Photo: Sanjay K Sharma
The stock of Bata India has surged 13 per cent after a healthy December 2018 quarter result, taking the one-year gains to about 98 per cent. The stock has outpaced the S&P BSE FMCG index that rose 4.7 per cent since February 12 and is up about 14 per cent in one year. This sharp rally could cap upside in the stock that now trades around 45 times its FY20 estimated earnings, 15 per cent higher than its average five-year valuation, even as the company's earnings outlook remains healthy, say analysts.
An expected rise in advertising spends from 0.7 per cent of revenue in CY13 (earlier Bata followed calendar year) to 3 per cent in FY20 with focus on celebrity endorsement is likely to increase footfalls, Girish Pai, head, research at Nirmal Bang said in a report. This would get a leg up from technology initiatives, currently at a pilot stage, to convert these footfalls through better inventory management, he adds.
Also, preference to purchase through the e-commerce channel has been rising, giving additional benefits to consumer stores such as Bata. From an expected 4 per cent in FY19, Bata’s revenue-contribution of this distribution channel is aimed at 15 per cent in five years. Although, a muted performance of the wholesale channel can prove a downside risk to volume growth. Given this backdrop, analysts estimate Bata to clock about 15 per cent annual growth in net sales over the next two years.
While rising advertising spends and investment in new technology could cap operating margins, gross margin expansion would help partially offset this pressure. Gross margin should benefit from volume discount by raw material vendors, change in revenue mix with rising traction of high-profitable premium products and women's wear (repositioning Bata for youth), to add more. In December 2018 quarter too, Bata saw good discount from vendors, which is likely to continue at least till September 2019.
Bata's Ebitda margin is expected to rise to 18 per cent by FY21 from around 17 per cent during April-December 2018. Thus, net profit is likely to rise faster (vis-à-vis revenues) by 19 per cent annually during FY19-FY21.