Bata India: walking on rough terrain

Retail companies in general are facing tepid consumer sentiment. Competition from the online marketers is also making life difficult. Photo: Ramesh Pathania/Mint

Bata India Ltd is finding it tough to sell shoes. Retail companies in general are facing tepid consumer sentiment. Competition from the online marketers is also making life difficult. Against that backdrop, the shoe maker managed a modest 5% year-on-year revenue growth for the September quarter to Rs.575 crore, well below expectations.

Gross margins declined 115 basis points to 53%. “To liquidate inventory and increase footfalls/conversion which had declined because of SAP implementation/e-commerce impact, Bata India ran various promotional schemes and increased price discounts which impacted gross margin,” said Nirmal Bang Institutional Equities in a report on 5 November. Hundred basis points is one percentage point.

Operating performance was weak with operating profit margin narrowing about three percentage points to 8.5%, the lowest in the past 10 quarters at least and way below expectations. Nomura Research was expecting an operating margin of 11%. Nearly all cost components, raw material costs, rent and other expenses as a percentage of revenue, increased. As a result, after accounting for higher depreciation and lower other income, earnings before tax and one-time items declined a bit more than a third to Rs.38 crore.

What next? The company has said it will be expanding its product offering and strengthening its e-commerce business to reach out to a larger consumer base. As Nirmal Bang points out, it plans to introduce 100 footwear designs exclusively for e-commerce business, which is expected to contribute 70-80% to e-commerce revenue. The remaining e-commerce revenue is likely to be from designs which are common in online channels. However, the brokerage is not satisfied with this performance, saying that Bata India “plans to garner revenue of Rs.100 crore from e-commerce business in four years, a mere 3.5% of sales compared to less than 1% of sales currently.”

Unsurprisingly, analysts have lowered their earnings estimates after the September quarter results. The Bata India stock has declined 1.6% since numbers were announced and trades at 24 times next fiscal year’s estimated earnings. Of course, if those valuations are to sustain, revenue growth and margins have to recover.

Unfortunately, from a near-term perspective, the outlook on both measures is subdued. For one, revival in consumer sentiment may be slower than expected. Secondly, weak revenue growth and higher costs could mean pressure on margins will continue for some more time.

The writer does not own shares in the above-mentioned companies.

[“source -financialexpress”]

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