Another distressing sign for the company could well be the squeeze on operating margins in the first quarter ended March 1999, which have actually dropped from 6.93 per cent to 6.54 per cent. Compare this with buoyant margins for the 12 months ended December 1998 which were at 8.01 per cent and the problems are complete. However, it would be prudent here to mention that the prices of raw materials like leather have seen an upward revision in the recent times. Increased ad-spend and marketingexpenditure have also played an integral role in eroding earnings. These have obviously offset the benefits of a leaner workforce, which was a legacy of the company's voluntary retirement scheme.

But these problems in the first quarter aside, Bata's performance for the three months ended March 1999 leaves a lot to be desired. As is reflected in in the 23.39 per cent drop in earnings, which were at Rs 4.29 crore for the first quarter, this is in stark contrast to the company's buoyant bottomline last year. The rights issue of late 1996 and the retirement of costly debt in 1997 have resulted in a drastic reduction in the debt : equity structure of the company from 1.89:1 in 1996 to 0.37:1 for the year ended December 1997. All of which has obviously helped reduce the interest burden for the first quarter from Rs 2.14 crore to Rs 1.54 crore has helped.

It is the company's increased tax burden which has created a drain on earnings. In fact, with the effective tax rate increasing from 10.11 per cent to 36.44per cent, the tax burden has also increased to Rs 2.46 crore. This problem aside, the company's earnings streams in the second quarter could definitely get affected if the lockout at the Faridabad plant continues. Especially, as this facility with a capacity of 425 lakh pairs per annum makes rubber and canvas footwear, which is one of the high-margins businesses for Bata. All of which might well depress sentiment for the scrip which is currently on a southward detour dropping from the Rs 284 levels in March to the Rs 200 levels recently. Thus besides improving its labour relations and at the same time reducing employee costs, Bata will also also have to manage its inventory levels and keep track of the changing trends in the market. All of which hold the key to profitability of the company in the interim.