Bata’s revenues declined by 1% y-o-y in Q5FY15 (5% below our estimates) due to (a) supply chain challenges continuing till February’15 and (b) continued weakness in consumer demand. While gross margins expanded by 38bps y-o-y, Ebitda margins contracted by 375 bps y-o-y due to negative operating leverage around employee costs and rental expenses. Hence there was a 29% y-o-y decline in Ebitda (18% lower than our estimates). Adjusted PAT (pre-exceptionals) was R2,900 crore, 27% decline y-o-y and 10% lower than our forecasts.
Based on our channel checks we expect Bata’s revenue growth to revive to 10-11% y-o-y in H1FY16 amidst a weak macro. After a macro demand revival (likely from H2FY16), sales growth will revive to 16-18%, benefitting from: (a) competitive advantages around retail network size, retail execution, and widened merchandise; and (b) implementation of initiatives around e-commerce, advert campaigns and concept store launch.
We expect Bata’s 17% revenue CAGR to translate into EPS CAGR of 29% in FY15-18. Bata trades at par with its three-year historical average P/E, and a 20%unjustified discount to other high-quality consumer discretionary stocks. We revise our estimates downwards by 1-2% for revenue and 4-5% for PAT over FY16-17.
We reiterate our buy rating with a target price of R1,170, implying a 13% upside from current levels.
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