Bata India investors see margin recovery

More recently, increased emphasis on contingency of product portfolio has helped revenue performance. But a major concern for Bata has been the painfully slow recovery in the margins. For perspective: The company’s revenue in the December quarter (Q3FY22) stood at 841 cr, Q3FY20 approx. more than the revenue of 830 crores. Still, the pandemic is nowhere near the pre-quarter. Gross margin in Q3FY22 was approximately 53% compared to 61% two years ago. Further, Ebitda (earnings before interest, taxes, depreciation and amortization) margin stood at 20% in Q3FY22 as compared to 31.6% in Q3FY20.

Margin expansion is unlikely to happen in a hurry. “It will take some time for margins to reach pre-Covid levels. Akhil Parekh, Analyst, Centrum Broking Ltd., said one factor that hinges on margins is the company’s high dependence on formal footwear, which has not fully recovered due to the Covid-led restrictions.

Sachin Bobde, analyst at Dolat Capital Markets Pvt Ltd. Ltd. said, “Bata will need its average selling prices to support margin expansion.”

That said, Bata could benefit from better maneuverability as restrictions ease. With the continuous opening of schools and offices, the demand for formal footwear may pick up. “While Bata is doing well in its new sneakers segment, the space is relatively more competitive. Hence, demand recovery in the formal segment remains important. Even though these factors need to be monitored, the near-term outlook on revenue and profitability appears to be unpredictable for the company,” Parekh said.

Note that at two-year CAGR, Bata’s revenue growth in Q3FY22 was around 1%.

Still, investors are sitting on smart gains. Bata’s stock has gained about 29 per cent in the last one year. However, appraisals aren’t exactly cheap. Based on Bloomberg data, Bata India shares trade at 54 times estimated earnings for the financial year 2023. “For Bata investors, the question is more about growth than about higher valuations,” Bobde said. “Going forward, malls, schools, office reopenings, favorable premise, new advertising campaigns, sustained e-com traction and ramp-up in store openings will be key triggers in FY23E,” analysts at Dolat Capital said in their Q3 review report.