Bata: Struggling to fit in the online race

Intensifying competition from domestic and global players, especially on the online retail platform, has hit #Bata #India’s performance recently, and has turned the Street cautious on the #stock. 

#Brokerage Nomura recently downgraded the stock to ‘sell’ rating from a ‘buy’ and slashed its one-year target price by about 36% to Rs 425 apiece, indicating a 14% downside from current levels. Slowing consumption demand, frequent mid-management changes, higher inventories (nine months) and delayed implementation of enterprise resource planning (ERP) program are other factors weighing on Bata's performance. 

Lumpy quarterly revenue growth (year-on-year) has led to a fall in the adjusted (for one-offs) net profit for four straight quarters that ended in September 2015. Thanks to the high distribution network of over 1,200 stores, Bata's fixed costs have remained unchanged at about 35% of sales. 

As a result, Bata's EBITDA margin has contracted from 15.6% in CY13 to 13.6% in FY15. This metric is likely to contract further over the next two years as it corrects the inventory in the system and steps up advertising spends to build brand equity, estimate analysts. 

At a time when online retailing is growing at a rapid pace, Bata's large distribution network (about 3.3 million square feet) is no longer an entry barrier. In its recent interactions with analysts, the management indicated that they are going slow on store expansions and plan to set up 70-72 stores this fiscal against the earlier guidance of 100 stores. 

The company has under-invested in its key brands such as Bata, Marie Claire, Power, Naughty Boy, North Star, among others, relative to its peers and has focused only on store expansion to grow. Licensed brands such as Hush Puppies, Dr.Scholls, among others, however, have grown better and provided some support to overall sales. Strong brand equity, coupled with an attractive pricing strategy hold the key to successful online presence. 

Bata’s management believes its e-commerce division has done exceptionally well and has reached approximately 1,400 cities across India with its shipments. It plans to launch 100 footwear designs exclusively for e-commerce. 

Analysts at Nomura, though, believe these plans may not be sufficient to capture the online market potential.

Notwithstanding these pressures, Bata’s scrip trades at 29 times its FY17 estimated earnings, slightly higher than its own historical average one-year forward price to earnings (PE) ratio of about 28 times. 

In this backdrop, analysts remain cautious on the near term prospects of the company. Any improvement in same store sales growth and performance of its products on the online channel could act as key upside triggers for the stock. Successful implementation of the company's corrective measures will also be crucial going forward.