This segment is dominated by international brands like Adidas, Puma, Nike, Metro Brands, etc.
- Economy ( ₹500-1,000), Mid ( ₹1,001-1,500), and Mid Premium ( ₹1,501- ₹2,000): Campus, Bata, and dominate this segment.
- Mass (< ₹500): Offered by retailers like Relaxo
Rising raw material costs in 2022 impacted Organised Sector
Footwear is manufactured using key raw materials, such as polyvinyl chloride (PVC), ethylene-vinyl acetate (EVA), rubber, and polyurethane (PU). These commodities' prices are susceptible due to demand-supply, adverse weather conditions, and crude oil prices.
So, around 2021, when their prices started increasing, organized footwear retailers like Bata were prompted to raise product prices due to increased input costs.
Steady Rise in PVC and EVA Prices Since 2020 Peaked in Mid-2022
Bata generated 75% of its revenue from products priced below ₹2,000, 25% revenue from products priced between ₹500-1000, and 15% revenue from products priced below ₹500. This price point targets lower-middle-income consumers who have been dealing with structural challenges and have reduced their spending.
40% of Bata’s Sales Come from Products Priced Below ₹1,000
High inflation and low real wages have reduced this class's purchasing power. Moreover, the slowdown in the rural sector has worsened the situation.
This forced many of them to seek more affordable options from unorganized players. This shift impacted their sales, profitability, margins, and market share.
The limited focus on premium offerings left Bata with little choice, especially as demand in the premium segment grew steadily. The numbers don't lie either, as Bata's sales and profit have compounded at just 3% and -2 % in the last five years, respectively.
Hence, it is slowly moving away from its old image to bring back growth.
Bata is shedding its image as a budget friendly brand
Young Indians' aspirations have increased. Footwear is not limited to one pair anymore; instead, people buy multiple pairs for different purposes (office wear, casual wear, etc.).
Plus, consumers opt for premium goods, driving the demand for premium footwear. Also, people are more inclined towards athleisure, expected to grow by 15% annually, as per Yes Securities.
Despite having multiple brands, Bata was late in realizing this change in market dynamics, which hampered its growth.
But it now realizes that Indian buyers aspire for more—they want style, swag, and a premium lifestyle. This has inspired it to enhance its modern and premium vibe to connect with today's shoppers.
How is Bata tapping into this new opportunity?
It is doing this by focusing on premiumization through mid to premium brands: Red Label, North Star, Power, Weinbrenner, Bubblegummers, and Comfit. It hopes these brands can lead the company's next phase of growth.
After Bata, Hush Puppies Stands as the Top Brand, Followed by Power
It has also increased its focus on its premium brand, Hush Puppies (HP). It is expanding this by increasing the number of stores, which reached 136 in September 2024, compared to 113 in the second quarter of FY 2024.
Growing HP brand outlet
Further, to attract millennials and Generation X with multiple options, it introduced the concept of Sneaker Studio in FY22. This showcases a wide range of Bata brand sneakers inside a dedicated space at EBO. As of Q3FY25, the idea has been expanded to 756 stores.
In addition, Bata launched Flotz – a casual, washable, and comfortable open footwear range – at a 50% premium to existing Bata products in 2021. It is Bata’s fastest-growing brand to cross ₹100 crore in revenue, contributing ~5% to Bata’s sales. It expects to contribute ₹500 crore to its topline in the next five years.
Flotz turnover has grown 1.6x in 2QFY25, while the volume has grown 1.7x. It is available at 1500+ doorsteps and 14 kiosks, which are targeted to increase to 26 in Q3FY25.
It has also rejuvenated its athletic brand, "Power," the third largest brand under the Bata portfolio. In Q2FY25, sales grew 6% YoY, while volume grew 9%. Bata now has four power EBOs, which it plans to increase to 10 during Q3FY25.
In addition, it has expanded into athletic apparel with the Power Apparel brand. It has a presence in 70 stores and aims to expand to 100 stores by 2QFY25. In the premium category, it has also partnered with Authentic Brands Group to manufacture and distribute the famous Nine West brand.
Around 11% of Bata's sales come from e-commerce, including the Bata portal, its fastest-growing channel, and is expected to grow faster than the overall business. It recorded a 16% YoY growth in e-commerce business in Q2FY25.
E-commerce Contributes 11% to Bata Sales, Company-Owned Outlets Dominate.
In this segment, the company is also in talks with quick commerce companies to offer 10-minute delivery of its products, a first in the sector.
Bata has been very lazy in expanding its store network, growing from 1,265 in FY16 to 1,561 in FY20 at a CAGR of just 5%. This slow expansion and a lack of focus on brand building have also hurt it.
However, it now aims to aggressively expand its stores to 100-150 stores annually, which could lead to growth. Moreover, to expand its urban coverage, it is considering adding larger stores beyond tier-1 cities.
Total Store Count Increased by 93 in 1HFY25 to 1,955
Finally, this restructuring has started yielding positive results for Bata. Products priced below ₹1,000 now contribute only 40% of its revenue in FY24, compared to 50% in FY19. At the same time, the contribution of sneakers and casual footwear has increased from 35% to 50-55% in the same period, at a CAGR of 11-13%.
Products Below ₹1,000 Account for 40% of FY24 Sales; Sneakers & Casual Footwear Contribute 50-55%
In addition, Bata is aiming for economies of scale by integrating its sourcing partners. It aims to focus on 55-60 partners instead of 100 earlier. It expects to consolidate 45% in FY25 and another 20% in FY26. By integrating, Bata aims to reduce costs, improve efficiency, and strengthen bargaining power.
What about Bata’s financial and valuations?
In Q2FY25, Bata's revenue grew 2.2% YoY to ₹837 crore, while profit after tax rose 53% YoY to ₹52 crore. This was driven by operational efficiency and premiumization.
On the other hand, its Earnings before interest tax depreciation and amortization (EBITDA) decreased 4% YoY to ₹181.6 crore, while its margin declined to 20.8% from 22.2% in Q2FY24.
Bata’s Valuations
Given the company’s lackluster performance, it’s not surprising that the stock has been a underperformer.
Bata has Underperformed after Topping in Late 2021
Bata's poor performance is reflected in its valuations - both price-to-equity (PE) and an EV/EBITDA basis.
It is trading at 53.4x, below its 10-year median PE of 56.9x. This valuation is at a high discount to its peers, Metro, Relaxo, and Campus, which trade at PEs of 82x, 93.4x, and 93.5x, respectively.
Moreover, on an EV/EBITDA basis, its current multiple of 21.1x is 17.5% lower than its 10-year average of 25.7x.
Conclusion
Bata is slowly moving from being primarily a mass retailer to also having a fair share in the premium category to tap into consumers' changing tastes. It also focuses on the athleisure wear segment through MBOs. While it has delivered early results, the benefits (if any) will be reaped in the coming years. Moreover, prices of raw materials have decreased from their peak levels, which is expected to benefit the entire industry and improve margins.
Note: Throughout this article, we have relied on data from www.Screener.in and Tijorifinance. Only in cases where the data was unavailable have we used an alternate but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.
Disclosure: The writer does not hold the stocks discussed in this article.
Also Read: Bata India continues to drag its feet on growth; trail remains rough
