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Taking Stock: A Deeper Look at Bata India

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As part of our taking stock series started in 2017, in this post we analyze Bata India – leading retailer in the footwear business in the country.

The Industry

The global footwear industry is estimated be $220 Billion (14.30 Lakh Cr) and 23 billion pairs. China has more than 60% share in global production volumes. The global footwear market can be divided into four regions – North America, Asia Pacific, Europe and Rest of the World,.

Asia Pacific is the largest and has 40% market share.The Indian footwear market is estimated to be Rs 50,000 Crs and 2.2 Billion pairs. In terms of volumes India has 9.6% share in the global production and 4% in value terms. 90% of the footwear produced are consumed domestically and exports form a very small portion. Exports from India are mainly to the USA and UK, 30% of the total exports are to these countries. India is the second largest footwear producer in the world after China and third largest consumer after China and USA.

The domestic footwear industry can be classified into various segments. Firstly let us look at the organized and unorganized market. The organized market constitutes 26% of the market with 74% being with the unorganized segment, the unorganized segment is catered by small scale industries. The organized market is estimated to be growing at 18% as compared to 14% for the unorganized segment.

Footwear can also be classified into men’s, women’s and kids segment. The men’s segment has a 54% share of the market followed by the women’s segment with 37% and the kids segment having a share of 9%.

The organized players are strong in the men’s segment whereas it is the unorganized players who have a major share in the women’s and children’s segment. The women and the kids segment is also the fastest growing segment growing at 18-20%, whereas the men’s segment is growing at 12%. One interesting aspect of the Indian footwear Industry is that India produces more of men’s footwear whereas the world’s major production is in the women’s segment.

The market can also be classified into branded and unbranded. The branded market is estimated to be 42% of the market, while the unbranded market constitutes the balance 58%. Some of the players in the organized and branded segment include Bata, Khadims, Adidas, Liberty, Relaxo, Rebook, VKC and Paragon. International brands like Aldo, New Balance, Kenneth Cole and Asics have also set up shop in the country.

Sales of footwear happen through various channels. 74% of the footwear in the country is sold through the traditional channel, which includes mom and pop footwear stores, 13% is sold through exclusive brand outlets (EBOs) – these include stores by Bata, Relaxo, Nike Reebok etc, 6% is sold through stores like shoppers’s stop, lifestyle and pantaloons, 4.5% through multi brand shoe stores like metro and mochi and 2.5% through the online channel.

67% of footwear sales are from urban India while rural India makes up the remaining 33%. Urban India is further classified into metro/mini metro, tier 1, tier 2 cities. 40% of the urban market sales come from metro and mini metro cities (Metro – Mumbai and Delhi NCR, Mini metro – Bangalore, Kolkata, Chennai, Hyderabad, Ahmedabad and Pune).

Footwear can also be segmented based on the price that it is sold at, the segments are shown below.

Taking Stock: A Deeper Look at Bata India

Players in the premium segment include Charles & Keith,Clarks, Kenneth Cole, Aldo etc. These companies typically have exclusive brand outlets (EBOs). The mid and economy segment is dominated by Bata, Khadims, Liberty, Woodland etc. Mass brands include Action, VKC, Lakhani, Lancer, Relaxo etc.

Footwear can be segmented as leather and non leather. Non leather products include – rubber slippers, canvas, sports and school shoes, sandals etc. Sales of non leather footwear account for about 52% in volume terms in the country. Casual footwear is the largest product segment in the Indian footwear market,  it forms 67% of the retail footwear market in the country.

GST rate stands at 5% for footwear for upto Rs 500 and 18% for footwear priced greater than 500.

The Company : Bata

Bata is the behemoth of the footwear industry in India. It is the largest retailer and manufacturer of footwear in the country. The company was born as T&A Bata Co in 1894 in Zlin, Czechoslovakia and entered in 1931 as Bata Shoe Company private limited. It set up a small operation in Konnagar near Calcutta in 1932. It developed this facility and currently it is township called Batanagar. The company changed its name to Bata India Limited after going public in 1973.

Bata India is the Indian unit of Switzerland headquartered Bata shoe organization (BSO). BSO is structured into three geographic units – Bata Europe, Bata Emerging markets (Asia Pacific, Africa and Latin America) and Bata protective (worldwide B2B operations). The parent has presence in over 70 countries operating more than 5000 stores supported by 26 global production units across 18 countries.

Some of the aspects of the Bata India in numbers – 4 manufacturing units in Kolkata, Patna, Bangalore and Hosur, 3.01 million sq.ft of retail space, production capacity of 21 million pairs of footwear, sales of 47 million pairs of footwear in FY18. 1375 retail stores across at the end of FY18. The company has the largest retail footprint in the country. Below are details of retail outlets of other players in the footwear market at the end of FY16.

Taking Stock: A Deeper Look at Bata India
                       Source: Khadims DRHP

Bata is way ahead when compared to the other players in terms of no of stores that it has in the country

The companies principal business activities is in the below segments

  • Footwear and accessories – Retail
  • Footwear – non retail

On the retail front the company has 1375 stores across the country, the stores are a mix of company owned and franchisees. Out of the 1375 stores about 150 stores operated through the franchise route, which translates to 11%.

The company intends to increase the number of franchise stores to 300-350 in the next 2-3 years. These will be mainly set up in tier 2 and 3 cities. An added advantage in the franchise model is that the CAPEX to set up the stores will not undertaken by the company and has to be made by the franchise owner.  This should help the company in increasing its asset turnover ratios going forward. The company has been setting up 80-100 stores every year and will continue to do so in the near future.

Bata has three formats of stores – Bata, Hush Puppies and Footin. Hush Puppies is positioned as a premium lifestyle casual footwear brand by the company. These products are known for its comfort, quality and style. The company has 90 exclusive Hush Puppies stores across the country at the end of FY18. Footin outlets are targeted towards customers in the age group of 15-25 and products are priced in the range of Rs 399-599. The footin stores on an average are spread over an area of 1000 sq ft and offer affordable fashion footwear and accessories.

The company is also investing on upgrading its existing stores to increase footfalls and improving shopping experience of customers. Various initiatives undertaken by the company in the recent past are –

  • Launching of “Red Angela Stores” in Kolkata and Delhi. These stores have a red and white format to facilitate instant recall for the Bata brand.
  • Setting up of the “All Women Store” in Bangalore.
  • Opening of the “Power” store in Noida, which will stock the power brand of products. The company has also got Smriti Mandhana, opener of Indian women’s cricket team as the brand ambassador of its sports brand Power. It has also got on board Kriti Sanon, upcoming bollywood actress as brand ambassador of Bata.
  • Company has also launched various new collections under its brands. .

The company is undertaking all these incentives as Bata is not perceived as a youthful brand. When one would hear about Bata school shoes, hawai chappals and sandals would come to mind, the company wants to change this perception, hence undertaking all these activities.

The company also has a significant online presence. It sells its products through various e commerce channels and also through its website and mobile application. In FY18 the company sold more than 8.9 lakh pairs of footwear through the online channel and achieved turnover of Rs 88 Cr.

The non retail business comprises of urban wholesale, industrial and institutional business divisions. The company has about 350 distributors across the country to cater to the wholesale business.

Brands

Taking Stock: A Deeper Look at Bata India
             Source: Bata ARs and Website

Financials

Balance Sheet

Taking Stock: A Deeper Look at Bata India

Bata is not a asset heavy company. What do we mean when we say this? The net fixed assets as percentage of total assets was only 14% for the company at the end of FY18. In the FY09-18 period net fixed assets have peaked at 22% of total assets in FY11. The two largest components of net fixed assets are buildings and furnitures and fixtures. The net book value of these were Rs 105 Cr and Rs 68 Cr respectively at the end of FY18. If the net fixed assets do not form a majority of the assets then what does? The answer to that lies in the current assets.

Bata is a current asset heavy company, current assets include items like inventories, receivables, cash and bank balances and other current assets. Current assets formed 73% of the total assets of the company at the end of FY18. Inventories formed a major part with 36% of the assets followed by cash and equivalents at 28%, receivables form only 4% of the assets, this is because Bata’s derives majority of its revenues from its retail business which is cash and carry. The cash and equivalents component has increased over the years and was the highest at 28% in FY18.

Why has this increased and where are these monies parked? Let us take the example of FY17 where  Rs 207 Cr were invested in bank deposits, take a look at the below cash flow statement

Taking Stock: A Deeper Look at Bata India

The company generated net cash flow from operations (CFO) of Rs 256 Cr, CFOs are cash that the company generates by running its day to day operations, these can be used to invest back in the business by buying assets like plant and machinery, buildings etc or purchase financial assets, reduce debt and pay dividends.

In the case of Bata, the company does not have debt and as discussed above as it is not a fixed asset heavy company – does not require large investments in fixed assets. The company has used majority of its CFOs by investing in bank deposits which mature in the next 12 months. The company has also paid dividends to the tune of Rs 45 Cr, a dividend payout of 20%.

Taking Stock: A Deeper Look at Bata India

Since the company has no debt majority of the assets have been funded by equity. Equity funds 69% of the assets of the company. The other major component that funds the assets are trade payables, they fund 27% of the assets. Trade payables are the monies that the company has to pay for buying inventory on credit, it is like a float that the company enjoys. Hence one more important aspect that an investor must pay attention to while analyzing the business of Bata is its working capital. We will come to the working capital later in the post. ​​​​​​​

Profit and Loss​​​​​​​​​​​​​​

Taking Stock: A Deeper Look at Bata India

The company posted net revenues of Rs 2634 Crs in FY18. 70% of the revenues come from the men and kids segment and 28% from the women’s segment. 40% of the companies revenues are from its premium brands. The company sold 47 million pairs of footwear in FY18. Assuming that 5% of net revenues are derived from the accessories, garments and others segment, the average realization per pair is Rs 532 (2502/4.7).

Compounded revenue growth hasn’t been impressive. The CAGR growth in sales since FY09, FY12-18 and FY16-18 period has been 11%,7% and 4% respectively. The company earlier used to follow the Jan-Dec period to report its financial results, they have changed this since FY15 and now follow the Apr- Mar period. In FY16 the company lost market share and volumes due to challenges that it faced in implementing its new IT system, this lead to delay in supply of footwear to retail stores.

Gross profits have grown in line with the increase in revenues. Gross profits have increased by 12%, 8% and 6% for the period discussed above. Gross profits can grow faster than sales if input prices (raw materials) fall and the company is able to maintain its selling prices or there is change in the product mix – the company is selling premium products at higher prices. In the case of Bata we do not have the volume breakup of its various brands. Gross profit margins in FY18 were 54%, the company has been able to maintain gross margins of greater than 50% since FY09, this is a positive.

Operating profits or EBIT of the company was Rs 291 Cr, EBIT margins were 11%. Average operating margins since FY09 have been 10%. Operating margins are impacted by the fixed expenses recorded below the gross profit line, below is the trend of some of the major expenses over the last three years.

Taking Stock: A Deeper Look at Bata India

Salaries, rent and advertisement expenses are 60% of the expenses, this is excluding depreciation expenses. The company has strong retail presence and has to pay salaries to its staff in those stores. Majority of the outlets are company owned and the company enters into lease agreements for those stores and records it as rent in the profit and loss. The company has 150 franchisees out of the 1375 outlets, going forward the no of stores through the franchisee route are going to increase and hence one can expect in rental expenses moderating.

One can observe that advertising expenses have increased by 30% CAGR in the FY16-18 period, advertisement expenses as percentage of sales is just 2%. The company also pays royalty of 1% of sales. Operating profits have increased by 22% CAGR in the FY16-18 period, when sales have increased by only 4%. This is primarily due to single digit increase in expenses below the gross profit line and drop in depreciation expenses by 10%.

Net profit of the company stood at Rs 221 Cr in FY18 (excluding Rs -16 Cr of other comprehensive income), net margins of 8%. The average net margins since FY09 have been 9%. Net profits have increased by 16% CAGR since FY09, 5% in the FY12-18 period and have been flat in the FY16-18 period. There was an exceptional item of Rs 75 Cr that was added back in FY16, excluding this item the compounded net profit growth would have been 24%.

Effective tax rate calculated as tax expenses/earnings before tax was 35% in FY18, this has been in the same range except two years FY11-27% and FY17-29%. This is a good sign as it indicates that the company is paying its full taxes. 

Cash Flow Statement

Taking Stock: A Deeper Look at Bata India
Taking Stock: A Deeper Look at Bata India

While analyzing the cash flow statement it is very important to check if the company is generating cash from the operations of the business, in other words to check the CFOs of the company. In the case of Bata the company reported a positive CFO of Rs 160 Cr, this needs to checked with the net profits. CFOs are compared with the net profits of the company to check if accounting profits are being converted into cash, these need to be checked for longer periods of time. One needs to add the cumulative CFOs and net profits over periods of time and check for any divergence, if the cumulative CFOs are higher than the cumulative net profits then the company is efficient in converting its net profits to cash.

In the case of Bata the cumulative CFOs for the FY09-18 period is Rs 1287 Cr and the net profits are Rs 1602 Crs, net profits are higher by 25%.

For FY18 the CFOs are Rs 160 Cr as compared to the net profits of Rs 220 Cr, the divergence is mainly due to the changes in working capital. The company has had to invest more in working capital during the year and this is lead to lower CFOs as compared to the net profits.

The company has used these CFOs to invest in the assets for the business and Rs 76 Cr have been invested in bank deposits. The free cash flow is Rs 48 Cr (CFO – CFI), this is used to pay dividends and interest amounting to Rs 56 Cr. The company has used the cash from the previous year to meet the shortfall (56-48). The company has been posting positive CFOs from FY09, which is a very good sign.

The ROE of the company was 16% at the end of FY18, the average ROE of the company since FY09 is 22%. In the FY09-18 period the company posted highest ROE in FY11 of 45%.

As discussed above in the balance sheet section the company is current asset heavy, proportion of current assets is highest when compared to the total assets. Hence we decided to look at the cash conversion cycle (CCC) of the company. CCC is calculated as

                                  CCC = Inventory days + Receivable days + Payable days

Lower CCC days is good and indicates that the company is able to complete the whole cycle of converting raw materials to finished goods, selling the same and receiving monies for credit sales and paying off for goods bought on credit. Below is the trend in the cash conversion cycle of the company since FY09

Taking Stock: A Deeper Look at Bata India

The current CCC of the company is 97 days. The company had the lowest CCC in FY11 – 77 days, the company does not have to invest additional in working capital if the CCC is low.

Competition

The other listed players in the market are Relaxo, Khadims, Liberty, Mirza International, Sreeleathers and Superhouse Ltd. Some of the important financial parameters of these companies are shown in the table below

Taking Stock: A Deeper Look at Bata India

Data for all the companies except Liberty is for FY18, for Liberty the data is for FY17. CFO and FCF figures for all companies except Bata are for FY17, In the case of Bata it is FY18. Data has been taken from morning star, screener and moneycontrol.

Observations from the above table

  • Four companies have posted double digit revenue growth, with Sreeleathers recording an impressive growth of 42%. Cumulative revenues of all the 7 companies is Rs 7,598 Cr
  • Gross margins of four companies is greater than 50%, companies recording higher gross margins is a positive sign
  • Operating margins for Sreeleathers is the best at 22%, although it has the lowest gross margins. The companies expenses below the gross profit line is not much and hence gross profits are able to directly flow to the operating profits. Bata, Relaxo and Mirza have similar operating margins
  • Net margins of all the players except one is in single digits, it is likely taxes that lead to this as all the companies except Superhouse have no or negligible debt
  • Relaxo has the best ROE and ROIC among the pack. Three other players have ROE and ROIC in higher double digits. It is very important for the company to earn more than the cost of capital to create value for the investors
  • All companies have positive CFO and FCF. In the case of Sreeleathers and Superhouse the CFO is equal to the FCF, this means that these companies haven’t invested in business or financial assets
  • Market cap of all the 7 players is Rs 23,780 Crs. Bata and Relaxo trade at +50 PE multiples

Other Items

The company has strong leadership – The MD, Rajeev Gopalakrishnan has been with the company for 28 years. Sandeep Kataria is the CEO and has an impressive history with Vodafone, the KFC/Pizza Hut chains and Unilever.   The promoter is Bata BV (Netherlands) and has 52%. There’s no pledging or trading of shares by the promoter.

Management salaries are: 4.4 cr. for the MD, and will be around 3 cr. for the CEO. This isn’t much compared to a 200+ cr. profit.

Institutions own 31% of the company, including mutual funds, insurers and FIIs.

The stock chart:

Taking Stock: A Deeper Look at Bata India

Final Thoughts

Bata has taken a lot of initiatives in the recent past to project itself as a youthful brand. The investments made by them will take time to pay off. The company is also looking to add more stores through the franchisee route, this will lead to the company making less investments in setting up retail outlets. Other initiatives like home delivery of footwear, ordering online and collecting products from the store, which can enable more sales when the customer visits the store to collect their product and enrolling members to its programme Bata Club will help the company.

Triggers like growth in the women’s and kids footwear segment will help, the company derives 30% of its sales from the women’s segment and there is scope to increase sales from this segment. Increase in incomes and customers preferring branded products should help the company as it has a presence across the country through its 1375 retail outlets.

The company has a long runway and investors need to give a serious thought in having this company in their portfolios, however the company trades at 51 times earnings, which is not cheap. It is for investors to decide if they find value at the current prices or would wait for the company to trade lower to add this in their portfolios.

Note: this is not a recommendation to buy. This is purely an educational exercise. Please do your own diligence before you buy or sell securities. Capitalmind may have the stock in portfolios recommended by it, or managed by it at Capitalmind Wealth.


NOTE: As a disclosure some Capitalmind authors may own the above company in their stock portfolios. There is no other relationship between Capitalmind and the above company. Please do not consider this article as a recommendation, It is purely for informative purpose only.

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