Downgrade Bata India (Bata) to ‘sell’ (earlier ‘buy’) with a DCF-based fair value of R1,174, (implied FY16 P/E multiple of 34x). Current valuations of 37x FY16 P/E leave no room for upside. Given the high operating leverage and market expectation of a macro demand revival in H1FY16, we forecast 17% revenue CAGR and 28% EPS CAGR in FY15-18. The current FY16 P/E multiple of 38x is in line with other good-quality discretionary consumer companies but this is not justified by Bata’s sluggish approach towards strategic changes required to address its key long-term issues. Hence we change our stance.
Bata reported a 3% y-o-y decline in revenues and a 44% y-o-y decline in PAT due to supply chain disruption following SAP implementation across all its stores in November; weaker-than-expected retail footfalls for the broader macro, and negative operating leverage given high fixed costs (22% and 6% y-o-y growth in employee costs/rental expenses).
Bata has the widest retail network and product portfolio with the best working capital cycle amongst footwear retailers. An efficient incentive structure for its retail staff creates a strong push-based demand at its stores. Bata has further strengthened these aspects through SAP implementation at all its stores in November 2014, and new training centres for sales and manufacturing staff.