Bata India stares at earnings downgrades

The pain for Bata India is far from over. After an earnings downgrades following weak results in the June quarter of this fiscal, the unimpressive results for the September quarter (Q2) suggest that analysts could further downgrade their earnings estimate for the company.

Weak demand coupled with rising competition, particularly from online/e-commerce players, pulled down Bata India's Q2 results. For the quarter, Bata's revenues inched up by 1.6% over the year-ago quarter to Rs 584 crore and lagged Bloomberg consensus estimate of Rs 615 crore. This is the second straight quarter of poor top-line growth for Bata.

Given the discretionary nature of its products, Bata could also be impacted from demonetisation, believe analysts. There are other issues as well.

"Structural concerns such as large store network, under-investment in branding which may hit return ratios despite the recent drag on e-commerce sales as brands reduce discounts for distribution gains are key overhangs on the Bata scrip," wrote analysts at Ambit Capital in a recent note on the company. The brokerage has a 'sell' recommendation on the stock due to these headwinds.

What saved the day for Bata in Q2 was the savings in input costs as well as other expenses, which led to an 81 basis point year-on-year expansion in the EBITDA margin to 9.2%. Other income, too, grew 45% to Rs 14 crore. These helped Bata post a 32% increase in profit before tax and exceptional items to Rs 50 crore. A sharp jump in the tax rate (from 22% to 31.3%) led to a fall of 36% in the reported net profit to Rs 35 crore, which though was in-line with Bloomberg consensus estimates.

At current levels, the Bata stock trades at 30 times one year forward estimated earnings which is also higher than its historical average one-year forward price to earnings ratio of 28 times. These valuations do not fully capture the downside risks from note ban adequately.

While organised sector players like Bata will gain in the longer run from both demonetisation and GST as the unorganised sector may struggle, the near-term prospects do not look exciting. For now, investors are thus better off staying away from this scrip.

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