Sharekhan has recommended Buy on Bata India with a price target of Rs 1550. Bata India’s Q2 FY2021 revenue declined by 49% YoY to Rs 368 cr. Recovery in metros and urban areas was much slower than semi-urban areas, which saw increased demand. Post the easing of the lockdown, almost all stores have become operational. Recovery has improved to 50% of pre-COVID levels in Q2 from 15% in Q1. To register an early recovery, the company has undertaken relevant steps such as enhancing product portfolio with some value-added products, boosting presence in the e-commerce channel and stringently managing its costs going forward. The company has scaled up its digital initiatives by widening its portfolio on its website, while strengthening its presence across online marketplaces. Many broking houses and analysts believe that the Government will support the footwear industry and Bata being the leader in the segment will hugely benefit going forward. 

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Newly launched channels such as Bata ChatShop, Bata Home Delivery and Bata Store on Wheels contribute over 10% to store revenue. Bata has also changed its portfolio mix from formals and fashion categories to more relevant casuals, fitness and essential categories, which has led to faster pick up in volumes. The company has also renegotiated lease rentals, the benefit of which will be seen in the coming quarters.

The company expects more and more consumers to be shifting to top brands and would be buying value based products in the near term. Moreover, there might be some wedding/ festive demand seen in the second half of FY2021. Overall, Sharekhan expects FY2021 to be subdued and strong recovery is expected in FY2022 once the pandemic situation normalises. The company has a strong cash balance of Rs 800 crore as of first half of FY2021, which will help the company take care of near-term obligations in an uncertain environment.

Key positives:

Digital initiatives helped in enhancing revenue contribution from digital channels to 10% of revenue. To respond to semi-urban demand, the company opened its 200 th franchisee store in Andhra Pradesh.

Key negatives:

Gross margin declined significantly by 600 bps to 50.4%, Operating margins was down from 25.7% to 4.9%.

Valuation:

Bata is focusing on expanding its presence through e-commerce/omni-channel and innovating its product portfolio with new relevant variants to drive growth in the medium to long term. Further, the company will benefit from the shift from non-branded to branded products. Bata is a debt-free company with a strong cash balance of close to Rs 800 crore, which along with negative working capital and improving store fundamentals will help the company take care of its near-term expansion plans without any disruptions. The stock has corrected by 41% from its recent high and is currently trading at 42.9x its FY2023E EPS, which is a discount to its historic average and factors in the near-term headwinds. In view of this and long-term prospects, Sharekhan recommends Buy on the stock with a price target of Rs 1550.

Key Risks:

If the lockdown sustains and normalisation takes longer than expected, it will further affect second half of FY2021 earnings due to sustenance of store closures, resulting in an overall earnings disruption for FY2021.