Initiating Coverage April 21, 2014
Rating Matrix Rating : Buy Bata India (BATIND) Target : | 1225 Target Period : 12 months | 1072 Potential Upside : 14% Legacy brand with stable growth…
YoY Growth (%) Bata India Limited (Bata) is India’s leading and one of the oldest footwear (YoY Growth) CY12 CY13P CY14E CY15E companies. Bata has brought about some structural changes in the organisation which have aided in improving its financial position. We Net Sales 19.4 12.1 17.9 14.7 expect the company’s revenues and PAT to grow at a CAGR of 15.7% and EBITDA 19.3 12.8 24.8 17.9 24.9% during CY13-15E. Considering that only 40% of the footwear Net Profit (24.0) 11.2 29.0 22.7
market is organised and that footwear is relatively lower penetrated as compared to other consumption categories, we believe that Bata has Valuation Summary immense growth potential. We remain positive about Bata’s future growth CY12 CY13P CY14E CY15E prospects considering the enhanced product mix, improved store layouts, PE (x) 40.1 36.1 28.0 22.8 launch of a promotion campaign, shift to an asset light business model Target PE (x) 45.9 41.3 32.0 26.0 and the store addition plans. We have valued Bata at 26.0x CY15E EV/EBITDA (x) 23.5 20.6 16.1 13.4 earnings to arrive at a target price of | 1,225. We initiate coverage on Bata Target EV/EBITDA (x) 26.9 23.7 18.6 15.5 with a BUY rating. Price/BV (x) 9.8 8.1 6.8 5.9 India’s per capita expenditure on footwear to grow at a CAGR of 16.5% RoNW (%) 24.5 22.5 24.4 25.8 India’s per capita footwear consumption at 2.5 pairs per year (2012) is RoCE (%) 33.4 31.0 33.3 34.2 considerably lower than the average of 4-5 in developed countries. A Stock Data report by Ken Research estimates that India’s per capita expenditure on Bloomberg/Reuters code BATA IN/ BATA.BO footwear is likely to go up from $6.3 in 2013 to $11.6 by 2017. Improving Sensex 22,629 demographics, rising rural penetration, the booming online retail industry shall aid this growth. Average volume 214,092 Market Capitalisation 6,886 Key company level changes to aid growth EV 6,626 Bata has made several changes like (a) revamping of existing stores; (b) 52 week H/L 1159 / 700 extension of working hours of stores; (c) reduction of employee costs and Equity capital | 64.3 crore (d) increased outsourcing. All these have aided in improving the financials Face value | 10 of the company. Going forward, the company plans to increase its Promoter's stake (%) 53.0 presence across media to emphasise the changes in the company and to
change the perception about Bata. The company also plans to launch Comparative return matrix (%) brand specific outlets which will further enhance its brand value. Returns (%) 1m 3m 6m 12m Improving financials warrant BUY Bata India -2.9 6.0 21.1 42.1 Bata’s share price has appreciated on the back of the ongoing changes in Relaxo Footwear 11.7 24.9 85.1 167.2 and the improved financials. We expect Bata to continue to demand a Liberty Shoes 5.1 13.6 91.7 80.9 better multiple than its peers not only because of its size but also owing to the better financial health. The scope of enhanced profitability, improving Price movement return ratios and chances of higher dividend payout could lead to a re- 6,500 1,200 rating of Bata. We initiate coverage on Bata with a BUY rating and target price of | 1,225 (based on 26.0x CY15E EPS of | 47.0). 6,000 900 Exhibit 1: Financial Performance 5,500 600 CY11 CY12 CY13P CY14E CY15E 5,000 Net Sales (| crore) 1,542.5 1,842.5 2,065.1 2,434.2 2,792.2 300 EBITDA (| crore) 239.2 285.4 321.9 401.8 473.6 4,500 PBT (| crore) 319.4 252.0 282.0 364.7 447.6 4,000 0 Net Profit (| crore) 225.8 171.6 190.7 246.1 302.1 May-13 Jul-13 Oct-13 Jan-14 Apr-14 EPS (|) 35.1 26.7 29.7 38.3 47.0 Bata (R.H.S.) Nifty (L.H.S.) PE (x) 30.5 40.1 36.1 28.0 22.8
PBV (x) 12.0 9.8 8.1 6.8 5.9 Analyst’s name EV/EBITDA (x) 13.7 23.5 20.6 16.1 13.4 Bharat Chhoda ROCE (%) 34.5 33.4 31.0 33.3 34.2 [email protected] RONW (%) 39.3 24.5 22.5 24.4 25.8 Dhvani Modi Source: Company, ICICIdirect.com Research [email protected]
ICICI Securities Ltd | Retail Equity Research
Shareholding pattern (Q1FY14) Company Background Shareholder Holding (%) Promoters 53.0 Bata India Ltd (Bata) is India’s oldest, largest as well as one of the fastest Institutional Investors 30.0 growing shoe retailers. The company was promoted by Leader AG, a General Public 17.1 member of the Bata Shoe Organisation. The Bata Shoe Organisation, founded in 1894, is a family-owned footwear and fashion accessory manufacturer and retailer. It was one of the world’s first shoe FII & DII holding trend (%) manufacturers; a team of stitchers and shoemakers creating footwear not just for neighbours but for distant retail merchants. Today, it has a 25 presence in 70 countries over five continents. 20.1 19.2 17.9 18.8 20 Bata’s India operations commenced in 1931 when it was incorporated as 15 11.5 12.2 10.8 9.8 Bata Shoe Company Pvt Ltd for manufacturing and marketing all types of 10 footwear, footwear components, leather and products allied to the 5 footwear trade. The company initially set up a small operation unit at Konnagar (near Kolkata) in 1932. The company went public in 1973 and - the name was then changed to ‘Bata India Ltd’. Bata manufactures Q2CY13 Q3CY13 Q4CY13 Q1CY14 footwear for men, women and children. Its product portfolio includes FII DII leather, rubber, canvas and PVC shoes. The Bata Shoe Organisation provides an important interchange of new Revenue mix – Channel-wise (%) manufacturing technologies, machine design, factory layout plans advertising market forecasts, fashion trends, modern marketing techniques and new material testing. Apart from this, it provides information on the most advanced machinery and technology for Whole- production of shoes to the Bata group of companies, including Bata India. sale Over the years, the company has tied up with various brands and Channel Retail 18% currently owns brands like Hush Puppies, Dr Scholl’s, Marie Claire, Channel Northstar, Power, Sparx, Weinbrenner, Naturalizer and Sundrops. Apart 82% from these, the company has in-house brands like Bata Industrials, Mocassino, Ambassador and Bata Comfit.
Source: Company, ICICIdirect.com Research Bata’s total sales have crossed 5 crore pairs per annum. The company serves more than 1,50,000 customers daily in it’s over 1388 stores. The company has five manufacturing facilities in Bihar, Haryana, Karnataka, Revenue mix – Segment-wise (%) West Bengal and Tamil Nadu. Bata currently employs over 5,000 people. 28% Exhibit 2: Bata - Sales mix
2,800 159 2,450 17% 142 2,100 124 1,750 117 48% 112 2,079 1,400 1,805 7% 102 (| crore) 1,050 1,496 Menswear Womenwear 103 100 1,311 90 1,089 Kidswear Accessories 700 893 534 645 749 350 469 238 236 230 241 301 349 371 408 - Source: Company, ICICIdirect.com Research CY07 CY08 CY09 CY10 CY11 CY12 CY13P CY14E CY15E
Rubber & Canvas Footwear Leather & Other Footwear Plastic Footwear
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 2
Exhibit 3: Bata's journey thus far... Timeline 1894 The Bata Shoe Organisation was founded by Tomas J. Bata, a ninth generation shoe maker 1931 The Bata Shoe Company Pvt Ltd was incorporated in India The production of footwear commenced in rented premises at Konnagar, a few miles away from 1933 Kolkata, where for the first time rubber and canvas shoes were manufactured in India 1934 The first manufactuing unit was set up in the outskirts of Kolkata (now known as Batanagar) The factory operation shifted from Konnagar to Batanagar. Towards the end of 1936, the 1936 factory produced leather footwear for the first time. 1937 Batanagar tannery became operational towards the end of 1937 A footwear manufacture plant, a machinery department was set up at Batanagar, which produced the 1942 first India-made major shoe machine. Simultaneously, several auxiliary departments were started. Thereafter, another factory was set up at Bataganj, Bihar 1950 Bata launched the brand 'Hawai' 1951 The rubber/canvas factory was set up at Faridabad, Haryana 1952 One of Asia’s largest tanneries was set up at Mokemehghat, Bihar With the public issue , Leader AG St Moritz, Switzerland offered for sale 5,00,000 shares out of their 1973 holdings at a premium of | 20 per share 1977 Leader AG St Moritz, Switzerland further reduced its stake to 40% 1979 Bonus issue in the ratio 1:4 1984 Bonus issue in the ratio 2:5 1987 Bonus issue in the ratio 1:1 (i) The Bata factory was set up in Peenya, Bangalore; (ii) Signed an agreement with Adidas, West Germany for manufacture and marketing of sports and special application 1988 footwear, sports goods and sportswear in India; (iii) started marketing 'Star' clothings, US; (iv) A new brand of shoe, `Tigre' was introduced 1989 The company sucessfully launched `Adidas' collection of hi-tech sports footwear The workers at Batanagar factory went on strike from January 3 to May 23, thereby affecting 1992 production for six months (i) Batanagar factory became the first Indian shoe-manufacturing unit to receive the ISO 9001 1993 certification; (ii) came out with rights issue in the ratio of 1:1 The company’s factory at Hosur in Tamil Nadu became operational. This was originally an export 1994 oriented unit but now caters to the domestic Indian market 1997 Entered into a marketing tie-up with Nike to offer Nike's products at select Bata outlets 1998 Agreed to sell Hush Puppies and Marie Claire brand of shoes 1999 Launched the 'Sundrops' brand 2002 Shareholders approved transfer of tannery & footwear division to separate companies 2003 Forged an agreement with Lee Cooper Shoes to retail their shoes 2005 Came out with rights issue in the ratio of 1:4
es Source: Company, ICICIdirect.com Research
Bata’s product mix, which was earlier dominated by rubber Exhibit 4: Bata's changing product mix and plastic based footwear, is now being replaced by the higher margin leather and other footwear. Over the years, 100 10 10 9 8 7 7 666 we have seen the company’s operating margin almost 90 double from 7.9% in CY07 to 15.5% in CY12 80 70 60 62 66 69 72 73 74 75 77 77 50 (%) 40 30 20 28 10 24 21 19 20 20 19 17 17 - CY07 CY08 CY09 CY10 CY11 CY12 CY13P CY14E CY15E
Rubber & Canvas Footwear Leather & Other Footwear Plastic Footwear
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 3
Investment Rationale Indian footwear market likely to touch | 38,760 crore by CY15E The Indian per capita consumption at 2.5 pairs (as on India is the world's second largest footwear producing country, second to 2012) is considerably lower than average consumption of China, and is also the third largest consumer market globally. Owing to five pairs in developed countries the large population, India accounts for 12.7% of global footwear consumption. Having said this, the per capita footwear consumption in India has gone up from 1.4 pairs per year in 2004 to 2.5 pairs per year in 2012. However, this is still much below the average per capita footwear consumption of five in developed countries. The Indian footwear market is likely to grow at a CAGR of 14% to | 38,760 crore from the current | 29,982 crore. This growth is likely to be led by growth in the ladies and other footwear segments. Exhibit 5: Footwear market expected to touch | 38,760 crore… Exhibit 6: …with women’s segment outpacing men’s segment
41,000 Indian footwear market likely to 25,000 grow at CAGR of 14% 20,000 31,000 38,760 15,000 21,003 34,179
21,000 19,094 29,982 10,000 17,358 (| crore) (| crore) 15,780 26,300 13,634 11,000 23,074
20,240 5,000 11,362 9,468 7,890 2,630 3,156 3,724 4,123 1,000 - CY10 CY11 CY12 CY13 CY14E CY15E CY12 CY13 CY14E CY15E
Indian footwear market Mens Footwear Womens Footwear Others
Source: Relaxo Footwear Annual Report, ICICIdirect.com Research Source: Relaxo Footwear Annual Report, ICICIdirect.com Research
The Indian footwear market is dominated by the unorganised segment, which constitutes 56% of the total footwear pie. However, with increasing disposable incomes and rising aspirations, the organised segment is growing faster than the unorganised segment. Going forward, the organised segment is likely to grow at a CAGR of 15% in CY13-15E, thereby outpacing the industry growth of 14%. The size of the organised footwear market is likely to increase from | 13,225 crore to | 17,500 crore by CY15E.
The organised footwear segment is growing faster than the Exhibit 7: Rising share of organised segment unorganised segment on the back of rising aspirations and favourable demographics 100 90 80 55 70 63 57 56 56 56 60 50 (%) 40 30 45 20 37 43 44 44 44 10 - CY10 CY11 CY12 CY13 CY14E CY15E
Organised Unorganised
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 4
Changing Indian demographics augur well for consumption oriented companies India’s demographic profile and increasing disposable income, growing middle class, increasing individual wealth and large young population all put it in pole position for a surge in consumption. The company has witnessed a demographic shift with per capita income (current prices) increasing at 9.5% YoY to | 79,556 (FY13). The demographic advantage continues to remain owing to a relatively low median age (~27 years), more working women and increased urbanisation. Exhibit 8: Rising per capita income Indian demographics have worked in favour of various consumption players. With rising aspirations and incomes, the preference for branded products has been on the rise 12,000,000 90,000
10,000,000 75,000
8,000,000 60,000 10,028,118
6,000,000 45,000 (|) 8,974,947 (| crore)
4,000,000 7,795,313 30,000 6,477,827
2,000,000 5,630,063 15,000 4,987,090 - - FY08 FY09 FY10 FY11 FY12 FY13
GDP (current market prices) Per capita income
Source: Economic Survey, ICICIdirect.com Research
Every third person in an Indian city today is a youth. In about seven years, the median individual in India will be 29 years, very likely a city-dweller, making it the youngest country in the world. India is set to witness a dynamic transformation as the population burden of the past turns into a demographic dividend but the benefits will be tempered by social and spatial inequalities. By 2020, India is set to become the world’s youngest country with 64% of its population in the working age group. With the West, Japan and even China ageing, this demographic potential offers India and its growing economy an unprecedented edge.
The consumption of footwear is also likely to improve as Exhibit 9: Rising per capita spend on footwear footwear is moving from being a necessity to becoming a fashion commodity. The number of pairs owned by a 14 Per capita expenditure on footwear expected to grow at CAGR of 16.5% person has been on the rise owing to increasing fashion 11.6 12 (2013-17E) consciousness 10.2 10 8.6 8 7.4 6.3 ($) 5.4 6 4.7 3.7 4.1 4 3.1 2.4 2.7 2
0 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E
Source: Ken Research, ICICIdirect.com Research
The per capita expenditure on footwear in India has gone up from $2.4 in 2006 to $6.3 in 2013. This is expected to further increase to $11.6 by 2017. The rising retail penetration, growing popularity of online shopping, increased affordability and shift from the unorganised to the organised
ICICI Securities Ltd | Retail Equity Research Page 5
segment has aided this strong growth. The Tier II and III cities and rising rural incomes have also aided the consumption boom in India. Exhibit 10: Indian retail industry size
1400 Organised retail penetration likely to go up from 9.3% in FY13 to 21.0% by 1200 FY20E 262 1000 210 168 800 134 106 85 600 69
($ billion) 55 44 986 28 35 839 913 400 693 765 535 584 640 200 397 436 484 0 FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E FY20E
Unorganised retail industry size Organised retail industry size
Source: BGC-CII Estimates, ICICIdirect.com Research
According to BCG-CII estimates, the Indian retail industry is likely to grow from $590 billion in FY13 to $1248 billion in FY20E. Modern retail has seen significant growth with large scale investments made by Indian corporate houses, primarily in food and grocery retailing. Also, many foreign players have entered the country, independently or through partnerships to capture a share of the growing Indian retail sector. The share of organised retail is likely to go up from 9.3% in FY13 to 21.0% by FY20E. Another factor aiding growth is booming online retail.
The convenience of shopping from home and paying cash Exhibit 11: Growing Indian online retailing market on delivery is driving online retail in India 1,200,000 1,080,000 12
1,000,000 10
800,000 8
600,000 6 (%) (| crore) 400,000 4
200,000 54,000 2 - - 2011 2020E
Size of e-commerce market E-commerce market as a % of total retail
Source: Technopak Advisors, ICICIdirect.com Research
Aiding boom in online retail A study by Technopak Advisors expects the Indian online retailing market to grow from | 54,000 crore in 2011 to | 10,80,000 crore by 2020E, Smartphone 4 Users 45 translating to a CAGR of 39.5%. The factors aiding the growth in online 2011 retail are (a) increasing internet penetration, (b) ease and convenience of PC/ Laptop/ 1 2020E shopping, (c) emergence of a time-poor, yet brand-aware consumer, (d) Tablet Users 15 steep growth of internet enabled devices; (e) limited availability of brands Internet 11 in Tier II and III towns and cities, (f) convenient payment options (like cash Users 80 on delivery) and (g) the ease of product return/replacements. The booming online retail industry augurs well for both domestic and 0 20406080100 (in crore) international brands. The online model not only leads to improved margins for the brands but also gives them access to newer markets Source: Technopak Advisors, ICICIdirect.com Research where they may not be present in the physical retail formats.
ICICI Securities Ltd | Retail Equity Research Page 6
Global brand with local touch… Bata’s parent, Bata Shoe Organisation, is the largest as well as one of the oldest shoe makers globally. Bata is a Czech brand but is known in every nook and cranny of India as an integral part of Indian culture. Contrary to popular belief, Bata is a multinational company and one of the world's largest retailers. Today, Bata sells a wide variety of footwear in canvas, rubber, leather and plastic. Exhibit 12: Bata’s strong brand portfolio
Source: Company, ICICIdirect.com Research
Though it initially started off as a men’s wear and school kids wear shoe retailer, the company has gradually got transformed into an offering for the entire family, for all seasons. Over the years, Bata has developed a portfolio of brands (both owned and licensed) that has offerings across price points. Apart from its own brands, the company has tied up with international companies and licensed brands like Hush Puppies, Dr Scholl, Naturalizer and Footin and also tied up with designer Malini Ramani. Bata has also given birth to and nurtured brands like Northstar, Ambassador, Mocassino, etc. In the women’s segment, the company has launched brands like Marie Claire, Sandak, Sundrops, etc. To cater to the youth, Bata has tried to establish a connect with brands like Footin.
After an 83-year presence in India, many are unaware that Exhibit 13: Bata’s brand heritage...created over decades! Bata, one of the most trusted brands for “sasta” and Brand Ownership Target Audience Category “tikau” footwear, is not Indian. The company has created a Bata Own Women, Men, Kids Mid-segment connect with the Indian consumer and catered to the Sundrops Own Women Premium masses for decades Bata Comfit Own Women, Men Mid-segment Mocassino Own Men Mid-segment Ambassador Own Men Premium Bubblegummers Own Kids Low-end Marie Claire Own Women Mid-segment Sandak Own Women Low-end North Star Own Women, Men Mid-segment Weinbrenner Own Men Premium Power Own Women, Men, Kids Mid-segment Sparx Own Women, Men Low-end Bata & I Own Women Low-end Hush Puppies Licensed Women, Men Premium Dr. Scholl Licensed Women, Men Premium Naturalizer Licensed Women Premium Footin Licensed Youth Low-end Malini Ramani by Bata Tie-up with designer Women Premium
Source: Company, ICICIdirect.com Research
Over the last several years of operations, Bata has created this strong portfolio of brands. However, the company (due to its old fashioned stores and the attitude of salesmen) has suffered a perception drag of being a down-market brand. Bata is now working on changing this image and has taken several steps for the same.
ICICI Securities Ltd | Retail Equity Research Page 7
Revamp of stores and structural changes for better tomorrow To change its impression and become a brand more Despite being one of the oldest footwear brands in India, Bata has accepted by the Indian youth, the company has taken suffered due to an unfavourable impression of a perception drag and has several steps like revamping of existing stores, change in been unable to connect with the youth. This was due to a number of store formats, improving of employee outlook, launch of a factors like (a) crowded store formats; (b) subdued store staff, (c) lack of new brand communication campaign, increased presence in the media, etc. However, Bata has started taking corrective outsourcing (and thereby reduced employee count) and action. We are optimistic about the company’s future. After Marcelo likely launch of more brand focussed stores Villagran took over Bata’s operations in 2005 he brought about many changes in the company that have led to a turnaround. Revamp of existing stores... As part of the restructuring plan set out by Mr Villagran, Bata opened 718 stores, closed down 524 and remodelled 296 stores during CY05-12. The new stores opened were decided in a phased manner and designed according to the target audience that it catered to. The company now categorises stores as i) metro, ii) metro & mini metro and iii) smaller towns. Based on this classification, it decides the store layout, product profile and location based on that. While stores in metros are air- conditioned and stock more premium and fashion brands, the metro and mini-metro stores are non air-conditioned and stock products catering to the aspirational upper middle class consumers. Similarly, in small towns, the stores are non air-conditioned and stock economy and mid-range products meant for mass markets. Bata recently opened its largest ever store (20,000 sq ft) in Thane. This enabled it to showcase its entire range of shoes and accessories. The company intends to add two to three such stores in metros.
With the extension of store timings from the earlier 10 am– Change in store format and operating metrics... 7 pm to 10 am – 9 pm, footfalls increased, thereby leading The erstwhile Bata stores had a very congested layout and the display of to a better inventory turnover all SKUs was at times either not possible or not accessible. However, with the revamping of stores, the company has now improved the design and layout to make more products visible and available for touch and feel to the consumer. The company has also extended the store timing by two hours (from the earlier 10 am – 7 pm to 10 am – 9 pm). The company has also decided to keep stores open on Sundays. This led to higher footfalls and, therefore, improved inventory turnover. Exhibit 14: Bata’s inventory days...
140 124.5 120 107.4 100 93.4 90.9 90.0 90.0 82.4 80.5 83.2 80
60
(Inventory days) 40
20
- CY07 CY08 CY09 CY10 CY11 CY12 CY13P CY14E CY15E
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 8
Reducing employee count... In CY05-12, the company reduced the headcount from 9,631 to 5,162. The employee cost as a percentage of sales has come down from 21.1% in CY07 to 10.3% in CY13. With the change of management, the company emphasised on changing the attitude of the store staff to improve the customer experience. Employees who were unwilling to work longer hours or change their attitude were sacked.
The employee cost as a percentage of sales has halved to Exhibit 15: Employee cost as percentage of sales 10.3% in CY13. The company has further reduced the 25 headcount. We expect employee costs to further come 21.1 down 20 17.9 16.0 14.2 15 12.0 10.6 10.3 10.0
(%) 9.8 10
5
- CY07 CY08 CY09 CY10 CY11 CY12 CY13P CY14E CY15E
Source: Company, ICICIdirect.com Research
Launch of new brand communication programme For many years, Bata had not worked on enhancing its visibility. Apart from its physical stores, advertisements or a media presence were as good as absent. In CY12, Bata appointed DDB Mudra (a marketing agency) to develop a brand communication programme to be aired across all media. The new brand communication would focus on the diversified product portfolio and also the revamped store format, which would further boost footfalls in the stores. Increases outsourcing to help save costs As part of Mr Villagran’s strategy, the company started to outsource labour intensive products to the cost effective Chinese and Malaysian markets. Over the years, the share of finished goods purchase has increased from 25.3% in CY07 to 34.3% in CY12. Likely launch of brand specific stores After the success of the Hush Puppies stores, the company plans to launch more brand specific stores, going forward. This helps customers de-link the brand from the Bata group and, thereby, overcomes the drag of a mass market brand. On the back of these changes, we remain hopeful of a pick-up in Bata’s sales. This will also help to enhance the brand image of the company and, thereby, remove the perception drag on the company’s impression.
ICICI Securities Ltd | Retail Equity Research Page 9
Largest distribution network and still growing! Bata boasts of the largest distribution network (in terms of After getting the other 3 Ps in place (product, price and promotion), the number of stores) and yet plans to add ~100 stores each fourth P (place) has always been Bata’s key advantage. The company year for the next four to five years boasts of one of the largest distribution network in terms of number of stores. With over 1300 stores, Bata is clearly ahead of all its competitors and that too by a huge margin. In 2011, the company’s senior management said in a press statement, “While the last five years were about consolidation, the next five years will be about expansion”. In line with this, Bata plans to add ~100 stores each year to further grow its distribution strength. Exhibit 16: Bata’s strong distribution network CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 No of stores 1174 1172 1173 1165 1161 1209 1259 1388 Revenue per store (in lakh) 60.2 65.7 74.0 84.7 94.0 104.1 122.5 132.7 Of the 1300 stores, Bata has 250 franchise stores, 450 K stores, 31 Hush Puppies outlets, 28 store in stores and 10 Source: Company, ICICIdirect.com Research Footin stores. The remaining are company owned stores Focus to remain on large stores...
Over the last three to four years, the company has clearly focused on closing down stores of ~1,000 sq ft. Bata has been adding stores averaging ~3,000 sq ft. Large format stores help the company to better display their entire range of products and also enhance the customer experience. K stores to aid further growth... K stores refer to commission stores, which the management started to promote entrepreneurship. Here, existing employees were encouraged to be entrepreneurs by enrolling to become a franchisee. In this format, the company helps the K store owner with regard to location, rent, furniture, stocks and promotional material. The company extends 7-8% commission (based on turnover) to a K store owner. This is a win-win situation for both the employee as well as the company as this commission is lower than the employee cost of 10-12%. Also, the store owner has a sense of ownership and, hence, works more efficiently to boost sales. The management has guided that a large part of store additions, going forward, will be in the form of K stores. Smaller cities and hinterland – another opportunity So far, Bata’s presence was limited to towns with a population of over 5,00,000. The company now plans to expand to towns and cities with a population exceeding 1,00,000. This will enable it to spread its wings to the Tier III and rural markets. These stores will also be far more cost efficient considering the lower rentals. Women and kids segment to aid growth Bata intends to tap the relatively untapped women’s and Like a lot of other segments, in footwear also, the women’s segment is kid’s footwear segments to fuel growth. With increased relatively underpenetrated and growth in the women’s segment is likely to employment and improving social status, women tend to outpace that of the men’s segment. Over the last few years, the company match their footwear with apparel colour and also tend to has been trying to enhance the sales of women and kids footwear. We use different types of footwear like flats, high heels, expect growth in this segment to aid revenue growth, going forward. Bata wedding footwear, which would aid the women’s segment has worked towards designing special products and launching brands to grow faster than other categories that focus on these segments. The same are picking up well. Over the years, the share of women’s footwear has gone up from 25% in CY08 to ~28% in CY12. Bata has also launched various kids’ specific brands to increase its share.
ICICI Securities Ltd | Retail Equity Research Page 10
Risks & concerns Raw material price fluctuation may impact operational efficiency Like any manufacturing company, raw material costs entail the largest share of Bata’s expenses. Any fluctuation in raw material prices that cannot be passed on to the end user may impact the operational efficiency of the company. The company typically passes on the impact of increased input costs with a lag of about three months. Hence, the margin impact may be for a relatively short period. Exhibit 17: Cost break-up
100 6 7 777 7 777 90 6 7 7 7 8 7 8 8 8 80 12 13 15 15 15 18 18 17 17 70 23 60 20 18 16 14 13 12 12 12 50 (%) 40 30 53 54 53 55 56 56 54 56 56 20 10 - CY07 CY08 CY09 CY10 CY11* CY12 CY13P CY14E CY15E
Raw Material Staff Costs Manufacturing Costs Selling Costs Admin & Other Costs
Source: Company, ICICIdirect.com Research
Increase in royalty Bata pays one of the lowest royalties compared to other emerging market Bata companies. Considering that the Indian business is the second largest contributor to Bata Shoe Organisation’s revenues and also that the growth potential in the Indian market is significant, Bata faces the risk of an increase in the royalty payments. Exhibit 18: Royalty/technical fees as percentage of sales CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 Bata India - - - 1.0 1.2 1.2 1.0 1.0 Bata Pakistan 0.1 0.1 0.7 1.2 2.3 2.9 3.8 3.7 Bata Bangladesh - - - 3.0 3.0 2.9 3.9 3.9 Bata Indonesia 1.7 1.7 1.7 2.3 2.9 3.5 3.9 4.0
Source: Company, ICICIdirect.com Research
Bata’s royalty payment as compared to other listed Exhibit 19: Royalty payments as percentage of sales companies is also significantly lower. This poses a threat CY/FY05 CY/FY06 CY/FY07 CY/FY08 CY/FY09 CY/FY10 CY/FY11 CY/FY12 CY/FY13 of an increase in royalty, going forward Maruti Suzuki 1.8 2.1 2.5 2.7 3.3 3.4 5.1 5.0 5.5 Nestle India 3.3 3.3 3.3 3.4 3.4 3.4 3.4 3.5 3.4 Bosch 1.2 1.1 0.7 1.1 1.1 1.8 1.6 1.7 - HUL -----0.9 1.4 1.3 1.5
Source: Capitaline, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 11
Increased threat of competition The unorganised footwear market is fairly large in India, especially at lower price points. Apart from this, Bata is also likely to face competition from imported Chinese products as they are priced competitively. Also, with the government opening up FDI in single brand retail, more and more foreign players are likely to tap the Indian markets where the growth potential is high. All these factors could pose a threat to Bata’s sales and growth plans. Rising lease rentals may impact store expansion plans Exhibit 20: Rising lease rentals
14 11.7 11.8 11.9 12.0 12 9.3 9.2 9.4 10 7.8 8 6.4 (%) 6
4
2
- CY07 CY08 CY09 CY10 CY11* CY12 CY13P CY14E CY15E
Source: Company, ICICIdirect.com Research
With an increasing retail presence, the lease rental as a percentage of sales has increased from 6.4% in CY07 to 11.7% in CY12. Going forward also, the company plans to add 100 stores each year. A steep increase in lease rentals will not only impact the company’s operating margin but also hamper the new store addition plans. This will have an adverse impact on our growth estimates. Drag on brand image over generations Over the years, Bata has been perceived as a brand primarily catering to mass markets (rubber footwear) largely in the men’s and children’s wear segment. If the company is unable to change this image and become a more aspirational and contemporary brand for the youth then our revenue growth assumptions may be put to risk. On the other hand, if the company is able to successfully transform the brand image then it will be able to gain significant market share from its organised as well as unorganised peers, thereby calling for upgradation of estimates. Overall slowdown in economy The company’s product portfolio comes under the discretionary spends segment. A slowdown in the economy, rising interest rates and increasing inflation all have a direct bearing on discretionary spends. If there is a prolonged period of slowdown and such a macroeconomic turmoil, the company’s revenues could be significantly impacted.
ICICI Securities Ltd | Retail Equity Research Page 12
Financials Bata to maintain past track record; revenue CAGR of ~16% during CY13-15E Over the last seven years, Bata’s revenues have grown at a CAGR of 15.4%. This growth came on the back of an improving product mix, which aided the company to report a realisation growth of 10.9% during the period. Volumes, on the other hand, increased at a mere 3.6%. Going forward, we expect the company to maintain the growth rate and report a revenue CAGR of 16.3% contributed equally by volume and value growth (CY13-15E). Over the next two years, we expect Bata’s volumes and realisation to grow at a CAGR of 7.9% and 8.1%, respectively. Exhibit 21: Volumes to grow at CAGR of 7.9% in CY12-15E… Exhibit 22: …realisations to improve to | 429/piece by CY15E
7 6.3 500 429 5.9 400 6 5.2 5.4 368 4.7 4.8 4.9 400 343 5 4.4 4.6 308 4 300 237 256 197 207 3 200 (|/ piece) 2 (pieces in crore) (pieces 100 1 - - CY07 CY08 CY09 CY10 CY12 CY07 CY08 CY09 CY10 CY12 CY14E CY15E CY14E CY15E CY11* CY11* CY13P CY13P
Source: Company, ICICIdirect.com Research
Source: Company, ICICIdirect.com Research
During CY07-12, Bata’s volumes increased from 4.4 crore pieces to 5.2 pieces while realisation improved significantly from | 197/piece to | 343/piece. Accordingly, the company’s revenues increased from | 867.5 crore to | 1,842.5 crore in CY12. We expect revenues to further increase to | 2,792.2 crore by CY15E. Volumes are likely to increase to 6.3 crore pieces with an average realisation of | 429/piece. Exhibit 23: Bata likely to continue topline growth trajectory…
3,000 2,792 2,434 2,500 2,065 2,000 1,842 1,543 1,500 1,258 1,092 (| crore) 987 1,000 867
500
- CY07 CY08 CY09 CY10 CY11 CY12 CY13P CY14E CY15E
Source: Company, ICICIdirect.com Research
So far, Bata has grown on the back of (a) improved product mix (i.e. increasing share of leather products), (b) expanding retail footprint and (c) refurbishments of stores and staff orientation. Going forward, we expect the retail expansion (store addition plans of ~100 stores each year) and the launch of new products to aid growth.
ICICI Securities Ltd | Retail Equity Research Page 13
Leather segment to lead growth… The share of leather footwear has increased from 62% in CY07 to 74% in CY12. We expect the same to go up to 77% by CY15E. Bata’s leather footwear sells at a premium of 2.3-3.6x in rubber, canvas and plastic footwear. Historically, the leather segment has been the fastest growing segment. We expect the same to continue, going forward, also. While the rubber, canvas and plastic footwear segments are expected to grow at ~12-13%, the leather footwear is likely to grow at 17.2% during CY13- 15E. In terms of size, we expect leather segment sales to soar from | 1,310.6 crore in CY12 to | 2,053.4 crore in CY15E. Exhibit 24: Leather segment to lead growth…
30 25.0 21.9 25 20.8 20.7 19.3 20.3 20 16.0 14.1 15.2 15 16.1 14.4 14.8
(%) 14.7 10 6.2 4.6 12.2 10.1 5 9.2 (0.8) 6.4 - (2.6) 4.4 1.9 CY08 CY09 CY10 CY11 CY12 CY13P CY14E CY15E (5) (2.5)
Rubber & Canvas Footwear Plastic Footwear Leather & Other Footwear
Source: Company, ICICIdirect.com Research
Operating margins to improve 140 bps over two years to 16.9% Bata’s operating margin has gradually expanded from 7.9% in CY07 to 15.6% in CY13. This has been achieved on the back of (a) price hikes, (b) higher share of leather footwear and (c) lower staff costs due to improved staff efficiency (exhibit: 26). Going forward, we expect a margin expansion of 140 bps over the next two years to 17.0% by CY15E. This is expected to come on the back of an improving product mix and reduced employee costs. In Q4CY13, the company provided | 10.7 crore towards VRS benefits paid to employees. Bata has discontinued the tannery in Patna and will be outsourcing the process. This will further aid margin expansion.
Over the years, Bata’s operating margin has expanded from Exhibit 25: EBITDA margins to expand on back of improved product mix and controlled costs 7.9% in CY07 to 15.6% in CY13. We expect this to further 17.0 increase to 17.0% by CY15E on the back of an improved 500 20 product mix and lower employee costs 450 16.5
400 15.5 15.5 15.6 474 350 13.3 402 15 300 11.9
250 322 (%) 285
(| crore) 200 9.2 150 7.9 239 10
100 168 129
50 91 69 - 5 CY07 CY08 CY09 CY10 CY11 CY12 CY13P CY14E CY15E
EBITDA EBITDA Margin
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 14
Bata’s improving employee productivity… Exhibit 26: Enhanced employee efficiency for Bata
8000 0.4 0.32 6000 6853
6334 0.27 5776
4000 5424 5162 0.22 (| crore) 0.2 (| crore) 2000 0.17 1940 0 1333 1618 1565 1578 0.12 CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12 CY12/FY13
Total Employees (Bata) Total Employees (Liberty Shoes) Rev/employee (Bata) (RHS) Rev/employee (Liberty Shoes) (RHS)
Source: ACE Equity, ICICIdirect.com Research
We have compared the staff efficiency for Bata and Liberty Shoes. Over the years, Liberty Shoes’ revenue per employee has stayed flat at | 16-20 lakh. Despite the employee count rising from 1,333 in FY09 to 1,940 in FY13, sales have increased from | 241.8 crore in FY09 to | 340.1 crore in FY13. Bata, on the other hand, has witnessed an increase in revenue per employee from | 14 lakh in CY08 to | 36 lakh in CY12. While the employee count has come down from 6,853 in CY08 to 5,162 in CY12, sales have grown at a CAGR of ~17% to | 1,842.4 crore in CY12. Increased outsourcing Exhibit 27: Purchase of traded goods as percentage of sales
45 38.0 38.3 36.2 34.3 35.5 36 30.6
25.3 25.1 24.7 27 (%) 18
9
- CY07 CY08 CY09 CY10 CY11 CY12 CY13P CY14E CY15E
Source: Company, ICICIdirect.com Research
Bata has decided to outsource some manufacturing to China and Malaysia. Over the years, the share of purchased goods has gone up from 25.3% in CY07 to 35.5% in CY13. This has also aided in operating margin expansion. Apart from this, the company has been focusing on increasing sales of premium products, opening more franchisee based stores, etc. This has also aided in operating margin expansion.
ICICI Securities Ltd | Retail Equity Research Page 15
Enhanced operational performance to aid 150 bps PAT margin expansion We expect Bata’s PAT to increase from | 190.7 crore in CY13 to | 302.1 crore in CY15E, translating to a CAGR of 25.9%. With a topline CAGR of 16.3% and an operating margin expansion of 140 bps over two years, we expect the PAT margin to expand 150 bps to 10.8% by CY15E. With increased focus on outsourcing, the interest and depreciation are also likely to remain relatively subdued. Owing to an enhanced operating margin, we expect a 150 Exhibit 28: PAT margin to expand 150 bps owing to improved operational efficiency bps expansion in Bata’s PAT margin to 10.8% (in CY15E). PAT is likely to grow at a CAGR of 25.9% during CY13-15E 350 15 300
250 302 10.8 200 9.3 9.2 246 226 10.1 10 (%)
150 191 (| crore)
7.6 8.6 172 100 6.2 6.2 50 5.5 95 67 61 47 - 5 CY07 CY08 CY09 CY10 CY11* CY12 CY13P CY14E CY15E
PAT PAT Margin
Source: Company, ICICIdirect.com Research Note: PAT margin for CY11 has been adjusted for the exceptional income relating to gain on investment in the real estate business
Return ratios to pick up Bata’s return ratios have improved significantly on the back of improved operational efficiency. Going forward also, as the operational efficiency further improves, we expect the return ratios of Bata to improve. We expect the return on equity to improve from 22.5% in CY13E to 25.8% in CY15E. Similarly, return on capital employed is also likely to improve from 31.0% in CY13E to 34.2% in CY15E.
We expect return ratios to pick up in CY15E led by Exhibit 29: Trends in return on equity and return on capital employed (%) expansion in operating margin 40 34.5 34.2 32.9 33.4 33.3 35 31.0 28.3 30
25 21.4 (%) 25.8 17.4 23.9 24.5 24.4 20 23.2 22.5 20.9 20.1 15 18.9
10 CY07 CY08 CY09 CY10 CY11* CY12 CY13P CY14E CY15E
RoE RoCE
Source: Company, ICICIdirect.com Research Note: RoE for CY11 has been adjusted for the exceptional income relating to gain on investment in the real estate business
ICICI Securities Ltd | Retail Equity Research Page 16
Negative working capital cycle to aid in maintenance of debt-free status As the churn of inventory improved, Bata started to work on a negative working capital cycle, indicating that it managed to receive money for goods before it had to be paid to suppliers. This enabled the company to completely retire the debt. Apart from this, the company generates healthy cash flows, which aid in funding any capacity expansion requirements. Exhibit 30: Improving inventory turnover aids debt retirement & negative working capital cycle Bata has been operating on a negative working capital led by consistent improvement in the inventory turnover. On the back of this, the company is able to maintain a debt- 20 12 free status. Its strong cash flow generation aids it to fund 10 the capex requirements 2 0
-10 -4
(days) -20
-30 -27 -27 -30 -40 -33 -42 -41 -50 CY07 CY08 CY09 CY10 CY11* CY12 CY13P CY14E CY15E
Source: Company, ICICIdirect.com Research
Dividend payout to improve on back of increased cash flows Exhibit 31: Dividend payout trend
45 40.0
36 28.7 28.9 30.0 27.1 26.5 27.0 27 22.5 22.0 (%) 18
9
- CY07 CY08 CY09 CY10 CY11* CY12 CY13P CY14E CY15E
Source: Company, ICICIdirect.com Research Note: Dividend payout for CY11 has been adjusted for the exceptional income relating to gain on investment in the real estate business
We expect Bata to improve the dividend payout, going forward, considering increased cash flow generation. The company’s cash from operations has gone up from | 64.8 crore in CY07 to | 306.3 crore in CY12. Considering that no major capacity expansion is planned, we expect the company to increase dividend payouts, going forward.
ICICI Securities Ltd | Retail Equity Research Page 17
Valuation Key reasons why Bata has been re-rated: • The company has maintained a topline growth rate of ~15% and is likely to further grow at the same pace • New store additions and launching & nurturing of brands has aided the revenue growth • The company has brought about cost efficiencies and, hence, witnessed margin expansion over the years • Owing to this, the profitability of the company is slated to grow faster than the topline (~25%) • On the balance sheet front, the working capital cycle of the company has improved significantly • Considering the generation of cash flows, we expect the company to increase dividend payouts
Exhibit 32: Two year forward P/E band (2004-08) Exhibit 33: Two year forward P/E band (2009-14)
350 1,500 280 1,200 210 900 140 600 70 300 - - Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Avg. Price 11.0x 15.0x Avg. Price 11.0x 15.0x 19.0x 23.0x 27.0x 19.0x 23.0x 27.0x
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research
Exhibit 34: Improving multiple with improvement in FCF
1500 300 The multiple has been improving with 250 1200 improvement in FCF generation 200 900 150 (|)
600 (| crore) 100 300 50 0 - Jul-13 Jul-08 Jan-11 Jan-06 Sep-12 Sep-07 Nov-11 Nov-06 Mar-10 May-09
Avg. Price 11.0x 15.0x 19.0x 23.0x 27.0x
Source: Company, ICICIdirect.com Research
It has been observed in the past that the market rewards a higher multiple in anticipation of an increase in free cash flows (FCF). As visible in the exhibit above, Bata has also witnessed a multiple re-rating with improving financials and enhanced FCF generation. Bata’s FCF has increased from | 32.7 crore in CY07 to | 123.8 crore in CY13. We expect this to further double by CY15E. We, therefore, believe Bata is a candidate for multiple re-rating.
ICICI Securities Ltd | Retail Equity Research Page 18
A comparison of various other companies in the consumption space also reveals that companies having healthy return ratios, negligible leverage and consistent growth get rewarded with an average multiple of 29.7x FY15E earnings. Considering the favourable demographic profile and immense opportunity that lies ahead for consumption oriented companies, these companies tend to remain a preferred investment avenue.
Exhibit 35: Comparison of companies with similar return ratios (FY15E) Revenue CAGR Company Market Cap (| crore) RoE (%) P/E (x) EV/EBITDA (x) (FY13-15E) Marico 13,317 25.0 24.1 15.9 8.1 Dabur 31,223 36.4 28.7 22.3 14.6 Titan 22,834 29.7 25.2 17.5 16.5 Page Industries 6,379 49.2 37.1 23.6 31.6 TTK Prestige 3,606 21.3 24.4 15.3 9.8 Bata* 6,886 24.4 28.0 16.1 14.9 Asian Paints 52,156 33.9 35.3 22.1 14.2 Jubilant Foods 6,419 27.0 35.2 17.8 26.0 Average 30.9 29.7 18.8 17.0 Source: Bloomberg, ICICIdirect.com Research * - Bata’s numbers are for CY14E
Exhibit 36: Peer comparison (FY13/CY13) Particulars Unit Bata Relaxo Footwear Liberty Shoes EBITDA Margin % 15.6 11.0 8.2 PAT Margin % 9.2 4.4 1.5 Return on Equity % 22.5 20.9 3.9 Return on Capital Employed % 31.0 19.4 7.8 P/E (TTM) x 36.1 8.1 52.0 Market Cap | crore 6885.9 1789.2 279.8
Source: Company, ICICIdirect.com Research
Bata is not only bigger in size but also in a better financial position compared to its peers in the listed space. We have valued Bata at 26.0x CY15E EPS of | 47.0 to arrive at a target price of | 1225. At the CMP, the stock is trading at 28.0x and 22.8x its CY14E and CY15E EPS, respectively. We believe Bata is likely to be one of the beneficiaries of the Indian consumption boom. We expect the topline and bottomline to grow at a CAGR of 16.3% and 25.9%, respectively, during CY13-15E. We are initiating coverage with a BUY rating on the stock.
ICICI Securities Ltd | Retail Equity Research Page 19
Financials Exhibit 37: Profit & loss account (| crore) CY10 CY11 CY12 CY13P CY14E CY15E Net Sales 1,258.2 1,542.5 1,842.5 2,065.1 2,434.2 2,792.2 % Growth 15.3 22.6 19.4 12.1 17.9 14.7 Other Operating Income ------Raw Materials 594.5 726.5 868.0 948.6 1,134.2 1,303.6 Manufacturing Expenses 159.6 197.7 273.1 314.9 340.8 390.9 Employee Expenses 178.4 185.9 195.9 213.3 243.4 273.6 Sell. & Distri. Expenses 79.6 100.6 112.9 144.6 170.4 189.9 Admin. Expenses 78.3 92.6 107.2 121.8 143.6 160.5 Total Exp. 1,090.3 1,303.3 1,557.1 1,743.2 2,032.4 2,318.5 % Growth 29.7 42.5 19.3 12.8 24.8 17.9 Operating Profit 167.9 239.2 285.4 321.9 401.8 473.6 Depreciation 32.5 41.1 51.4 59.2 66.3 73.5 Interest expense 7.6 9.6 12.0 12.0 12.2 14.0 Other Income 15.3 130.9 30.0 31.3 41.4 61.4 PBT 143.00 319.40 251.96 282.05 364.66 447.61 Tax 47.6 93.6 80.4 91.3 118.5 145.5 Net Profit 95.4 225.8 171.6 190.7 246.1 302.1 % Growth 41.8 136.8 (24.0) 11.2 29.0 22.7 Equity 64.3 64.3 64.3 64.3 64.3 64.3 Dividend % 40.0 60.0 60.0 65.3 114.9 188.0 EPS 14.8 35.1 26.7 29.7 38.3 47.0
Source: Company, ICICIdirect.com Research
Exhibit 38: Balance sheet (| crore) CY10 CY11 CY12 CY13P CY14E CY15E Equity Share Capital 64.3 64.3 64.3 64.3 64.3 64.3 Reserves & Surplus. 334.0 510.0 636.1 783.4 943.9 1,105.8 Secured Loans ------Unsecured Loans 13.8 - - - - - Other LT Liabilities ------Total Liabilities 412.0 574.3 700.4 847.7 1,008.1 1,170.1 Net Block 153.1 219.0 241.4 246.2 264.8 273.4 CWIP 0.3 8.1 18.1 23.7 14.2 11.4 Investments 17.2 4.9 4.9 4.9 4.9 4.9 Deferred Tax Assets 31.1 34.2 44.4 68.1 71.5 75.8 Inventories 299.4 391.3 462.1 582.7 600.2 688.5 Sundry Debtors 30.2 31.4 44.9 50.9 56.7 65.0 Cash & Bank 135.6 122.9 187.1 262.3 403.6 539.4 Loans & Adv. 142.6 108.3 120.8 141.0 170.4 201.0 Other Current Assets 1.5 4.1 6.8 9.5 10.5 11.5 Current Assets 609.3 658.1 821.8 1,046.5 1,241.3 1,505.4 CL & Prov. 399.1 349.9 430.1 541.7 588.6 700.7 Net Current Assets 210.2 308.2 391.7 504.8 652.7 804.7 Total Assets 412.0 574.3 700.4 847.7 1,008.1 1,170.1
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 20
Exhibit 39: Cash flow statement (| crore) CY10 CY11 CY12 CY13P CY14E CY15E Net Profit Before Tax 143.0 319.4 252.0 282.0 364.7 447.6 Depreciation 32.5 41.1 51.4 59.2 66.3 73.5 Interest Expense 0.8 0.9 12.0 12.0 12.2 14.0 Direct Tax Paid (85.3) (90.8) (80.4) (91.3) (118.5) (145.5) (Profit)/Loss on sale of Assets (net) 0.3 0.0 - - - - Interest / Dividend Income (6.1) (9.0) (9.0) (9.4) (12.4) (18.4) CF before change in WC 85.2 261.6 226.0 252.5 312.2 371.1 Inc./Dec. in WC (15.7) (103.8) (19.3) (37.9) (6.7) (16.2) Others 13.3 (99.6) - - - - CF from operations 82.9 58.2 206.7 214.6 305.5 355.0 Pur. of Fix Assets (net) (56.8) (76.4) (71.0) (75.2) (69.9) (79.2) Purchase of Investments (net) (81.2) 19.5 - - - - Others 84.7 26.4 9.0 9.4 12.4 18.4 CF from Investing (53.3) (30.5) (62.0) (65.8) (57.5) (60.7) Inc./(Dec.) in Debt (14.7) - - - - - Inc./(Dec.) in Net worth ------Others (16.7) (20.8) (56.8) (60.7) (97.8) (154.2) CF from Financing (31.4) (20.8) (56.8) (60.7) (97.8) (154.2) Opening Cash balance 17.4 15.6 22.5 110.4 198.6 348.8 Bank Deposits 119.9 100.4 76.7 63.7 54.8 50.5 Closing Cash balance 135.6 122.9 187.1 262.3 403.6 539.4
Source: Company, ICICIdirect.com Research
Exhibit 40: Key ratios CY10 CY11 CY12 CY13P CY14E CY15E Expenditure Break-up (%) Raw Material Expenses 54.5 55.7 55.7 54.4 55.8 56.2 Manufacturing, Admin & Selling Exp. 29.1 30.0 31.7 33.3 32.2 32.0 Personnel Expenses 16.4 14.3 12.6 12.2 12.0 11.8
Profitability Ratios (%) EBITDA Margin 13.3 15.5 15.5 15.6 16.5 17.0 PAT Margin 7.6 14.6 9.3 9.2 10.1 10.8
Per Share Data (|) Revenue per share 198.7 243.5 291.2 326.5 384.8 441.4 EBITDA per share 26.1 37.2 44.4 50.1 62.5 73.7 EV per share 262.0 510.1 1,042.4 1,030.7 1,008.7 987.6 Book Value per share 62.0 89.4 108.9 131.9 156.8 182.0 Cash per share 21.1 19.1 29.1 40.8 62.8 83.9 EPS 14.8 35.1 26.7 29.7 38.3 47.0 Cash EPS 19.9 41.5 34.7 38.9 48.6 58.4 DPS 4.0 6.0 6.0 6.5 11.5 18.8
Return Ratios (%) RoNW 23.9 39.3 24.5 22.5 24.4 25.8 RoCE 32.9 34.5 33.4 31.0 33.3 34.2 RoIC 36.8 50.6 33.8 32.9 41.0 48.3
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 21
Exhibit 41: Key ratios Financial Health Ratios CY10 CY11 CY12 CY13P CY14E CY15E Operating Cash flow (| crore) 82.9 58.2 206.7 214.6 305.5 355.0 Free Cash flow (| crore) 49.1 16.2 120.5 123.8 216.1 248.2 Capital Employed (| crore) 412.0 574.3 700.4 847.7 1,008.1 1,170.1 Debt to Equity (x) 0.0 - - - - - Debt to Capital Employed (x) 0.0 - - - - - Interest Coverage (x) 17.7 20.5 19.5 21.9 27.6 28.7 Debt to EBITDA (x) 0.1 - - - - -
DuPont Analysis (x) PAT / PBT 0.7 0.7 0.7 0.7 0.7 0.7 PBT / EBIT 1.1 1.6 1.1 1.1 1.1 1.1 EBIT / Net Sales 0.1 0.1 0.1 0.1 0.1 0.1 Net Sales / Total Assets 3.1 2.7 2.7 2.5 2.5 2.4 Total Assets / Networth 1.0 1.0 1.0 1.0 1.0 1.0
(YoY Growth %) Net Sales 15.3 22.6 19.4 12.1 17.9 14.7 EBITDA 29.7 42.5 19.3 12.8 24.8 17.9 Net Profit 41.8 136.8 (24.0) 11.2 29.0 22.7
Turnover Ratios Working Capital / Sales (x) 0.1 0.1 0.1 0.1 0.1 0.1 Inventory turnover (days) 82.4 80.5 83.2 90.9 90.0 90.0 Debtor turnover (days) 7.9 7.2 7.4 8.3 8.5 8.5 Creditor turnover (days) 132.2 117.8 123.7 140.6 125.0 125.0 Current Ratio (x) 1.5 1.9 1.9 1.9 2.1 2.1
Free Cash Flow (| crore) EBIT (post-tax) 90.3 140.1 159.4 177.6 226.4 270.1 Add: Depreciation 32.5 41.1 51.4 59.2 66.3 73.5 Less: Changes in working capital 15.7 103.8 19.3 37.9 6.7 16.2 Less: Capex 58.0 61.1 71.0 75.2 69.9 79.2 FCF 49.1 16.2 120.5 123.8 216.1 248.2
Valuation Ratios Price to earnings ratio (x) 18.9 30.5 40.1 36.1 28.0 22.8 EV / EBITDA (x) 10.0 13.7 23.5 20.6 16.1 13.4 EV / Sales (x) 1.3 2.1 3.6 3.2 2.6 2.2 Dividend Yield (%) 1.4 0.8 0.6 0.6 0.6 1.1 Price / BV (x) 4.5 12.0 9.8 8.1 6.8 5.9
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 22
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;
Pankaj Pandey Head – Research [email protected]
ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093
ANALYST CERTIFICATION We /I, Bharat Chhoda M.B.A.(FINANCE) Dhvani Modi M.B.A.(FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. Disclosures: ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.
The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.
This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.
ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Bharat Chhoda M.B.A.(FINANCE) Dhvani Modi M.B.A.(FINANCE) research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business.
ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.
It is confirmed that Bharat Chhoda M.B.A.(FINANCE) Dhvani Modi M.B.A.(FINANCE) research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies mentioned in the report.
ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.
ICICI Securities Ltd | Retail Equity Research Page 23