Bata India, India’s largest footwear retailer, will face an existential crisis, as it cedes distribution equity to e-commerce...
Bata India, India’s largest footwear retailer, will face an existential crisis, as it cedes distribution equity to e-commerce (footwear market size of $500mn). The under-investment in the brand (meager 1% of revenues over CY08-15) will bite into future earnings whereas the over-investment in stores will cap capital efficiency. FY17E EBITDA margin of 12.4% remains a far cry away from its historical peak (15.6% in CY13) given high fixed costs (35% of FY15 sales) amid pressure to increase commissions and ad-spend. A significant turnaround is some time away given (a) historical high inventory (nine months) requiring write-downs; (b) high possibility for gross margin compression and (c) declining asset turns (2.4x in FY17 from 3.1x in CY09); we expect FY17E RoE to be 19%.
We re-initiate with Sell and implied valuation of 23.5x FY17E EPS.
Over CY09-FY15, Bata generated Rs 12 bn CFO; rather than investing in the brand, it expanded retail space to 3.3mn sq ft (from 1.3mn), investing 1/4th CFO in brandex vs equal outlay by peers. Unparalleled network (>500 cities) and 84-year-old history made it a default consumer choice until customer moved online and started buying more aspirational brands, easily available online than Bata.
Bata brand’s diminishing distribution equity is evident from the muted growth (10%/4% in CY13/FY15) despite adding 50% more space.