Bata India’s stock price has fallen nearly 30% since April last year. Bata India, an iconic Indian footwear behemoth is facing headwinds in its core value segment impacted by inflation and GST. As consumer preference shifts towards sneakerization, athleisure and casual premium footwear, will Bata be able to maintain its supremacy amid high competitive intensity.
Lackluster Q3FY23 results, margins stable
Bata stock price lost 5% after its December Quarter 2022 results were announced. Revenues came in at Rs 900 crore in Q3FY23, up 7% YoY.
Bata reported volume fall of 5% in Q3FY23 compared to 7% volume growth in September Quarter 2022. Slow rural recovery, high inflation and GST hike impacted Bata’s core value/economy segment. GST was increased from 5% to 12% for footwear costing up to Rs 1,000 from January 2022. Economy segment (up to Rs 1,000) forms 22% of Bata’s revenue mix. Operating margins at 22.92% improved 288 basis points (bps) supported by cost control measures and benign raw material cost which fell 46% YoY in Q3FY23.
Net Profit stood at Rs 83 crore in December Quarter 2022 compared to Rs 72 crore in the same period previous year. Net profit was up 15% YoY, but still below pre-Covid levels. Net profit in Q3FY20 was Rs 117 crore. Compared to pre-Covid, Q3FY20, revenue growth is just 8% for Bata India compared to 68% for Campus Activewear and roughly 80% for Metro Brands. Why is Bata’s recovery slow post Covid? Is it product mix, distribution network or lower rejuvenation zeal in the 85 year old company.
Premium segment drives revenues, economy segment drags margins
The Indian footwear industry witnessed change in consumer behavior post Covid. Casual has taken over formal footwear, sports and athleisure and premium products are in high demand. Traditional buckle shoes have given way to sporty school shoes. Stylish, comfortable and trendy sneakers are the latest trend in the Indian footwear industry. Sneaker category is also doing well for Bata. Sneakers grew 20% YoY and constitutes one third of bata’s online sales. Premium brands, Hush Puppies and Comfit’s revenue growth was also strong at 30% YoY and 22% YoY in Q3FY23. According to the management, average selling price (ASP) of sneakers and Comfit was above Rs 2,000 and Hush Puppies ASP was above Rs 4,000 in Q3FY23. But still Bata’s ASP stands at Rs 772 in December Quarter 2022. Lower ASP is mainly due to economy/value segment footwear below Rs 1,000 which constitutes 22% of sales and around 50% of Bata’s product portfolio. Thus, even if the sneakers and premium footwear segment is doing well, their growth is not strong enough to offset muted economy/value segment performance.
All of this has led to lower ASP and Bata’s inability to pass on increases in raw material cost, fuel, rentals, employee costs driven by inflation. Consequently, operating margins have been lower for Bata India over the past three years. Operating margins fell from 33.70% in Q3FY20 to 22.92% in Q3FY23. Presently the best operating margins in the Indian footwear industry belong to Metro Brands followed by Bata and Campus Activewear.
Metro Brands ASP is also the highest among the top four listed players in the Indian footwear space.
Bata needs to increase its ASP and also control its operating expenditure to improve operating margins. Bata’s operating expenditure constitutes 76% of total revenue which is high compared to close peer Metro Brands at 63%. According to the management, higher operating cost is due to investment in digital, higher marketing spends and royalty impacting margins in the short run. As turnover increases and moves beyond pre-Covid levels, margins will also improve, said Gunjan Shah, Managing Director and CEO at Bata India.
The footwear industry is impacted by GST hike and inflation which has hit the economy segment (below Rs 1,000). With the Covid headwinds subsiding, unorganized players have also bounced back strongly in the mass/economy segment impacting organized players like Bata. Metro Brands has recently announced that the company is exiting the economy footwear segment (below Rs 1,000) which constitutes 12-13% of its sales. Though Bata is also reeling under high inflation and adverse GST hike, it plans to move on a different path.
Will franchise store expansion bear fruit
Bata has aggressively expanded its footprint through franchise stores in Tier III and Tier IV cities since 2019. The company currently has 2021 stores of which 392 are franchise stores. Bata added 39 franchise stores in Q3FY23.
The company has around 1293 company owned & company operated stores (COCO) and also sells its products through 343 shops in shops (SIS), multi-brand outlets. But franchise stores contribute around 65% of COCO store revenues mainly hit by inflation and GST hike. Thus, even with aggressive increase in franchise stores, revenue growth has not been on similar lines. According to the management, franchisee stores produce lower revenues but are better than COCO stores on the profitability front. And according to the management, as inflation stabilizes, revenue growth will also improve through the franchise model in the long run as rural and semi-urban India recovers. Management is highly confident of its franchise expansion model and aims to increase its franchise footprint to 500 by next year.
Bata foraying into apparel space
Bata is foraying into apparel space and expects to go live in H2FY23. Speaking on the company’s new business segment, Shah said that apparel is an adjacent area for Bata and its strong retail network would be beneficially utilized. While Bata is entering into apparel space, close peer Metro Brand is in talks with Foot Locker planning to enter India. Foot Locker is one of the largest sportswear and footwear retailers in the world. As competition heats up, Bata needs to pull up its socks and tighten its laces. It’s going to be a hard run to maintain its supremacy.
