RESEARCH

Initiating Coverage Sector: Footwear BSE Sensex: 16,644

BATA INDIA

INITIATE CMP TP

BUY Rs601 Rs730

Focus on expansion and encashing Brand value

Bata India (Bata), after recording a successful turnaround story in 2005, has consolidated its position as a leader in the country's organised footwear segment with a 14-15% market share. We like Bata primarily because (1) growth of the organised Indian footwear industry and increase in per capita footwear consumption to help show a revenue CAGR of 18% over CY11-13E, (2) expansion of retail stores to improve geographical reach (especially in Tier II and III cities) along with increase in per store sales from Rs9.5mn in CY10 to Rs15mn in CY13E, (3) focus on outsourcing model to rationalise employee cost and improve working capital (4) expected margin expansion by 335bps over CY1113E on account of improvement in value mix and outsourcing and (5) expected RoE and RoCE of 29% and 27.1% respectively in CY13E. We initiate coverage on Bata with a BUY rating and TP of Rs730 (22% upside). Expanding geographical reach and increasing per store sales: Over CY06CY10, Bata added 343 new stores, closed down 277 stores and remodeled over 196 outlets maintaining a constant store count of ~1200-1300. It now plans to open 70-100 new stores/year with a focus on new locations as more than 85% of its existing stores are renovated and less than 2-5% remain cash drain stores. We expect per store sale to increase from Rs9.5mn in CY10 to Rs15mn in CY13E. Old outsourcing mantra still under play: Over the last 5-6 years, Bata started outsourcing labour intensive operations while retaining machine related operations. This led to (1)reduced employee cost as labour intensive jobs were out sourced and (2) increased third party purchases from 38% of sales in CY06 to 52% in CY10. We expect employee costs to reduce further and third party purchases to be 65% by CY13E which will improve margins and return ratios. Margin expansion to continue: Post restructuring, margins improved by 690bps to 12.6% over CY06-10. Going forward we expect further improvement in margin from 12.6% to 18.8 % over CY10-13E due to (1) improving value mix by increasing revenue pie of leather business and focus on women and kids segment, (2)increased outsourcing ,(3)focus on industrial and institutional business where margins are 300bps higher than the retail business, (4)improving store efficiency, sales/store and cost rationalisation and (5)increasing revenue pie of accessories. VALUATIONS & RECOMMENDATION We value Bata using the PE methodology and assigning a 1-year forward P/E multiple of 19.0x and initiate coverage with a 'BUY' rating on the stock and a target price of Rs730. At CMP of Rs601, the stock discounts CY12 and CY13 EPS of Rs29.0 and Rs38.3 by 20.7x and 15.7x respectively.
PERFORMANCE (%)
1M Absolute Relative 11.3 4.5 suman.memani@pinc.co.in

20 January 2012 Suman Memani +91-22-6618 6479

Abhishek Kumar +91-22-6618 6398 abhishek.kumar@pinc.co.in

STOCK DATA
Market Cap Book Value per share Eq Shares O/S (F.V. Rs10) Free Float Avg Traded Value (6 months) 52 week High/Low (Rs.) Bloomberg Code Reuters Code Rs38.6bn Rs134 64mn 46% Rs459mn 741 / 295 BATA IN BATA.BO

INITIATING COVERAGE

TOP SHAREHOLDERS
Name FID Funds Mauritius LIC IDFC Premier Equity Fund HDFC Prud Fund Wasatch Emering Mkt Smallcap *As on Sept 30, 2011 % holding 7.62 4.17 2.14 1.06 1.79

3M (11.9) (10.8)

12M 71.1 82.9

KEY FINANCIALS
CY09 Net Sales YoY Gr (%) Op. Profits OPM (%) Adj. Net Profit YoY Gr (%) 10,917 10.6 1,246 11.4 626 5.9 9.7 19.3 19.8 61.7 3.4 29.5 CY10 12,752 16.8 1,613 12.6 883 41.1 13.7 22.2 24.2 43.7 2.9 22.8 CY11E 15,337 20.3 2,363 15.4 1,442 63.3 22.4 26.3 29.5 26.8 2.4 15.5 CY12E 18,120 18.1 3,087 17.0 1,861 29.1 29.0 25.7 28.1 20.7 2.0 11.9

(Rs mn) CY13E 21,327 17.7 4,002 18.8 2,463 32.3 38.3 27.1 29.0 15.7 1.7 9.2

RELATIVE PERFORMANCE
BATA 750 625 500 375 250 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Sensex Rebased

KEY RATIOS
EPS (Rs) ROCE (%) RoE (%) PER (x) EV/ Net Sales (x) EV/ EBITDA (x)

For rating objective and disclaimer, please refer to last page of the report PINC Research reports are also available on Reuters, Thomson Publishers and Bloomberg PINV <GO>

RESEARCH

Bata India

INVESTMENT RATIONALE
Domestic footwear consumption
Year 2004 2005 2006 2007 2008 2009 2010 2011 Domestic consumption (mn pairs) 990 1,084 1,169 1,270 1,379 1,620 1,854 2,021 Pairs/ person 0.9 1.0 1.0 1.1 1.2 1.4 1.6 1.7

A) Growth in organised segment & higher consumption to benefit Bata

Indias Footwear industry is having a size of ~Rs250-300bn (total India consumption ~2.0bn pairs) and is growing at 10% pa. Organised segment is ~30-35% of the footwear market and is growing over 20% pa. Bata holds ~14-15% of the organised market by value and is one of the key beneficiaries of this growth. It has one of the largest retail footwear networks with ~1200-1300 retail outlets (~20%-24% of organised retail outlets chain). We believe opening of new stores will help expand its geographical reach and increase market share.

B) Retail expansion the new recipe post restructuring

The company plans to open 70-100 stores per year post its restructuring in CY10. It has plans to open large format stores which will increase both the number of stores as well as revenue per store. Restructuring completed in CY10 Over CY06-CY10, Bata added 343 new stores, closed down 277 stores and remodeled over 196 outlets. The result was an 11% and 26.4% CAGR in sales and PAT over the same period. The number of stores over the last few years have remained constant at ~12001300 retail outlets due to a constant focus of making all stores profitabke before further expansion. Presently, 2-5% of its stores are non-profit making and are likely to be closed down/revamped in the coming years. It also plans to reduce MEP (Manufacturing Extension Partnership) stores to <100 over the next couple of years.

Source: PINC Research

Store restructuring
Particulars New Stores Cash Drain Remodeled CY06 37 39 78 CY07 67 66 40 CY08 62 74 38 CY09 69 73 40 CY10 108 25 0 Total 343 277 196

Source: Company, PINC Research

Store Expansion on the cards The company plans to open 150-200 stores in the next two years with a focus on new locations. This will take the store count to ~1450 by CY13 as more than 85% of its stores have been renovated and only 2-2.5% remain as cash drain stores. Opening of large format stores will help the company (1) increase revenue per stores and (2) expand reach in tier II and tier III cities through K-store and other store formats. 1) Focus on increasing revenue per store The company plans to open large format 70-100 stores per year. We believe the focus will be to increase sales per stores via thrust on store area, design, format (family or superstore) and a franchisee model. The average per store sale in CY10 was around Rs9.5mn as against Rs6.2mn in CY06. With the opening of large format stores we expect sales per store to rise to Rs15mn by CY13E. It will also help in generating higher efficiency and lower per store cost overhead.

suman.memani@pinc.co.in

RESEARCH

Bata India

Sales per retail outlet

Sales (Rs mn) 24,000 18,000 12,000 6,000 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E Sale per Retail outlet (Rs mn) (RHS) 20 15 10 5 0

Source: Company, PINC Research

2) Increasing presence in tier II and tier III city where consumption is still strong The company is increasing its reach in tier II and III cities by opening new large format stores(as required).We believe this will increase its store count from 1250+ to 1450 by the end of CY13 and also help increase its reach and market share (~14-15% of organised market at present). No of retail stores
1,500

1,375

1,250 1,125

1,000 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E

Source: Company, PINC Research

C) Outsourcing still the key mantra for growth- Encashing Brand

Outsourcing of certain manufacturing operations has been a key component of Batas successful turnaround strategy. Over the last 5 to 6 years, the company has started to outsource labour intensive operations while retaining machine related operations. This has lead to an increase in third party purchases from 38% (16.3mn pairs) of sales in CY06 to 52% (25.1mn pairs) in CY10. We expect external purchases to account for close to 65% of the companys requirement by CY13, lowering the cost of production and helping to improve margin and return ratio. It also helps in reducing employees cost as labour intensive jobs were out sourced and we expect employee cost as percentage of sales to fall further. The company also ensures high degree of quality of its products by maintaining rigorous quality checks for outsourced products.

suman.memani@pinc.co.in

RESEARCH

Bata India

Outsourcing as % of sales
80

60

40 20

0 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E

Source: Company, PINC Research

Rise in Third party purchase in all segments: Rise in third party purchases with a fall in capacity utilisation Currently, plastic items are 100% outsourced. The companys strategy is to further raise outsourcing of items such as rubber, canvas and leather footwear. Thus, the procurement price is reduced while the Bata brand enables it to charge a premium and enjoy higher margins. Third party purchases for rubber and canvas footwear have increased from 1% in CY06 to 49% in CY10; we estimate a further rise to 75% by CY13. Capacity utilization in this segment has accordingly reduced to 18.9% in CY10 as against 39.6% in CY06. Leather capacity utilization and third party purchase both at rise Third party purchases in leather has remained stable at ~37% over CY06-10 However, capacity utilization of leather and other footwear increased from 47% in CY06 to 71% in CY10. With a focus to improve the value mix, the company is trying to optimize the usage of its manufacturing facility and third party purchase of leather products. Going ahead we expect third party purchase to increase to 53% and capacity utilization of 93% by CY13. This is likely to help improve value mix and hence margins. We expect the company to incur capex of ~Rs100-150mn in the leather segment to enhance and modernise its leather capacities.

Production and Purchases

CY06 Rubber & Canvas Ftr Production (000 pairs) Capacity Utilisation %) Purchase (000 pairs) Leather & Other Ftr Production (000 pairs) Capacity Utilisation %) Purchase (000 pairs) Plastic Footwear Purchase (000 pairs) Source: Company, PINC Research 10,269 9,730 9,796 9,403 8,582 9,025 8,645 8,740 9,474 46.8 5,896 8,350 41.2 6,416 9,465 46.7 6,416 13,549 66.9 5,892 14,384 71.0 8,822 15,800 78.0 15,370 17,218 85.0 18,550 18,838 93.0 21,730 16,832 39.6 133 14,189 33.4 3,153 15,682 36.9 2,589 12,598 29.6 4,202 8,040 18.9 7,706 8,075 19.0 12,300 8,075 19.0 13,200 8,075 19.0 14,500 CY07 CY08 CY09 CY10 CY11E CY12E CY13E

suman.memani@pinc.co.in

RESEARCH

Bata India

Outsourcing to rationalise employee cost despite opening of new stores With employee expenses mounting to 24% of sales in CY06, the Bata management took twin steps to rationalise costs: 1) Outsourcing was introduced and a few labour intensive operations were outsourced and 2) offering surplus employees an early retirement option (VRS). Bata started reducing employees from CY06 and had reduced 3,124 employees till CY10 leading to decrease in employee cost from 24.0% to 14.1% of sales (9MCY11 employee cost is 12.2% of sales) . Also during CY06-10, third party purchases increased from 38.5% to 52.7%. By CY13 we expect third party purchase to increase to 65% and employee cost to come down to 10.2%. Plastic products are 100% outsourced. Gross margins in the plastic segment has been in the range of ~34-40% over CY06-10.

Employee cost
(%) Employees Expenses (Rs mn) No Of Employees Per Employee Cost (Rs) Employee cost as % of sales EBITDA margin (%) Source: Company, PINC Research CY06 1,849 8,900 207,708 24.0 6.0 CY07 1,832 7,854 233,292 21.1 7.9 CY08 1,732 6,853 252,760 17.6 9.2 CY09 1,683 6,334 265,726 15.4 11.9 CY10 1,768 5,776 306,142 14.1 13.4 CY11E 1,860 5,198 357,775 12.1 15.5 CY12E 1,935 4,679 413,589 10.7 17.2 CY13E 2,177 4,211 517,016 10.2 19.1

Rationalisation of Employee cost and outsourcing has improved margins from 6.0% in CY06 to 13.4% in CY10. Employee cost v/s Margins
No of Employ ees Employ ee cost as % of sales (RHS) EBITDA margin (%) (RHS) 10,000 7,500 5,000 2,500 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E
Source: Company, PINC Research

Outsourcing as % of sales
80

30.0 22.5 15.0 7.5 -

60

40 20

0 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E

Source: Company, PINC Research

Number of employees to remain under check despite increase in stores We expect number of employees to come down despite our assumption that the company will open new stores in CY12 and CY13 (~70-100 stores/year). The company has adopted the K- scheme where old employees (employees who opted for VRS and who possess full knowledge of the business) look after the stores on commission basis and helps the company save on employee cost (~12-14% of sales). This strategy has worked well for the company as the cost for a K-Agent is lower. Also commission of a K-agent is proportional to the sales of the store which incentivizes them to perform better. All other store expenses (rent, repair & maintenance, electricity, etc) are borne by the company as the company bears in case of company owned stores.

suman.memani@pinc.co.in

RESEARCH

Bata India

D) Margin expansion to continue

The companys margins have improved by 690bps from CY06-10 on account of (1) rationalisation of employee cost (2) outsourcing strategy (3) closing down of cash drain stores, opening of new stores as well as renovating old stores into newer formats to improve efficiency and reduce overheads. Going forward we expect further expansion in margins from 12.6% to 18.8 % on account of the following steps taken by the management: (1) improving value mix (leather business key focus) as well as focus on Women and Kids section (2) increase in outsourcing where purchase cost is lower than production cost (3) focus on industrial and institutional business (4) improve store efficiency and rationalise cost and (5) cross sell accessories and other products in the stores which will help improve margins at no extra cost. 1) Improving value mix as well as focus on Women and Kids section The company has started focusing on the leather segment where margins as well as realisation are higher as compared to rubber, canvas and plastic shoes. Leather shoe sales share have increased from 63.1% in CY06 to 70% in CY10. Going forward we expect it to be 78.4% by CY13 (See graph). In this section the company also has the Hush puppies brand which is a top end leather and leather look alike footwear and is helping the company enhance its brand and improve margins. The company has been able to improve its average realisation and margins through both product mix and price rise. Realisation (Rs/pair)
Rubber and Canv as 460 345 230 115 0 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E Leather Plastic

Segmental revenue breakup

Rubber/ Canv as Footw ear Plastic Footw ear 100% 75% 50% 25% 0% CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E Leather & look alike Footw ear Accessories, Garments and others

Source: Company, PINC Research

Source: Company, PINC Research

Mens footwear accounts for almost 58-59%market with womens shoes constituting 30% and kids footwear making up the rest. Women section is mostly driven by unorganised market but with the growth in working women population, organised players are likely to gain market share. This segment has been a focus of Bata in recent times due to its high margin and growth opportunity. It has high end brands such as Marie Claire and Charles & Keith catering to this segment. The Bubble Gummers brand is popular amongst the tiny tots with its trendy and lightweight all-weather footwear. All this branding is helping Bata to enhance its brand.

suman.memani@pinc.co.in

RESEARCH

Bata India

Category wise Brands

Men Ambassador Comfit Hush Puppies Mocassino North Star Power Reebok Weinbrenner Source: Company website Women Bata Shoes Comfit Hush Puppies Marie Claire Naturalizer North Star Power Scholl Charles & Keith Kids Bata Shoes Bubblegummers Power

2) Increase in outsourcing where purchasing cost is lower than production cost: With outsourcing increasing, we believe significant margin benefits would accrue from the shift in value mix. The outsourcing model will lead to a further decline in raw material cost as a percentage of sales, thereby supporting an improvement in the gross profit margin. Leather is the only item which has increased YoY as a percentage of raw material cost, signifying that Bata is emphasizing on the manufacture of higher-margin leather shoes. We expect Bata to continue its focus on outsourcing and expect third party purchases to increase from 38% of sales in CY06 to 65% by CY13E thereby improving gross margin from 50% in CY05 to 53% by CY13E. Major Raw Materials (excluding trading)
Raw Hides Skin 28 21 14 7 0 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E Leather Rubber
50 48 45 43 40 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E

RMC (including trading) v/s EBITDA Margin

RMC As % Of Sales EBITDA Margin (%) (RHS) 20 16 12 8 4

Source: Company, PINC Research

as % of total RMC

Source: Company, PINC Research

3) Focus on Industrial and Institutional Business The companys non-retail business has shown a remarkable growth in business and profit over last year. Various incentive programs are offered to existing dealers to ensure growth in this business. This business forms ~15% of the top line and margins in this segment are ~300 bps higher than the retail margin. We believe that going forward, the company will have considerable focus on the wholesale business and especially the industrial division where the company caters to various industries like construction, cement, oil & gas, etc. The company caters to these industries, with products having special features like impact and heat resistance, oil resistance, etc and also supplies products made of lightweight materials that enjoy higher margins.
suman.memani@pinc.co.in

RESEARCH

Bata India

4) Improving store efficiency and cost rationalisation The company has started showing improved efficiency at its retail stores and warehouses which is bringing in higher operating efficiency. This is likely to make the company improve on its inventory management and working capital cycle. Revamping smaller stores and closing cash drain stores is leading to higher store efficiency and lower per store cost. 5) Cross selling of accessories and other products The company has started selling other accessories (Ladies bags, Mens belt, etc) from its stores and these products have already started adding to the top line as well as margins. Also, the company does not have to bear any additional cost on marketing or administration for selling these accessories. These products at present contribute ~3% of sales and we expect the contribution from these products to stay ~3.5% of sales over CY11-13E.

suman.memani@pinc.co.in

RESEARCH

Bata India

OTHER INVESTMENT RATIONALE Cash from exit in Batanagar property to be re-invested in core business
Bata, at its Batanagar property (16km from central Kolkata on the eastern bank of the Hooghly River), has its factory spread over 47 acres and also has surplus land of 262 acres of which 25 acres was utilised for IT SEZ (Riverbank Holdings Private Ltd - RHPL) and 237 acres (Riverbank development private Ltd - RDPL) was meant for township. It formed two property JVs, RDPL and RHPL, with a 50% stake in RDPL till 2010. RDPL further held a 50% stake in RHPL. In the beginning of 2011 it sold its stake in RDPL (and RHPL) for Rs1bn and exited from the property business to focus on its core business. We believe this amount is likely to be utilized by the company to acquire few high rental stores in key metros.Moreover, the company is also likely to receive ~0.34msf of developed space. Batanagar property holding structure
Bata 50% stake sold for Rs1.09bn Riverbank Development Private Ltd (RDPL) 100% stake 237 acres Township Source: Company, PINC Research * Calcutta municipal development 25 acres IT Park CMD* 50% stake Saffron 50% stake 50% stake

Capital expenditure to improve Assets turnover We expect capital investment of Rs1.5-1.8bn over the next three years. The company in last four years till CY10 has invested Rs1.65bn and has improved assets turnover from 2.8x to 3.2x. Going forward despite massive investments in opening new stores, we expect assets turnover to improve further primarily due to improvement of per store sales. New stores v/s Capex
No of new stores 140 105 70 35 CY07 CY08 CY09 CY10 CY11E CY12E CY13E Capital Ex penditure (Rs mn) (RHS) 1,000 750 500 250 4.8 3.6 2.4 1.2 CY07 CY08 CY09 CY10 CY11E CY12E CY13E

Gross Fixed Asset Turnover v/s Opening Cost/store

Gross Fix ed Asset Turnov er (x ) Opening cost/store (Rs mn) (RHS) 12 9 6 3 0

Source: Company, PINC Research

Source: Company, PINC Research

suman.memani@pinc.co.in

RESEARCH

Bata India

FINANCIAL OVERVIEW
Revenue to increase at 18% CAGR over CY11-CY13E Bata recorded sales CAGR of 10.6% during CY06-CY10 which was largely due to the restructuring initiatives from CY04 onwards. Going ahead, we expect sales growth of 18% during CY11-13E led by 22% and 4% CAGR over CY11-13E from the leather and rubbercanvas segments respectively. Moreover, we believe the companys focus on leather segment will substantially enhance its value mix apart from increment in realisation. Segmental revenue breakup
Rubber/Canv as Accessories 100% 75% 50% 25% 0% 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E Leather Rev enue (Rs mn) (RHS) 24,000 18,000 12,000 6,000 Plastic and footw ear

Source: Company, PINC Research

Improving margins to bolster net profit growth With successful implementation of the restructuring initiatives, Batas EBITDA margin rose from 5.7% in CY06 to 12.6%% in CY10 (9MCY11 margin is 15%).This led to a 34% CAGR in net profit over CY06-CY10 led by focus on higher-value products and savings on employee and raw material cost from outsourcing. We expect the EBITDA margin to rise to 18.8% in CY13E, enabling a net profit CAGR of 40% over CY10-CY13E. In CY11 the company earned other income of Rs1bn and adjusting this net profit is expected to grow at 31% during CY11-13E. Net Profit v/s EBITDA Margin
Net Profit (Rs mn) 3,000 2,250 1,500 750 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E EBITDA Margin (%) (RHS) 20 15 10 5 0

Source: Company, PINC Research

suman.memani@pinc.co.in

10

RESEARCH

Bata India

RoE and RoCE likely to improve further We expect RoE to improve from 24.2% in CY10 to 29.0% in CY13e on improvement in assets turnover ratio (on increase in outsourcing) and improvement in net profit margin on account of benefits coming from the restructuring (employees cost and other raw material cost rationalisation). RoCE is also likely to improve from 22.2% in CY10 to 27.1% by CY13 on higher utilisation of capital investment. RoE v/s RoCE
RoE (%) 40 30 20 10 0 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E RoCE (%)

Source: Company, PINC Research

Further improvement in free cash flow: The companys operational cash flow which was negative in CY05 improved to Rs1.1bn in CY10 and we expect further improvement to Rs2.6bn in CY13E on account of improvement in working capital. We also expect FCF to increase further as renovation and cash drain store restructuring is almost completed and the company is likely to incur capex only on opening of new large format stores. We expect FCF to be Rs2.2bn in CY13E as against Rs0.6bn in CY10. Cash Flow
Operational Cash Flow (Rs mn) 3,200 2,400 1,600 800 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E FCF (Rs mn)

Source: Company, PINC Research

suman.memani@pinc.co.in

11

RESEARCH

Bata India

Quarterly Performance
Financial Table
(Rs mn) Revenue Expenditure EBITDA Other income Interest Depreciation PBT Ta x PAT EBITDA margin (%) EPS (Rs) Q3CY11 3,729 3,194 535 25 2 108 450 146 304 14.4 4.7 Q2CY11 4,330 3,633 697 27 2 105 617 207 410 16.1 6.4 QoQ (%) (13.9) (12.1) (23.2) (5.0) 41.5 2.9 (27.0) (29.5) (25.8) -174 bps (25.9) Q3CY10 2,942 2,568 374 25 1 89 308 101 207 12.7 3.2 YoY (%) 26.8 24.3 43.3 0.5 107.5 20.5 46.2 45.0 46.8 166 bps 46.9 9MCY11 11,202 9,525 1,677 1,171 6 297 2,545 737 1,808 15.0 28.1 9MCY10 9,070 7,969 1,100 48 6 227 915 306 609.6 12.1 9.5 YoY (%) 23.5 19.5 52.4 2,317.4 (7.6) 30.9 178.0 141.0 196.6 284 bps 196.7

Source: Company, PINC Research

Cyclical business second quarter seasonally the best for sales The business of footwear is highly cyclical in nature as seen from Batas quarterly trend. While Q2 of the calendar year is the best period for the company, followed by the fourth quarter, Q1 is the worst each year. We believe the outperformance in Q2 is due to buying that happens due to school reopening. Fourth-quarter sales are driven primarily because of the coinciding festival season. Though Q2 witnesses the highest sales of the year, margins are the lowest considering a larger share of sales in the low-yield school kids segment. Margins during the fourth quarter remain the highest due to the festive season, as sales increase in both the mens and womens segments. Seasonality of sales and margins
Sales (Rs mn) 4,700 3,900 3,100 2,300 1,500 Q1CY08 Q2CY08 Q3CY08 Q4CY08 Q1CY09 Q2CY09 Q3CY09 Q4CY09 Q1CY10 Q2CY10 Q3CY10 Q4CY10 Q1CY11 Q2CY11 Q3CY11 EBITDA (%) (RHS) 20 15 10 5 -

Source: Company, PINC Research

suman.memani@pinc.co.in

12

RESEARCH

Bata India

KEY RISK AND CONCERNS

Availability of labour Labour is an important element attached to footwear industry and the pace of growth of Indian footwear industry may lead to shortage of skilled labour for the industry. Manufacturing of footwear involves lot of manual work like stitching, fitting, finishing and, stamping with different pay scales for each skill set. More than 30% workers in this segment are women and we believe shortage of skilled and unskilled workers is a major challenge for the industry. Cut throat competition The Indian organised footwear industry is approximately 35% of the Footwear market. The footwear segment is largely controlled by the unorganised players who enjoy excise and tax benefit and therefore have lower cost of production. Strong competition from unorganised players and other MNC players on opening of 100% FDI in single brand retail could lead to a tussle to wrest market share thereby causing a price war which could impact margins. Bata is constantly endeavouring to keep pace with the latest developments in the industry and is gradually strengthening its position to enhance its market share by opening new stores to increase geographical reach, introducing more SKUs to cater to large customer base, appointing distributors and sub-distributors to improve the supply chain. Volatility in raw material prices Rubber and leather prices play an important role in the pricing of footwear. Major volatility in prices of rubber and leather may lead to change in margins of the company.

suman.memani@pinc.co.in

13

RESEARCH

Bata India

VALUATION
Bata has traded in the 1-yr forward P/E range of 15x-25x over the past 7 years. As compared to its peers, Bata appears to be trading at a lower multiple (see table). Also, we expect Bata to show a strong EPS CAGR of 30% over CY11-13E. We therefore value Bata by assigning a 1-year forward P/E multiple of 19.0x and initiate coverage with a 'BUY' rating on the stock and a target price of Rs730 (upside potential of 22%). At CMP of Rs601, the stock discounts CY12 and CY13 EPS of Rs29.0 and Rs38.3 by 20.7x and 15.7x respectively.

Peer Companies
CMP (Rs) BATA INDIA TITAN INDUSTRIES * PAGE INDUSTRIES * ASIAN PAINTS * HINDUSTAN UNILEVER COLGATE-PALMOLIVE MARICO NESTLE INDIA Source: Company, PINC Research 601 189 2,530 2,733 392 972 151 4,090 Mkt Cap (Rs mn) 38,590 168,191 28,219 261,998 846,265 132,172 92,996 394,341 EV (Rs mn) 36,747 157,789 28,825 263,697 817,164 128,818 98,361 395,782 Sales (Rs mn) FY13 FY14 18,120 104,295 8,927 109,809 269,014 30,365 45,905 96,077 21,327 123,336 12,131 129,197 307,138 35,078 53,600 119,274 EBITDA (%) FY13 FY14 17.0 9.5 21.5 16.9 14.1 23.2 12.5 19.2 18.8 10.2 20.3 17.2 14.3 23.3 12.9 18.8 EPS (Rs) FY13 FY14 29.0 8.3 104.9 123.4 13.5 38.6 6.3 118.3 38.3 10.0 138.5 149.8 15.7 44.7 7.9 146.3 RoE (%) 28.1 44.0 60.0 38.7 51.0 102.8 26.2 70.8 RoCE (%) 25.7 53.0 77.6 43.7 34.1 138.2 31.6 81.4 FY13 20.7 23.0 24.1 22.1 29.0 25.2 24.0 34.6 P/E (x) FY14 15.7 18.9 18.3 18.2 24.9 21.7 19.1 28.0

* Bloomberg consensus

suman.memani@pinc.co.in

14

RESEARCH

Bata India

1-yr forward P/E Band

1,000
25.5x 20.2x 14.9x 9.6x

1-yr forward P/E Band - Histogram (5 years)

100 75
(No. of weeks)

750

(Rs)

500 250

50 25 0 6.9x 9.0x 11.6x 15.0x 19.3x 25.0x 32.3x 41.7x

4.3x

0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Source: Company, PINC Research

Source: Company, PINC Research

1-yr forward EV/EBIDTA

70,000
16.1x

1-yr forward EV/EBIDTA - Histogram (5 years)

100 75
(No. of weeks)

52,500
(Rs mn)

12.2x 8.4x 4.5x

35,000 17,500

50 25 0 3.4x 4.6x 6.2x 8.4x 11.3x 15.2x 20.5x 27.7x

0.6x 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Company, PINC Research

Source: Company, PINC Research

P/E (x) v/s EPS growth (%)

30 26 22 18
Hindustan Unilever Bata India Page Industries

RoCE (%) v/s EBITDA Margin (%)

25
Page Industries Colgate-Palmolive

Titan Industries

20
Asian Paints

Nestle India

Marico Asian Paints Colgate-Palmolive Nestle India

15 10

Bata India Hindustan Unilever Marico Titan Industries

14 15 20 25 30

5 50 100 150

Source: Bloomberg, PINC Research

Source: Bloomberg, PINC Research

suman.memani@pinc.co.in

15

RESEARCH

Bata India

INDUSTRY OVERVIEW
Indian footwear market growing at 10% annually The Indian footwear market, estimated to be at ~Rs250-300bn in CY11, has shown a CAGR of 10% over CY0510. Indias per capita consumption is1.6 pairs(2008) which is substantially lower as compared to other countries (See table).Moreover, we believe that the growth in footwear industry is likely to come from value growth rather than volume as customers have now become more quality and brand conscious. Mens footwear accounts for almost 58-59% market with womens shoes constituting 30% and kids footwear making up the rest. Footwear industry size v/s growth
Industry size (Rs bn) 460 345 230 115 2006 2007 2008 2009P 2010P 2011E 2012E 2013E % Growth (RHS) 16 12 8 4 0 3,200 2,400 1,600 800 2006 2007 2008 2009P 2010P 2011E 2012E 2013E

Annual footwear consumption v/s growth

Pairs (mn) % Growth (RHS) 20 15 10 5 0

Source: Company, PINC Research

Source: Company, PINC Research

Organised market growing at a faster pace

Global footwear consumption (2008)

mn pairs Per capita consumption (pairs/year) 6.7 4.6 4.4 3.8 3.7 3.7 3.4 2.7 2.2 1.7 2.2 1.2 1.5

US Japan EU Canada Taiwan Australia Korea Brazil Thailand Mexico China India Indonesia

1939 584 1666 122 82 72 165 483 144 180 2768 1687 350

India is the second largest footwear manufacturer in the world next only to China. We believe that the organised segment, which constitutes ~30-35% of the footwear market, is growing at a faster pace of 15-20% as compared to the 10% industry growth. Since the unorganised sector controls a major portion of the market, we believe there is a significant growth opportunity for the organised players. Also, all the organised players, in order to capture a larger chunk of the footwear market, have put up aggressive retail expansion plans (see table), which, in our opinion, is likely to improve the reach and pie of the organised segment.

Expansion plans
Bata Liberty Metro shoes Reliance footprint Woodland Source: PINC Research 100 stores/year 100 stores/year 200 stores in 3 years 40-50 stores/year 60-70 stores/year

Source: PINC Research

suman.memani@pinc.co.in

16

RESEARCH

Bata India

Womens and Kids footwear fastest growing segments Mens footwear accounts for ~ 58-59% of the footwear market with womens shoes constituting 30% and kids footwear making up the rest. With an increasing number of educated working women joining the workforce, the demand for branded womens footwear has increased, which ultimately will attract more internationally renowned players to the Indian market. The Indian kids footwear segment is highly fragmented and dominated by the unorganised sector. The overall kids retail segment has a robust margin of ~20-25% which is a huge potential opportunity for organised branded retail footwear players. Also, given Indias sizeable young population, the market for childrens footwear is yet to be fully explored. In womens and Kids section there exists a huge opportunity as these segments have no organised retail chain with a national presence. The domestic footwear market is thus expected to have a CAGR of 10.0% over CY10-13E to reach a size of ~Rs400bn by the end of CY13. Branding based on price points The Indian footwear market is very price sensitive. The organised players have categorized the product segment based on pricing. International players eye the higher end of the spectrum, with the lower end being taken care by the domestic players as well as the unorganised segment

Segmental breakup - based on target segment

Segments Mass Market Economy Market Sports Market Premium Leather Luxury Source: Browne & Mohan, PINC Research Price range (Rs/pair) 185-700 700-1,000 1,000-3,000 3,000-5,000 10,000-50,000 % of market 60% (BATA, Liberty) 30% ( BATA, Liberty) 7% (Nike, Adidas) 5% (Charles & Keith) 1% (Gucci,Louis Vuitton)

Organised players eyeing rural areas and tier II & III cities Organised players are eyeing rural consumers and customising product to increase the market share in high consumption rural market where unorganised segment has a stronger presence. In the expansion plan of new stores, all organised players have given higher importance on penetrating rural India to capture revenue pie from the unorganised segment and increase their market share.

suman.memani@pinc.co.in

17

RESEARCH

Bata India

COMPANY PROFILE
Bata India is the largest footwear retailer in India and the market leader in the organised segment with a 14-15% share. The company manufactures and markets footwear and non footwear items (accessories like Ladies Bags, T-shirts, and Mens Belt) through retail and wholesale channels. With more than1,250 stores across the country, Bata today has the widest footwear retail network in India. % of stores
Adidas 14.4 Woodland 5.8 Action 14.4 Metro 1.4

M&B 1.4

Reebok 17.3

Red Tape 0.9 Puma 0.9 Shree leather 0.5 BATA 24.0 Liberty 8.6

Khadims 10.6 Source: Company, PINC Research

Over the last 5 years, the company has turned around its fortune by closing down its cash drain stores, opening new formatted large stores and remodeling old small stores. The company also reduced the number of employees on its payroll through VRS scheme and focused on outsourcing labour intensive jobs. This helped improve margins due to fall in employee cost, higher realisation due to brand value and efficient working capital management. The companys product range encompasses classic shoes such as the Ambassador for men and comfort shoes such as Comfit for ladies, as well as the trendy Marie Claire collection, apart from a sporty fashion collection for young adults called North Star.

Category wise Brands

Men Ambassador Comfit Hush Puppies Mocassino North Star Power Reebok Weinbrenner Source: Company website Women Bata Shoes Comfit Hush Puppies Marie Claire Naturalizer North Star Power Scholl Charles & Keith Kids Bata Shoes Bubblegummers Power

The company has production facilities at Batanagar in West Bengal; Patna and Hathidah in Bihar; Faridabad in Haryana, Bangalore in Karnataka and Hosur in Tamil Nadu. It sells over 48mn pairs of footwear every year and serves over 125,000 customers every day.

suman.memani@pinc.co.in

18

RESEARCH

Bata India

Plant details
Plant Location Batanagar - Kolkata Bataganj - Patna Faridabad - Haryana Mokameh ghat - Bihar PeenyInd Estate - Bangalore Batashatak - Hosur Source: Company, PINC Research NA - Not available Specialize in Sporstwear and Sandals NA Rubber and Canvas Tannery & Footwear School Shoes HushPuppies

Historical Events
Year 1931 1937 1952 1973 1990 1992 1998 2003 2004 2011 Events Incorporated in Kolkata as BATA Shoe Co Tanning was introduced at Batanagar along with introduction of leather products Faridabad Factory was constructed Came with a Public issue and name was changed to Bata India Ltd Scheme of Arrangement with Company and Bata Properties Ltd(BPL),certain properties were transferred to BPL Batanagar factory went on Strike for 6 months resulting in a substantial production loss BATA outlets start selling Hush Puppies and Marie Clarie ranges Repositiones itself as a marketing firm. Incurs losses over CY02 to CY04 Starts to reduce employees through VRS and closes down cash drain stores. Opens new large format stores Restuturing almost complete and company plans to open large format stores. Exited Batanagar Property business

Source: Company, PINC Research

Historical Stock Price

800

600

400

200

0 Jan-02 Aug-02 Mar-03 Oct-03 May -04 Dec-04 Jul-05 Feb-06 Sep-06 Apr-07 Nov -07 Jun-08 Jan-09 Aug-09 Mar-10 Oct-10 May -11 Dec-11
Source: Company, PINC Research

suman.memani@pinc.co.in

19

RESEARCH

Bata India
Year Ended Dec. (Figures in Rs mn)

Income Statement
Net Sales Growth (%) Other Operating Income EBITDA Growth (%) Depreciation & amortisation EBIT Interest Other income PBT Income taxes Extra-ordinary items Min int / inc from assoc Reported net income Adjusted net income Growth (%) Diluted EPS (Rs) Growth (%)

CY09
10,917 10.6 7 1,246 42.8 283 962 97 93 958 331 (1) 626 626 5.9 9.7 5.9

CY10
12,752 16.8 6 1,613 29.5 332 1,281 76 155 1,360 477 883 883 41.1 13.7 41.1

CY11E
15,337 20.3 6 2,363 46.5 403 1,960 77 1,221 3,104 880 2,224 1,442 63.3 22.4 63.3

CY12E
18,120 18.1 6 3,087 30.6 402 2,685 90 179 2,774 913 1,861 1,861 29.1 29.0 29.1

CY13E
21,327 17.7 6 4,002 29.6 420 3,582 95 199 3,686 1,223 2,463 2,463 32.3 38.3 32.3

Cash Flow Statement

Pre-tax profit Depreciation & Amortisation Total Tax Paid Chg in working capital Other operating activities Cash flow from oper (a) Capital Expenditure Chg in investments Other investing activities Cash flow from inv.(b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Change in MI Dividend (incl. Tax) Other financing activities Cash flow from fin (c) Net chg in cash (a+b+c)

CY09
958 283 (310) 251 119 1,302 (417) (41) 24 (434) 868 (146) (161) (97) (403) 464

CY10
1,360 332 (398) (225) 16 1,085 (535) 45 61 (430) 655 461 (226) (75) 161 816

CY11E
3,104 403 (449) (828) (1,085) 1,146 (790) 75 1,162 446 1,592 62 (299) (77) (314) 1,278

CY12E
2,774 402 (840) (49) 20 2,306 (525) 70 (455) 1,851 10 (301) (90) (381) 1,470

CY13E
3,686 420 (883) (637) 25 2,611 (500) 70 (430) 2,181 10 (301) (95) (386) 1,795

Balance Sheet
Equity Share Capital Reserves & surplus Shareholders' funds Min. Interest & Other Total Debt Capital Employed Net fixed assets Cash & Cash Eq. Net Other current assets Investments Other Assets Net Deferred tax Assets Total Assets

CY09
643 2,716 3,358 300 3,659 1,373 573 1,286 169 15 241 3,659

CY10
643 3,284 3,927 762 4,689 1,577 1,389 1,287 124 311 4,689

CY11E
643 5,208 5,850 824 6,674 1,963 2,667 1,704 50 291 6,674

CY12E
643 6,768 7,410 834 8,244 2,086 4,137 1,710 50 261 8,244

CY13E
643 8,930 9,572 844 10,416 2,166 5,932 2,037 50 231 10,416

Key Ratios
OPM (%) Net Margin (%) Dividend Yield (%) Gross Fixed asset turnover (x) Total asset turnover (x) Adjusted debt/equity (x) Interest coverage ratio (x) RoCE (%) RoE (%) EV/Net Sales (x) EV/EBITDA (x) P/E (x) P/BV (x)

CY09
11.4 5.7 0.5 3.0 1.6 0.1 9.9 19.3 19.8 3.4 29.5 61.7 11.5

CY10
12.6 6.9 0.7 3.2 1.6 0.2 16.8 22.2 24.2 2.9 22.8 43.7 9.8

CY11E
15.4 9.4 0.7 3.4 1.4 0.1 25.5 26.3 29.5 2.4 15.5 26.8 6.6

CY12E
17.0 10.3 0.7 3.6 1.4 0.1 29.8 25.7 28.1 2.0 11.9 20.7 5.2

CY13E
18.8 11.5 0.7 3.9 1.4 0.1 37.7 27.1 29.0 1.7 9.2 15.7 4.0

1-yr forward P/E Band

1-yr forward EV/EBIDTA 25.5x 20.2x 14.9x

(Rs mn)

1,000

70,000
16.1x

750

52,500

12.2x 8.4x 4.5x

(Rs)

500 250

35,000 17,500

9.6x 4.3x

0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

0.6x 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

suman.memani@pinc.co.in

20

RESEARCH

T E A M
EQUITY DESK
Sadanand Raje Head - Institutional Sales Technical Analyst sadanand.raje@pinc.co.in 91-22-6618 6366

RESEARCH
Vineet Hetamasaria, CFA Nikhil Deshpande Tasmai Merchant Vinod Nair Ankit Babel Hitul Gutka Subramaniam Yadav Madhura Joshi Satish Mishra Urvashi Biyani Naveen Trivedi Rohit Kumar Anand Niraj Garhyan Namrata Sharma Sakshee Chhabra Bikash Bhalotia Harleen Babber Dipti Vijaywargi Sushant Dalmia, CFA Poonam Sanghavi Suman Memani Abhishek Kumar C Krishnamurthy
Head of Research, Auto, Cement Auto, Auto Ancillary, Cement Auto, Auto Ancillary, Cement Construction, Power, Capital Goods Capital Goods, Engineering Power Construction Power Fertiliser, Oil & Gas Fertiliser, Oil & Gas FMCG IT Services IT Services Media Media Metals, Mining Metals, Mining Metals, Mining Pharma Pharma Real Estate, Mid caps Real Estate, Mid caps Technical Analyst

vineet.hetamasaria@pinc.co.in nikhil.deshpande@pinc.co.in tasmai.merchant@pinc.co.in vinod.nair@pinc.co.in ankit.b@pinc.co.in hitul.gutka@pinc.co.in subramaniam.yadav@pinc.co.in madhura.joshi@pinc.co.in satish.mishra@pinc.co.in urvashi.biyani@pinc.co.in naveent@pinc.co.in rohit.anand@pinc.co.in niraj.garhyan@pinc.co.in namrata.sharma@pinc.co.in sakshee.chhabra@pinc.co.in bikash.bhalotia@pinc.co.in harleen.babber@pinc.co.in dipti.vijaywargi @pinc.co.in sushant.dalmia@pinc.co.in poonam.sanghavi@pinc.co.in suman.memani@pinc.co.in abhishek.kumar@pinc.co.in krishnamurthy.c@pinc.co.in

91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618

6388 6339 6377 6379 6551 6410 6371 6395 6488 6334 6384 6372 6382 6412 6516 6387 6389 6393 6462 6709 6479 6398 6747

SALES
Rajeev Gupta Ankur Varman Himanshu Varia Shailesh Kadam Ganesh Gokhale
Equities Equities Equities Derivatives Derivatives

rajeev.gupta@pinc.co.in ankur.varman@pinc.co.in himanshu.varia@pinc.co.in shaileshk@pinc.co.in ganeshg@pinc.co.in

91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618

6486 6380 6342 6349 6347

DEALING
Mehul Desai Amar Margaje Ashok Savla Sajjid Lala Raju Bhavsar Hasmukh D. Prajapati Dhirenpuri D. Goswami Arjun Prajapati
Head - Sales Trading

mehul.desai@pinc.co.in amar.margaje@pinc.co.in ashok.savla@pinc.co.in sajjid.lala@pinc.co.in rajub@pinc.co.in hasmukhp@pinc.co.in dhirenpurig@pinc.co.in arjun.prajapati@pinc.co.in

91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618

6303 6327 6321 6337 6322 6325 6345 6346

DIRECTORS
Gaurang Gandhi Hemang Gandhi Ketan Gandhi gaurangg@pinc.co.in hemangg@pinc.co.in ketang@pinc.co.in 91-22-6618 6400 91-22-6618 6400 91-22-6618 6400

COMPLIANCE
Rakesh Bhatia Head Compliance rakeshb@pinc.co.in 91-22-6618 6400

Rating Objective
Large Caps Rating M.Cap > USD1bn Mid Caps M.Cap <= USD1bn

Return % BUY Accumulate Reduce Sell More than 15 5 to 15 (-)5 to +5 Below (-)5 More than 20 10 to 20 0 to 10 Less than 0

Infinity.com
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Financial Securities Ltd
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