We are positively surprised by Bata India Ltd's margin expansion and believe that levers for further growth remain strong.
Bata is making right investments in the business model amid a slowdown with its focus on women’s, kids and accessory segments. We assign a ‘buy’ rating on the stock, but cut our revenue assumption while raising the margin assumption, leading to an increase in CY14/CY15 EPS by 1.5%/3.2%. At the current market price of R1,000, the stock trades at 25.6x and 20.8x CY14 and CY15 EPS, respectively. We revise our target price from R1,170 to R1,200, valuing the company at a 25x CY15 EPS of R48.
Bata's Q4CY13 results were in line with estimates. The company reported revenue of R554 crore (versus estimates of R577 crore) vs R509 crore in Q4CY12, marking a y-o-y growth of 8.9%. For CY13, revenue growth stood at 12.1% y-o-y. However, this growth was slower due to lower net store addition (~40-50 stores) during the year compared to 130 in CY12. The company has guided to open ~100 stores in CY14, which should drive higher growth in CY14.
Ebitda margins for Q4CY13 stood at 18.0% (vs estimates of 15.7%) against 15.8% in Q4CY12, a y-o-y increase of 220 bps. Margins are higher due to a 280-bps increase in gross margins and a 140-bps reduction in employee and other expenses. However, rentals increased 200 bps y-o-y, which negated gains from employee and other expenses.
- Motilal Oswal