We maintain ‘hold’ on Bata India and a September 2015 target price of R1,200 per share, based on 25x 1-year forward P/E (the sector’s 5-year mean). We cut our CY14-15 EPS by 2-5%, and lift CY16 EPS by 1.4%. Bata’s nine months CY14 core EPS was below expectations, at 64% of our previous CY14 forecast.
We recommend investors to wait for better entry points and buy the stock on declines (below R1,200 levels) for a more favourable risk-reward. The stock is trading at 39.9x CY14 P/E and 31.3x CY15 P/E, leaving limited room for any share price upside in the near term. Bata continues to execute well in terms of new product launches (especially in the mid-range to premium-end segments), marketing and store rollouts, and it should benefit from any spending upturn given its high operating leverage. But we believe that the risks of a delayed recovery in consumption and high retail costs are not adequately priced.
After a period of lull in the past three quarters, when net sales growth was stuck in high single digits, Bata India’s net sales growth rebounded to 13.1% y-o-y, 2.8% above our expectation. The company continues to maintain its target of opening 100 new stores in CY14 (99 new stores opened in CY13). We estimate an same store sales growth (SSSG) of 8% in Q3 versus a low of 5% in the last few quarters. Note that its SSSG levels stood at 14-15% a few years back.