FY17 has been a fairly challenging year for Bata, with revenue growth plummeting to just 2.1%, the lowest in more than a decade. Further, EBITDA margin contraction continued during the year, albeit at a slower pace. While we do see growth recovering from these levels over the next couple of years (we now forecast revenue growth of 10.0%/14.0% in FY18/FY19F), we believe this is just off the low base and still just about in line with the historic average. Revenue growth average of 11.5% for FY18F and FY19F is absolutely in line with revenue growth of 11.8% for 2014 and FY16. Further, we do not foresee any significant improvement in EBITDA margins despite the significant contraction over the past couple of years.
We continue to foresee long-term challenges We continue to believe that long-term challenges remain for the company. Some of the key long-term issues are: 1) lack of any significant presence in the online space (online footwear retailing’s share now stands at 12.3%); 2) lower-than-expected growth in premium portfolio for brands like Hush Puppies, Scholl, Weinbrenner and Marie Claire; and 3) continued loss of market share in the organised space (Bata has now lost more than 6pp of market share over the past four years). We are yet to see any significant change in management strategy which would enable the company to overcome these challenges.
Valuations at 34.7x FY19 EPS suggest a recovery is priced in; we maintain our Reduce rating. Bata is currently trading at 34.7x FY19F EPS, 1SD above its long-term average. At current valuations, we believe a recovery is priced in and see limited further upside. We maintain our Reduce rating on the stock, with a revised TP of Rs458, which we have raised owing to roll-forward in our valuation by a couple of quarters. Our top pick in the sector remains ITC.