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Bata India

SELL
INITIATING COVERAGE BATA IN EQUITY December 09, 2015

Distribution has little Power left Retail

Bata India, Indias largest footwear retailer, will face an existential crisis, Recommendation
as it cedes distribution equity to e-commerce (footwear market size of Mcap (bn): `64/US$1
US$500mn). The under-investment in the brand (meager 1% of revenues 6M ADV (mn): `250/US$3.7
over CY08-15) will bite into future earnings whereas the over-investment
CMP: `495
in stores will cap capital efficiency. FY17E EBITDA margin of 12.4%
TP (12 mths): `388
remains a far cry away from its historical peak (15.6% in CY13) given
Downside (%): 22
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; Flags
(b) high possibility for gross margin compression and (c) declining asset Accounting: GREEN
turns (2.4x in FY17 from 3.1x in CY09); we expect FY17E RoE to be 19%. Predictability: RED
We re-initiate with SELL and implied valuation of 23.5x FY17E EPS. Earnings Momentum: RED
Competitive position: WEAK Changes to this position: NEGATIVE
Catalysts
Brand equity is actually distribution equity
Over CY09-FY15, Bata generated `12bn CFO; rather than investing in the Increased competition from e-
brand, it expanded retail space to 3.3mn sq ft (from 1.3mn), investing 1/4th CFO commerce is a threat to at least 12%
in brandex vs equal outlay by peers. Unparalleled network (>500 cities) and 84- of Batas FY17E revenues
year-old history made it a default consumer choice until customer moved online FY16E and FY17E earnings to be
and started buying more aspirational brands, easily available online than Bata. impacted by inventory write-downs
Bata brands diminishing distribution equity is evident from the muted growth
(10%/4% in CY13/FY15) despite adding 50% more space Increased K scheme commissions
and ad spends from FY17E
Distribution equity challenged by new brands and e-commerce
In the last four years, Nike/Puma have expanded at a CAGR of 40%/30%, aided
by e-commerce; online footwear sales account for over 11% of the organised Performance (%)
footwear market. Even after assuming that sports footwear is the dominant 120
category in footwear sold online, foreign brands pose a direct threat to 12-15% 110
of Batas portfolio and can impede the growth of the Power brand. Every 5% fall 100
in revenue growth of Power impacts overall earnings by 3%. 90
80
A large ship is difficult to steer in rough waters 70
With a network of over 1,200 stores and 4,800 employees, Bata resembles a 60
large ship in rough watersrising competition, negative operating leverage
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
(high-and-rising fixed costs) and inventory management challenges looming on
EBITDA margins (est 10.7%/12.4% in FY16E/17E). Moreover, we expect an
BATA IN SENSEX
increase in K scheme commissions (currently unviable rates) and ad spends. A
similar situation played out in China, with local incumbents losing to
international competition which quickly switched to online sales. Source: Bloomberg, Ambit Capital research

The beginning of a de-rating cycle; switch like the consumer


Stock trades at 32x one-year forward EPS (close to 5-yr avg), which is expensive
for a franchise whose distribution advantages will be disrupted by rising adoption
of ecommerce. Over the next decade, we model high-teen revenue growth but
low-and-stagnant margins/asset turns, thus lower than historic RoEs. De-rating
can be more if e-commerce impacts more than just Power (12% share). Key
risk: Operating leverage from revamped product offering.
Key financials
Particulars CY13 FY15 FY16E FY17E FY18E
Revenues 20,652 26,940 24,417 28,582 32,030
EBITDA 3,220 3,666 2,612 3,404 3,971
Net Profit 1,909 2,313 1,498 2,014 2,445
Adjusted EPS (`) 14.9 18.0 11.7 15.7 19.0 Analyst Details
ROE (%) 29% 21% 15% 18% 19% Abhishek Ranganathan, CFA
P/E (x) 33 28 43 32 26 Tel: +91 22 3043 3085
P/B (x) 8 6 6 5 5 abhishekr@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Bata India

Snapshot of Company Financials


Profit and Loss Company Background
Year to Mar (` mn) FY15 FY16E FY17E Originally incorporated as Bata Shoe Company on December 23,
Net revenues 26,940 24,417 28,582 1931.
EBITDA 3,666 2,612 3,404 Bata India made its first public issue of shares on June 25, 1973,
offering 33% of the post IPO equity shares.
Depreciation 793 776 833
Marcelo Villagran took over as MD as a part of the management
Interest expense 18 12 - revamp in CY04. Implementation of VRS initiatives.
Adjusted PBT 3,289 2,140 3,006 Saw improvement in wholesale business in CY06 by introducing
Tax 976 642 992 stringent credit policy and focusing on top-300 wholesalers.
Adjusted net profit 2,313 1,498 2,014
Improvement in gross margins in CY07 led by introduction of new
designs.
Reported net profit 2,313 1,498 2,014
Focus on building Batas brand image in CY09 by opening large
Profit and Loss Ratios stores which display better collections.
EBITDA Margin (%) 14% 11% 12% Improved margins and production in CY10 led by improvement in
Net profit margin (%) 9% 6% 7% all areas of operations like manufacturing, sourcing, retail
restructuring, relations with labour unions.
EV/ EBITDA (x) 16.9 23.6 17.4
Undertook modernization of plants in CY14 to improve product
P/E on adjusted basis (x) 27.6 42.6 31.7 quality and productivity.
EV/Sales (x) 2.3 2.5 2.1 Launched a marketing campaign Where Life Meets Style in
FY15 aimed across all demographic profiles.

Balance Sheet Cash flow


Year to Mar (` mn) FY15 FY16E FY17E Year to March (` mn) FY15 FY16E FY17E
Total Assets 16,370 16,767 19,605 PBT 3,289 2,140 3,006
Fixed Assets 3,077 3,252 3,368 Depreciation 793 776 833
Current Assets 11,926 12,147 14,869 Tax (1,435) (642) (992)
Investments - - - Net Working Capital (1,215) (576) 1,275
Total Liabilities - - - CFO 1,710 4,122 3,027
Total networth 10,212 11,126 12,438 Capital Expenditure (1,336) (951) (950)
Total debt - - - Investment - - -
Current liabilities 5,396 5,377 5,863 CFI (1,140) (951) (950)
Deferred tax liability - - - Issuance of Equity - - -
Balance Sheet ratios Inc/Dec in Borrowings - - -
RoCE 30.9 17.2 21.8 Net Dividends (487) (585) (701)
RoE 21.4 14.9 18.1 Interest paid (18) (12) -
Gross Debt/Equity (x) - - - CFF (504) (596) (701)
Net debt (cash)/ Eq (x) - - - Net change in cash (457) 163 2,471
P/B (x) 6.3 5.7 5.1 Closing cash balance 2,100 2,263 4,733

Limited scope to improve asset turns impedes RoE Bata ranks at an insignificant #3 in online shopping searches

Asset turnover (x) Net Margins (RHS) RoE (RHS)


70
3.5 40% 60
3.0 35% 50
2.5 30%
40
25%
2.0
20% 30
1.5
15% 20
1.0 10%
10
0.5 5%
0.0 0% 0
Bata Metro Clarks Red Tape Hush
FY16E
FY17E
FY18E
FY19E
FY20E
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
FY15

Puppies

Source: Company, Google trends, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 2


Bata India

Distribution equity, not brand loyalty


Smart companies fail because they do everything right. They cater to high-profit-
margin customers and ignore the low end of the market, where disruptive innovations
emerge from.
- Clayton M. Christensen, The Innovator's Dilemma: When New Technologies Cause
Great Firms to Fail
Bata India has built its franchise largely on distribution equity and years of existence
and the company has done little to strengthen its brand; over CY15-FY15, the
average ad spend was at 1% of revenues vs 4% for footwear peers and 6% for other
strong-brand retailers. Since CY11, licensed brands for Bata have been the growth
driver; moreover, even the low LTL growth over CY10-FY15 indicates Bata brands
eroding customer base. With increasing competition from international brands and
emerging domestic brands (that are using e-commerce as a channel to reach
customers), the under-investment in branding could turn out to be a mistake for Bata
India which is otherwise considered as a strength (strong brand not requiring high
spends).
Exhibit 1: Relative Score Card
Parameters Bata Relaxo Liberty Metro Puma Comments on Bata's Position
Brand strength has not be
corroborated by LTL growth
Store/Distribution
whereas peers such as Metro
Network Stores 1200 Stores-225 Stores - 400 Stores - 305 Stores - 400 have witnessed LTL growth except
for FY15
Brand investment (as a Bata has lowest ad spend ratio to
% of sales) made over sales amongst peers at 1%
last decade as 1% 8% 5% 4% NA whereas peers are at 6%

Relaxo has As a global brand


Metro has in the
Has 84 year old created and collection of
past used Bata's 14% CAGR has been led
Brand Strength and legacy in India and segmented Liberty though well- footwear including
celebrities as brand by space addition rather than LTL
Revenue CAGR from presence over 500 brands and has known is limited in specific casual range
ambassadors and growth, which is an indicator of
FY06-15 cities making it a brand size and presence. has made Puma a
well known in Brand strength
fairly known brand. ambassadors for Rs15 bn brand in
urban centres.
each of them. India.
Revenue CAGR Revenue CAGR of Revenue CAGR of Revenue CAGR Revenue CAGR
of 12% 21% 12% of 26% of 31%
Bata and its sub brands score
Weak as per Weak as per Weak as per High as per High as per poorly on shopping searches as
Brand Strength online popularity of the popularity of the popularity of the popularity of the popularity of the per Google trends online,
Brand in Google Brand in Google Brand in Google Brand in Google Brand in Google whereas likes of Metro and
Shopping Shopping Shopping Shopping Shopping Puma score highly

With average
13% of Portfolio and
selling price of
any high value
Rs200/pair and Vulnerable to Popular brand Competition from foreign brand
(above Rs1500)
Ability to withstand e- catering to low ecommerce as online as well as and high fixed costs from large
product is Derives nearly 30%
com competition value categories availability of offline. Moreover it store network, make Bata
vulnerable to more of revenues from
and has limited foreign brands at has smaller but vulnerable
aspirational brands ecommerce
store network. similar price points very efficient store
online and has high
Therefore there is is high network
fixed costs at 35% of
no immediate
sales
threat to Relaxo.
Inventory days have deteriorated
from 177 days in CY10 to 237
days in FY15. During this period
Inventory days
194 105 168 177 156 peers' inventory days on an
average has stayed around the
150 day mark
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak. Pumas CAGR calculated for CY11-
CY14.

December 09, 2015 Ambit Capital Pvt. Ltd. Page 3


Bata India

Franchise has been built on distribution


The companys priority of capex over brandex is evident from the fact that brandex
accounted for only one-third of its capex over CY09-FY15. Thus, revenue growth has
been conspicuous by the absence of volume growth despite the capex in adding
stores. The other side of the coin is LTL growth, rather the absence of credible LTL
growth, over the last five years.
Revenues have been driven primarily by store addition
Bata India has added 828 large format (3,000 sq ft) stores (before closures) over
CY08-15. However, this would translate into higher space addition, as most of the
store portfolio prior to CY08 comprised small stores (average size of 1,500 sq ft). We
estimate that the company has added 2mn sq ft net of closures (i.e. nearly 400) over
this period. The change in store size and along with it the product offering resulted in
improved realisation but at the cost of volumes.
Exhibit 2: Store network has been the revenue driver

Revenue Rs psf (LHS) Space added % (RHS)


Revenue growth % (RHS)
8,000 30%
7,000 25%
6,000
20%
5,000
15%
4,000
10%
3,000
2,000 5%

1,000 0%
CY09 CY10 CY11 CY12 CY13 FY15

Bata Indias realisation has been


Source: Company, Ambit Capital research
increasing since CY06, as it began
Bata Indias realisation has been increasing since CY06, as it began vacating low- vacating low-margin products,
margin products, and consequently, its product mix moved towards high-margin
leather and leather look-alike products.
Exhibit 3: But there has been no volume growth despite the addition in store network
25.0% 25.0%
20.0%
20.0%
15.0%
15.0% 10.0%
Since CY10 there has been no
10.0% 5.0% volume growth, despite adding
0.0% nearly 700 stores (gross)
5.0%
-5.0%
0.0% -10.0%
CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

FY15

Revenue Growth Realisation Growth Volume Growth (RHS)


Source: Company, Ambit Capital research

Like-to-like growth has been an enigma for Bata India


Bata India has grown revenues primarily on the back of store additions and like-to-
like (LTL) growth has largely emanated from new stores entering their second full year
of operations.

December 09, 2015 Ambit Capital Pvt. Ltd. Page 4


Bata India

Exhibit 4: Barring CY11 there has been no real LTL growth for Bata since CY10
4%
3%
2%
1%
0%
-1% CY10 CY11 CY12 CY13 FY15
-2%
-3%
-4%
-5%
-6%
-7%
Source: Company, Ambit Capital research

Exiting the lower end helped gross margins


As Bata vacated the lower end of the product spectrum, the gross margin profile of
the company improved along with revenue per pair. This was also aided by the
increasing share of the licensed brands, which enjoy higher gross margins and
absolute gross profits.
Exhibit 5: Higher realisations and gross margins have aided EBITDA margins

70.00 55.0%
60.00 54.0%
50.00
53.0%
40.00
52.0%
30.00
51.0%
20.00
10.00 50.0%
0.00 49.0%
CY08 CY09 CY10 CY11 CY12 CY13 FY15

EBITDA per pair Rs Gross Margin

Source: Company, Ambit Capital research

Under-investment in brands
The company has invested `6bn in capex over CY05-FY15 with ad spend at `1.68bn
whereas peers have invested significantly more in percentage of sales terms as well
as absolute terms.
Exhibit 6: No concrete brand building strategy has been adopted

2.5%
Ad spend as % of Sales

2.0%

1.5%

1.0%

0.5%

0.0%
CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15

Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 5


Bata India

Exhibit 7: Commentary on ad and marketing strategy from annual reports


CY09 CY10 CY11 CY13 FY15
Your Company shall At the beginning of the current financial period, your
invest in various Company launched a 360-degree integrated marketing
In order to firmly establish Bata
marketing plans to re- campaign, Where Life Meets Style along with an
Industrials as the most sought after
position the Hush innovative TV commercial which appealed to the
and premium brand of safety
No commentary No commentary Puppies brand in the consumers across all age groups and demographic
footwear, your Company continues to
minds of consumer as profiles. The new marketing campaign also reinstated
invest in intense marketing and
international premium your Company's commitment to deliver value, quality,
communication programs.
lifestyle casual footwear aspirational and contemporary products to the
brand in India. customers
Source: Company, Ambit Capital research

Brandex has significantly lagged capex


One of the parameters to evaluate brands is the amount of resources the company
commits to brand building. Brandex as we call it includes advertisement, loyalty
programmes etc. Bata has consistently invested in points of sale (as evident in the
capex of `6bn) over product and positioning (brandex of `1.68bn).
Exhibit 8: Batas Brandex has significantly lagged capex Exhibit 9: Peers brandex has matched capex

Relaxo's Sales (Rs mn) (LHS) Bata's Sales (Rs mn) (LHS)
Liberty's Sales (Rs mn) (LHS) Metro's Sales (Rs mn) (LHS)
Relaxo's Ad. expenses as a % of Sales (RHS) Metro's Ad. expenses as a % of Sales (RHS)
Liberty's Ad. expenses as a % of Sales (RHS) Bata's Ad. expenses as a % of Sales (RHS)
16,000 12%
24,000 5%
14,000 21,000
10%
12,000 4%
18,000
8%
10,000 15,000 3%
8,000 6% 12,000
6,000 9,000 2%
4%
4,000 6,000
2% 1%
2,000 3,000
- 0% - 0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 10: Momentum in brandex is high Exhibit 11: ...forming a considerable portion of sales

1,400 1,600 300


1,200 1,400
250
1,200
1,000 200
1,000
800
800 150
600 600
100
400 400
50
200 200

0 0 0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Liberty's Capex (Rs mn) Bata's Capex (Rs mn) (LHS)
Relaxo's Capex (Rs mn) Metro's Capex (Rs mn) (LHS)
Liberty's Ad spend (Rs mn) Bata's Ad spend (Rs mn) (RHS)
Relaxo's Ad spend (Rs mn) Metro's Ad spend (Rs mn) (RHS)

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Most leading footwear companies have continued to invest as much in their A&P as
they are investing in capex; during this phase, they have grown faster than Bata, as
they have allocated capital equally for expansion and brand building unlike Bata.
Therefore, a decade of under-investment has impacted Batas brand equity which has
been built on its strong network and 84 years of existence. This underinvestment will
impact adversely in the future given that millennials and the nextgen, the core target

December 09, 2015 Ambit Capital Pvt. Ltd. Page 6


Bata India

audience for lifestyle brands, are more likely to be influenced by product, positioning,
fashion quotient and effective promotion; Bata not only isnt aspirational/fashion but
also lacks effective promotion to be on top of recall.
Although Relaxo footwear serves the lower end of the footwear market with ASPs of Louis Philippe shoes, an extension
`200 per pair (123mn pairs sold in FY15), it has captured a large customer base from of the largest mens wear brand
the unorganised market through specific brand positioning (sub-brands with separate Louis Philippe has already reached
brand ambassadors) and investments in the brand. For Bata, the market is largely revenues of `800 mn with
restricted to the mid to upper end of the footwear market and Relaxo has successfully successful product extension on the
gained market share at the lower end of the market through its wholesale network. strength of the brand.

Loyalty programme needs fast fashion womens wear portfolio


Whilst Bata India launched its loyalty programme, Bata Club, in CY14, the challenges
in inducing footwear purchase more than once a year is more difficult than in apparel Brands such as Metro derive as
unless it is women-centric and fast fashion. As per unlisted competitors, Batas much as 30% of revenues from
product portfolio lacks the fast fashion element. The same is corroborated in the lack their loyalty programme driven by
of volume growth despite space addition. On the contrary, brands such as Metro fashion and trendy footwear
derive as much as 30% of revenues from their loyalty programme driven by fashion
and trendy footwear.
Exhibit 12: Loyalty programmes
Particulars Bata Club Club Metro Puma
No. of customers 4 million 2.5 million NA
Incentive 1% 4% 2-4%
Form of incentive Points Points Points
2% up to cumulative
Minimum purchase (`.) - - purchase of `6,000 and
thereafter 4%
Minimum redeemable points 50 100 50
Cumulative Purchase needed
5,000 2,500 any product
to trigger redemption (`.)
Points expire in 1 year 1 year 2 years
Joining bonus 50 points valid for 1 month NA NA
Redeemable in multiples of
Redemption conditions NA NA
50 points
Source: Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 7


Bata India

Licensed brands camouflage weakening Bata brand


Bata has a portfolio of licensed brands namely Hush Puppies, Dr Scholls, Angry Birds
and Naturalizer which have grown over the years and account for at least 12% of
Batas FY15 revenues.
Licensed brands led revenue growth from CY13
The portfolio as well availability of licensed brands has grown over CY10-FY15. The
portfolio has expanded from two brands in CY10 to 4 brands in FY15, with Hush
Puppies also opening exclusive stores and Shop in Shops (SIS) in departmental stores.
Exhibit 13: Licensed brands now account for over 12% of revenues
` mn CY10 CY11 CY12 CY13 FY15*
Hush Puppies, Hush Puppies, Hush Puppies,
Hush Puppies, Hush Puppies, Dr Scholls, Dr Scholls, Dr Scholls,
*Licensed brands
Dr Scholls Dr Scholls Angry Birds, Angry Birds, Angry Birds,
Naturalizer Naturalizer Naturalizer
Third-party royalty (paid
in foreign exchange 32 67 85 125 132
Third party royalty (paid
in INR) 31 131
Royalty Assumed 5% 5% 5% 5% 5%
Sales of licensed
products 635 1,345 1,707 2,290 2,639
YoY growth 34% -8%
Licensed products as %
5% 9% 9% 11% 12%
of sales
Exclusive Hush Puppies
16 31 34 63
stores
Hush Puppies SIS 16 28 37 36
Source: Company, Ambit Capital research. Note: *Growth has been normalized for 12 months as FY15 was a 15
month period

camouflaging the Bata brands weakening growth despite space additions


Batas own brand portfolio i.e. excluding the licensed brands has to be analysed to
gauge the strength of the product portfolio which comprises nearly 88% of revenues.
The portfolio which comprises Bata, Marie Claire, Power, Naught boy, North Star, etc
has not grown in tandem with the space added since CY10 and more concerning is
the fall in the rate of growth.
Exhibit 14: Batas own brand revenue growth has been falling

30%
25%

20%

15%

10%
5%

0%
CY11 CY12 CY13 FY15

YoY growth of Bata brands Space added % (RHS)

Source: Company, Ambit Capital research

Despite adding 697 stores (1.85 mn sq ft) over CY10-CY15, the Bata brand has just
about doubled its revenues as much as the store space, implying no like-to-like
growth. The pace of Bata brands growth too moderated in CY13 to 10% despite
adding 430 stores (1.13mn sq ft on a base of 1.78mn sq ft in CY10) over CY11-FY15.
The overall growth of 12% was largely due to 32% growth in licensed brands where
Angry Birds had its first full year of operation (launched in 4QCY12) and the number
of Hush Puppies outlets increased by 40%, as seen in the above exhibit.

December 09, 2015 Ambit Capital Pvt. Ltd. Page 8


Bata India

Exhibit 15: Porters five forces analysis for footwear

Bargaining power of suppliers Bargaining power of buyers


LOW HIGH
Since the raw materials i.e. rubber and Availability of foreign brands at attractive
leather are procured from local sources and price points offers customers wide choice.
given the fact that India has the largest High-end customers would prefer discounted
number of tanneries in the world, costs of products offered by e-tailers.
switching suppliers is low.
Price sensitive customers have a considerable
bargaining power as they prefer brands which
offer products at lower costs.

Competitive intensity
HIGH
FDI in retail along with the strength of the
Indian consumption story; many domestic and
international players have entered into the
footwear retail industry.
Low switching costs have led to intensified
rivalry in the industry
Regional/ apparel brands are using online
channel to become national footwear brands

Barriers to Entry Threat of substitution


LOW LOW
100% FDI in single brand retail has been Substitution effect absent as the utility of
approved by the Government. footwear cannot be replaced by any other
good.
Outsourcing of retail management of the
business model to franchisees or licensees
allows brands to expand, thereby avoiding the
high real estate costs.

Improving Unchanged Deteriorating

Source: Ambit Capital research

Exhibit 16: SWOT analysis


Strengths Weaknesses
Worldwide manifestation with presence in >70 countries. Bata brand is a victim of a peculiar discernment and is perceived to be
By far the largest retailer and manufacturer of footwear in India with a largely for the school going.
retail chain gauging over 1,200 stores and a non-retail distribution Lower brand recall due to limited variety in fashionable shoes.
network of over 30,000 dealers. Aspirational customers with increasing disposable incomes always prefer
Footwear range that caters to the entire family at affordable prices. a Puma or a Nike over a North Star or Power as they are status symbols.
Assistance received from parent company for product innovation, Lack of advertising over last decade has left consumer perception of
modern marketing techniques and sourcing. boring brand unchanged.

Opportunities Threats
Tapping the unorganised share which accounts for ~60% of the Indian Ecommerce has eroded distribution advantage and made foreign and
footwear market. domestic brands available across India at attractive prices.
Banking on brand recall by tying up with e-tailers thereby increasing Foreign players like Adidas, Nike and Puma which have been allowed
online presence. 100% FDI are an increased threat.
Strengthening brand loyalty by leveraging on their customer care Growth of domestic incumbents due to proliferation of e-commerce.
initiative of The Bata Club. Existence of several trade unions and a history of disputes with them.
Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 9


Bata India

Ecommerce is a clear and present threat


The reason why it is so difficult for existing firms to capitalize on disruptive innovations
is that their processes and their business model that make them good at the existing
business actually make them bad at competing for the disruption.
- Clayton M. Christensen, The Innovator's Dilemma: When New Technologies Cause
Great Firms to Fail
Until CY12, availability of foreign footwear brands was constrained due to limited
distribution reach. However, from FY14, e-commerce began erasing the fine-line
between brand and distribution equity and making aspirational brands available
across India. The US$10bn e-commerce market in India already accounts for
US$500mn of footwear sales and bulk of it is has been multinational sportswear
brands. E-commerce already accounts for over 11% of the organised footwear
market, making it a clear and present threat to large incumbents such as Bata.

E-commerce in footwear is large


The Indian e-commerce market is likely to be at US$10bn in size in CY15. The Footwear contributes to nearly 30%
lifestyle category i.e. clothing and footwear accounts for over 30% of the market. for the likes of Jabong and Myntra;
Importantly, volume wise, this category is the single-largest category, thus accounting 20% that for Flipkart, Amazon and
for the maximum shipments made. Footwear is likely to be around 20% of the Snapdeals business; taking the
lifestyle category, which translates into `20bn in value or gross merchandise value online footwear market to
(GMV). US$500mn
Footwear is one of the first purchases a customer makes online
Footwear is one of the first purchases a customer makes online, as it is standardised,
has aspirational brands and offers far more choice than a conventional store.
Footwear as a segment appeals to buyers, as it gives access to the brands and
especially foreign brands which hitherto they did not have much access to. Moreover,
gross margins (50% plus) and absolute margins in footwear are high, thus enabling
e-commerce players to acquire customers by offering higher discounts without
suffering very deep losses.

Exhibit 17: Composition of Indian e-commerce market Exhibit 18: Break-up of Jabongs CY14 revenues

Beauty & Others


Personal Others Kids 4% Men
care 3% 5% Apparel
Baby 2% 18%
Products
2% Accessories
Apparel 20%
Home
31%
Furnishings
8% Women
Women apprel
Books Electronics footwear Men 25%
7% 47% 6% footwear
22%

Source: Ambit Capital research Source: Jabong, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 10


Bata India

E-commerce competes with Bata directly


The common perception is that e-commerce poses little threat to Bata. But the sheer
range and convenience which e-commerce provides is a threat in itself as more
consumers buy online. The number of people who have shopped online in CY15 has The number of shoppers who have
already crossed 40mn as against 25mn in CY14. As more customers buy products shopped online has by over 60% in
online, markets and industries will have to be evaluated compositely, i.e., online plus CY15 to 4 mn.
offline.
Range is the biggest convenience All that money can buy
E-commerce offers conveniences of range, price and easy returns. All three combined
help customers gravitate towards e-commerce-friendly categories (standardised and
high margins). The number of SKUs (~200,000) available at a single location is the
single-largest attraction for customers.

Exhibit 19: Competition in online is more than offline Exhibit 20: Footwear figures high in purchase priority
Number of footwear SKUs Men Women Total

Flipkart 110,239 101,596 211,835

Amazon 36,178 27,176 63,354

Myntra 11,713 14,689 26,402

Jabong 13,906 18,741 32,647

Snapdeal 118,604 79,631 198,235

Source: Ambit Capital research Source: Google Forrester Consumer Research, 2014

Brands find it viable to sell online


Categories such as sportswear and casual footwear offered by well-known brands
which were hitherto limited by distribution and economically unjustifiable store
presence are able to increase market share. The e-commerce channel is likely to
contribute to nearly 30% in FY15 (vs 20% in FY14) of Puma Indias turnover. Puma, a
relatively late entrant in the Indian sportswear market, has straddled the e-commerce
channel successfully to gain and become the largest sportswear brand in India.
The cost of retailing in India is high and building profitable distribution takes time.
Nikes largest retailer in India, SSIPL, reported revenues of `4.3bn for Nike in FY15
and currently operates 230 Nike stores. During this period, SSIPLs retail operations
clocked EBIT margins of 6.7% on revenue of `6.5bn in FY15 and RoCE of 26%.
Rentals accounted for 15% of revenues. We estimate a player like Myntra alone
would clock `4bn of footwear GMV in CY15 and provide access to over 15,000 PIN
codes in India. Such a reach is obviously appealing to brands where the incremental
cost of penetration is just the logistics costs.
Exhibit 21: Cost of retailing is high and hence limits expansion
SSIPL Retail segment performance (` mn) FY11 FY12 FY13 FY14 FY15
Revenues 2,329 4,106 5,136 5,873 6,497
Rental expenses 227 557 779 853 910
EBIT 51 274 192 358 370
EBIT Margin 2.2% 6.7% 3.7% 6.1% 5.7%
RoCE 7% 32% 19% 30% 26%
No. of stores 213 289 339 427 439
Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 11


Bata India

Brand and price is the real power not distribution


The motivations to purchase are wider range, availability of brands (especially in tier
2 cities and beyond), price and size of choice. Footwear is one of the highest gross
margin products and the absolute margins in foreign sportswear brands is also high
due to higher values, thus giving e-commerce players enough room to discount
(couponing not to be missed) and still acquire customers without high transaction-
level losses.
Exhibit 22: Couponing makes aspirational brands more affordable

Source: Myntra, Ambit Capital research

Exhibit 23: Most foreign brands have limited physical distribution


Brand Number of outlets until Sep 2012
Bata* 1,362
Metro Shoes 235
Reliance Footprint 101
Red Tape 73
Catwalk 37
Crocs 28
Khadim's 640
Sreeleathers 31
Touristor 26
Liberty Shoes 370
Reebok 925
Puma 200 Reebok shut down more than half
Adidas 650
of its stores in CY13 on the
discovery of commercial
Fila 40
irregularities and fraud
Nike 350
* The store count is till Aug '12 and retail presence is till Jul '12
Source: Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 12


Bata India

Exhibit 24: Modern footwear market has expanded at 24% Exhibit 25: and e-commerce has played an important role
CAGR with 11% share

200 Other
Online channels,
180
4%
160 channel,
140 11%
120
100
80 Exclusive
60 brand
Multi brand outlets,
40
outlets, 55%
20 30%
0
FY12 FY15
Modern footwear market (Rs bn)

Source: Ambit Capital research Source: Ambit Capital research

What does all this mean for Bata India?


Bata India is at the crossroads, as the explosion of e-commerce disregards its large
store network, and foreign brands with aggressive pricing compete with a section of
Batas product offering.
Foreign brands have played the e-commerce channel to their strength
The top-four sportswear brands - Adidas, Nike, Puma and Reebok - have on offer a
wide range of SKUs online, thus, offering the customer a plethora of choice and
availability. The choice to reach over 15,000 PIN codes as against opening brick and
mortar stores in locations which do not make economic sense due to limited target
audience; makes e-commerce a valuable channel.
Exhibit 26: Range available online from top-4 international footwear brands is large
No. of SKUS (only men's shoes) of Top-4 Sportswear brands below ` 4000 SKUs
Myntra 684
Jabong 588
Flipkart 871
Snapdeal 4,048
Amazon 995
Source: Ambit Capital research

Footwear is a killer category for e-commerce


Footwear as a category appeals to e-commerce players, as it is fairly standardised as
far as sizes are concerned and the high value sportswear brands are attractive for The first category in fashion
customer acquisition. An average ticket size of `2,000 in a sportswear brand is purchased is shoes as it is
attractive due to the high margins the category offers and the low fulfillment cost (5- homogenous.
7%). The inventory turns are higher than that of the physical store when a product is
sold online, as it can be sold to a buyer anywhere in the country. - An ex-Employee of Jabong

Pricing, range and availability erase the distribution equity


The distribution advantage is easily erased, as customers continue to migrate to more
aspirational foreign brands at similar price points once they become available. There
are over 200,000 footwear options available online. As shown below, the availability
of brands such as Puma, Adidas, Nike and Reebok at price points similar to that of
Batas brand Power makes Batas financial performance vulnerable.

December 09, 2015 Ambit Capital Pvt. Ltd. Page 13


Bata India

Exhibit 27: Relative search interest across footwear brands Power ranks lowest

70.00
60.00
50.00
As more customers buy online, the
40.00
popularity of aspirational brands
30.00 increases at the expense of existing
20.00 brands with little USP

10.00
0.00
lotto shoes puma shoes reebok shoes adidas shoes power shoes

lotto shoes puma shoes reebok shoes adidas shoes power shoes

Source: Google trends


Exhibit 28: Power has only 40 SKUS on Bata Indias website

Source: Myntra, Ambit Capital research

Exhibit 29: Portals such as Myntra offer wide range at frequently attractive prices

Source: Myntra, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 14


Bata India

Exhibit 30: Larger marketplaces such as Snapdeal have Exhibit 31: Flipkart offers wide range at similar price points
even wider choice of footwear ( up to `4,000)

Source: Snapdeal, Ambit Capital research

Source: Flipkart, Ambit Capital research

Exhibit 32: Power has limited presence online despite efforts to increase presence

Source: Flipkart, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 15


Bata India

Exhibit 33: Availability of brands which compete with Power is wide across ecommerce
platforms.

Source: Amazon, Ambit Capital research

Exhibit 34: ..whereas Power has limited presence

Source: Amazon, Ambit Capital research

Omni channel - Not one size fits all


E-commerce has led most companies to talk about omni channel, but omni channel Omni channel has worked for the
has worked for the retailers in the West due to their size. However, in India, retailers in the West due to their
organised retail itself is less than 10% of the retail market. The investments in omni size
channel are largely on technology and warehousing, both of which cannot be shrunk
proportionately to the size of the Indian market. The dynamics of the business do not
change drastically online the product, price, position, point of sale and promotion
all remain relevant.
E-commerce is difficult for an under-invested brand
Bata India finds itself losing ground to other brands even in its core categories and
brand i.e. Bata. In a world where the customer is agnostic to shopping online or
offline, the Bata brands recall/search traffic online for shopping is significantly low.
Aspirational brands through easy availability have overtaken Bata in the online world.

December 09, 2015 Ambit Capital Pvt. Ltd. Page 16


Bata India

Exhibit 35: Google trends for leading footwear brands in India over Jan13-Oct15
70

60

50

40
The Bata brand lags in online
30 searches despite its 84-year-old
20 legacy in India

10

0
Bata Metro Clarks Red Tape Hush Puppies

Source: Google trends

Batas e-commerce strategy cannot be detached from the overall strategy


E-commerce strategy or channel cannot be seen in isolation. It has to fit in with the E-commerce strategy or channel
overall offering the product, brand and price. The company targets to increase its cannot be seen in isolation. It has
revenues from the e-commerce channel by 5x in CY15 (http://goo.gl/u514aB); to fit in with the overall offering
however, as much as the company wants to sell online, online portals and the product, brand and price
marketplaces are unwilling to showcase the entire range curated, as the brand does
not resonate with buyers in the wake of availability of other options.

Exhibit 36: Bata has 119 SKUs including Hush Puppies on Exhibit 37: Ruosh a brand owned by one of Batas
Amazon India as against suppliers has higher online presence

Source: Amazon, Ambit Capital research Source: Amazon, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 17


Bata India

A large and heavy ship in rough waters


Bata India faces headwinds as technology erodes its distribution advantage in a
product category which is amenable to e-commerce. The implications of erosion in
growth/market share of even certain categories such as footwear and casual wear
will contribute to negative operating leverage given the high fixed costs (35% of
sales), commensurate commissions expectations of K scheme stores, rising inventory
(193 days in CY13 to 235 days in FY15) and weak brand positioning.

Liability of large store network


Batas large store network makes it a large ship in rough waters with increasing
competitive intensity. Fixed costs such as employee costs, power costs and rental costs
account for over 35% of sales and make it very vulnerable to an earnings spiral even
if it losses market share in select categories. The companys commission scheme store
which helped improve the overall profitability ironically could pressurise earnings, as
the store viability reduces in the wake of changing competitive landscape.
High fixed costs leave the business vulnerable to an earnings spiral
Batas fixed costs have remained at 35% of revenues over CY09-FY15 despite
reducing employee costs (as a percentage of sales) due to higher rental costs and
power costs on opening large format stores. The ad expenditure however has
remained at 1% of sales, thus, leaving a chunk of the fixed costs as store-level costs
and employee costs. With limited visibility on sustainable revenue growth, absorption
of these fixed costs remains vulnerable.
Exhibit 38: Fixed costs (` mn) constantly form a major chunk of sales

Salaries Power & Fuel


Rent Freight
Advertisement and Sales Promotion Others
Revenues (RHS)
15,000 40,000

30,000
` mn

` mn

10,000
20,000
5,000
10,000

0 0
CY09 CY10 CY11 CY12 CY13 FY15 FY17E FY18E

Source: Company, Ambit Capital research

K scheme could be an Achilles heel if store sales do not grow


The K-Scheme (K stands for commission) format is agent-driven, one where an
agent/store manager is appointed to run a store for a commission on the store sales.
The onus of the employee costs fall on the agent/store manager. All other store
expenses are borne by the company, including rent, furnishing, etc. A store requires,
on an average, around 4-5 employees. The advantage of this model is that for an
84-year-old company, the salaries and wages per employee are at a higher level
than those prevailing in the market, and hence, it cannot for all practical purposes, There has been no change in K
hire employees in stores at lower wages than those at the existing ones. The scheme commission structure and
commission paid out to the K-Agent works out to be lower than having store we have inflationary pressures on
employees on the companys payrolls. store employee costs, thus reducing
However, the same could turn out to be its Achilles heel, as the commissions are a the net commissions.
function of sales and sales alone and not linked to gross margins (like Tanishq). A K-Scheme store manager
Moreover, there is no minimum commission which the store manager receives. Whilst
this move aided the company over CY09-12, in the absence of real LTL growth and e-
due to commerce-driven competition, the LTL commissions net of employee
expenditure would have fallen. Consequently, we expect higher pressure on K
scheme commissions.

December 09, 2015 Ambit Capital Pvt. Ltd. Page 18


Bata India

Exhibit 39: K-scheme commission is likely to increase, as

8.0% Incremental commission (%) on incremental sales

7.0%
6.0%
5.0%
4.0%
3.0% CY13 revenue growth was driven
2.0% by licensed brands, implying 50%
of the revenue growth came from
1.0%
licensed brands EBOs in CY13
0.0%
CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16E FY17E FY18E

Source: Company, Ambit Capital research

Exhibit 40: the economics for K scheme store managers become unviable unless
there is LTL growth or commissions increase
CY12 CY13 2014 FY16 FY17 FY18
Store Area sq ft 3,000 3,000 3,000 3,000 3,000 3,000
Revenue ` per sq ft 7,500 7,500 7,500 7,200 7,920 8,316
LTL growth 0% 0% -4% 10% 5%
Store Revenues ` mn 23 23 23 22 24 25
K Scheme Commission % 7% 7% 7% 7% 8% 8%
K Scheme Commission ` mn 1.58 1.58 1.58 1.51 1.90 2.00
Number of Store Employees 7 7 7 7 7 7
Average Salary per employee ` mn pa 0.14 0.16 0.17 0.19 0.21 0.22
Average wage inflation 10% 10% 10% 7% 7%
Employee cost excluding incentive `
1.01 1.11 1.22 1.34 1.44 1.54
mn
Net income for store manager ` mn 0.57 0.47 0.36 0.17 0.47 0.46
Source: Ambit Capital research

Is there RoE beyond ASP growth? The company will have to invest
more in its brand and restructure
Batas RoE profile has been dependent on ASP growth and K scheme (higher
the commission structure to retain
incremental EBITDA margins). But in the absence of visibility of either, we are unlikely
K scheme stores
to witness a phase of high RoEs>30% anytime soon. The company will have to invest
more in its brand and restructure the commission structure to retain K scheme stores.
Exhibit 41: RoEs are driven by net margins Exhibit 42: which have been driven by ASP

Asset turnover (x) Net Margins (RHS) RoE (RHS) Sales/Net block (x) Working capital turnover
3.5 40% ASP Rs (RHS)
3.0 35% 10.0 800
2.5 30%
8.0
25% 600
2.0
20% 6.0
1.5 400
15% 4.0
1.0 10% 200
0.5 2.0
5%
0.0 0% 0.0 0
FY16E
FY17E
FY18E
FY19E
FY20E

FY16E
FY17E
FY18E
FY19E
FY20E
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
FY15

CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
FY15

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 19


Bata India

Inventory management has deteriorated


Whilst Bata has exhibited working capital management better than peers, inventory
days began deteriorating even before the issues from SAP implementation cropped
up in November 2014. Whilst the same has been offset partially by better creditor
days, it does not mitigate the inventory risk which has ballooned in 2QFY16 to over 9
months of inventory.
Inventory management leaves a lot to be desired
Batas inventory days have steadily risen from CY11 onwards due to space addition,
incommensurate LTL growth and issues from SAP implementation. Consequently,
inventory levels have reached alarming levels, to 9 months of inventory.

Exhibit 43: Batas inventory days have increased faster Exhibit 44: than that of its peers

Metro's Inventory (LHS) Relaxo's Inventory (LHS)


Bata's Inventory (LHS) Liberty's Inventory (LHS)
Metro's Inventory days (RHS) 3,000 Relaxo's Inventory days (RHS) 250
8,000 250
Bata's Inventory days (RHS) Liberty's Inventory days (RHS)
2,500
200 200
6,000
2,000
150 150
4,000 1,500
100 100
1,000
2,000
50 500 50

- 0 - 0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Source: Company, Ambit Capital research, FY15 inventory data for Metro is Source: Company, Ambit Capital research
not available

Exhibit 45: Batas inventory days have reached alarming levels

9,000 300
8,000
250
7,000
6,000 200
5,000
150
4,000
3,000 100
2,000
50
1,000
- -
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q5FY15
1QFY16
2QFY16
Q2CY11
Q3CY11
Q4CY11
Q1CY12
Q2CY12
Q3CY12
Q4CY12
Q1CY13
Q2CY13
Q3CY13
Q4CY13

Inventory Rs mn Inventory days (rhs)


Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 20


Bata India

Better creditor days do not mitigate inventory risks


Whilst Bata enjoys higher than average credit period, it only facilitates working
capital management. The true strength of a brand is to generate cash flows from
inventory conversion rather than creditor days. The risk of inventory aging/mark-
down remains unmitigated, as the companys policy of opening stores takes
precedence over category management and improving LTL growth.

Exhibit 46: Bata enjoys a higher than average credit period


Creditor days FY09 FY10 FY11 FY12 FY13 FY14 FY15
Bata 140 138 143 126 111 131 154
Relaxo 40 42 47 33 33 45 46
Metro 68 68 69 63 71 68 NA
Liberty 98 95 159 143 149 118 110
Source: Company, Ambit Capital research

Flawed ERP implementation has created a ticking bomb


The impact of the IT system migration to the new ERP system is now clear from the The delay would mean that stock
rise in inventory levels. The issue was updation of correct inventory levels, where at meant for sale could not be taken
the back-end, the system-level inventory could not be reconciled due to integration into the system, and consequently,
issues. The delay would mean that stock meant for sale could not be taken into the the inventory missed its cycle of
system, and consequently, the inventory missed its cycle of sale. The corollary being sale.
that the inventory pile-up and relevance as per the season and subseason (school,
festivals, etc.) would drive the piled-up inventory towards mark-downs. Consequently,
we expect higher contribution from mark-down sales from 2HFY16E, spilling over to
FY17E.
Exhibit 47: Inventory markdown will impact margins until FY17E

Net Turnover (Rs mn) (LHS) Inventories (Rs mn) (LHS)

35,000 Gross Margin (RHS) EBITDA Margin (RHS) 60.0%

30,000 50.0%
25,000
40.0%
20,000
30.0%
15,000
20.0%
10,000

5,000 10.0%

0 0.0%
CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16E FY17E FY18E

Source: Company, Ambit Capital research, Note: FY15 was a 15 month period

December 09, 2015 Ambit Capital Pvt. Ltd. Page 21


Bata India

Annual management changes over last 4 years!


Bata has seen multiple changes at various key managerial positions over CY10-FY15.
An analysis of the changes in the Executive Committee highlights that key positions
such as Head of Retail operations have changed every year since CY12. Such
frequent changes are undesirable, as continuity in strategy and execution is impacted
in a business where inventory turns are 2x given the seasonality and complexity
(number of designs and number of sizes) of inventory.
Exhibit 48: Changes in Batas Executive Committee
CY10 CY11 CY12 CY13 FY15
M Villagran (MD) Rajeev Gopalakrishnan (MD) Rajeev Gopalakrishnan (MD) Rajeev Gopalakrishnan (MD) Rajeev Gopalakrishnan (MD)
F M Hussein (CFO) Ranjit Mathur (CFO) Ranjit Mathur (CFO) Ranjit Mathur (CFO) Ranjit Mathur (CFO)
E Tonolli (Sr VP, E Tonolli (Sr VP, E Tonolli (Sr VP,
Rajeev Gopalakrishnan (MD) Mr. Kumar Nitesh
Merchandising Flagship) Merchandising Flagship) Merchandising Flagship)
E Tonolli (Sr VP, Sook Fong (Merchandising Sook Fong (Merchandising Sook Fong (Merchandising
R S Gautam ( Sr VP, HR)
Merchandising Flagship) Manager) Manager) Manager)
Sanjay Kanth (Sr VP, Sanjay Kanth (Sr VP, Sanjay Kanth (Sr VP,
R S Gautam (Sr VP, HR) R K Gupta (VP, Finance)
Manufacturing & Purchasing) Manufacturing & Purchasing) Manufacturing & Purchasing)
Amitava Nandy VP Retail Amitava Nandy VP Retail
Mr. Anup Jain (Senior Vice Mr. Vikas Baijal Senior Vice
R K Gupta (VP, Finance) operations operations
President Retail / COO) President - Human Resources
(family) (family)
Kumar Sambhav (Head - Mr. Vikas Anand Senior Vice
M Chandra (VP, Marketing & Inderpreet Singh (VP-Retail Sumit Kumar (VP, marketing
Marketing & Customer President - Non Retail Sales
Customer Service) Operations) & Customer Services)
Service) & Marketing
Nitesh Kumar, VP and Head Francesco Ferraris (VP Sumit Kumar (VP, marketing
of Retail Product Development) & Customer Services)
Gigi Abraham, Group Brands Mr. Vijay Gogate (Vice E Tonolli (Sr VP,
Director President - Famous Brands) Merchandising Flagship)
Sumit Kumar (VP, marketing Mr. Matteo Lambert (product
& Customer Services) development manager)
Mr. Vijay Gogate (Vice
President - Famous Brands)
Mr. Kumar Sambhav (VP
Ecommerce)

Indicates Exited during/following year- some may not have exited the company
Indicates addition during the year
Indicates not part of the exec com but continued with the company

Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 22


Bata India

Valuations - Derailment of the distribution


bogey
Near-term earnings face multiple headwinds
Power less in e-commerce onslaught
As seen in the above sections, Batas sportswear brand Power faces the maximum
competition from Puma and Reebok as their pricing and product range, accentuated
by discounts, satiate the customers hitherto unfulfilled demand for aspirational
brands at their locations. The Power brand shoes (for men) start at a price of `1,199
per pair and go up to `3,299 per pair. Power, along with North Star, accounts for
about 15-20% of Batas turnover (http://goo.gl/FsgYqX ).
Exhibit 49: Powers vulnerability puts further pressure on already weak LTL growth
` mn FY16 FY17
Revenues 24,417 28,582
YoY Growth 11% 17%
Contribution of Power & North Star (%) 14% 13%
Contribution of Power & North Star 3,298 3,628
YoY Growth 0% 10%
Revenues excluding Power & North Star 21,118 24,953
YoY Growth required to achieve overall growth 13% 18%
Implied overall LTL growth 8% 13%
Gross Margin 52% 53%
Gross Profits 12,575 15,148
Overheads 10,085 11,565
EBITDA 2,490 3,583
Margins 10.2% 12.5%
Depreciation 832 949
EBIT 1,658 2,634
Other Income 288 352
Interest 12 0
PBT 1,933 2,986
Tax 580 985
PAT 1,353 2,001
EPS (`) 10.53 15.57
Source: Ambit Capital research
Exhibit 50: Sensitivity of growth in Power brand to earnings is material
Growth of Power Brand in FY17E EPS (`) Downside to Estimated EPS
10% 15.6 0%
5% 15.1 -3%
0% 14.7 -6%
-5% 14.2 -9%
-10% 13.7 -12%
Source: Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 23


Bata India

The full pain of mismanaged ERP implementation is yet to be felt


As seen in Exhibit 46, the inventory levels of `8.5bn at the end of 2QFY16 is excessive
by `2bn and the same will have to be marked down over the next six quarters.
Consequently, we expect gross margin pressures to sustain through FY17E.
Exhibit 51: Inventory implications will weigh on gross margins in 2HFY16E and FY17E
` mn
Excess Inventory 2,085
Normal Gross Margin on Sales 54%
Normalized sales 4,532
Mark down required 25%
Sales realized on excess inventory 3,399
Hit on gross profit 1,133
Gross margins on above sales 39%
Number of quarters required to liquidate the same 6
Amount of Discounted sales in 2HFY16 1,133
% of 2HFY16 revenues 10%
Gross margins in 2HFY16E 53.4%
Amount of Discounted sales in FY17E 2,266
% of FY17E revenues 8%
Gross margins in FY17E 52.5%
Source: Company, Ambit Capital research

Indian footwear appears to be going the Chinese way


Chinese footwear companies such as Belle International and Daphne International
have seen intense competition from e-commerce players where foreign brands
leverage the platform to reach consumers across China, thus impacting the store
performances of Belle and Daphne. These companies have seen a decline in their LTL
growth, revenue growth (despite store additions) and store footfalls due to intense
competition from e-commerce players.
Look east for lessons of impact of e-commerce on footwear
In China, leading local footwear companies such as Belle International and Daphne
International are examples of the impact e-commerce can have on local brands. Like
India, foreign footwear brands have limited distribution network especially in tier-2
and tier-3 markets. E-commerce helped them breach this barrier and the buyers
flocked towards these brands, impacting their LTL growth, as seen below.

Exhibit 52: Daphne International Weak LTL impacted Exhibit 53: Belle International LTL has been on a
margins downtrend since CY12

Revenue (HKD mn) Operating profit % (rhs) Revenue (RMB mn) PAT % (rhs)
PAT % (rhs) SSG Operating profit % (rhs) SSG
12,000 25% 50,000 20%

20% 15%
10,000 40,000
15%
8,000 10%
10% 30,000
6,000 5% 5%
0% 20,000
4,000 0%
-5%
10,000
2,000 -5%
-10%
0 -15% 0 -10%
2011 2012 2013 2014 2011 14mth-2014

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 24


Bata India

But international brands such as Nike have used e-commerce efficiently


In Greater China, Nikes DTC (own store and online) channel has expanded at a
CAGR of 40% over FY12-15. The DTC business has consistently recorded improving
LTL growth from FY13-15 even as wholesale channel growth (many of them brick-
and-mortar stores) remained largely flat.
Exhibit 54: Nike has used e-commerce efficiently to grow its China business
Nike Greater China Revenues (US$ mn) FY12 FY13 FY14 FY15
Sales to Wholesale Customers 2,336 2,126 2,041 2,233
Growth NA -9% -4% 9%

Sales Direct to Consumer (DTC) 407 561 834


306
Growth NA 33% 38% 49%
LTL Growth NA 13% 20% 28%
Contribution to total growth from Online
NA 18% 18% 21%
sales & new stores
Source: Company, Ambit Capital research

Exhibit 55: Nike Chinas ecommerce business has grown Exhibit 56: Footwear is sizeable in Chinese e-commerce
rapidly

Recreation Clothing and


120% Share of wholesale Share of DTC and Culture Footwear Electronics
2% 8% and home
Education
100% 2% Others applicances
15% 4%
80% Jewelry and
accessories Household
4% goods and
60% services
Hotel and 4%
40% catering
4%
Food and
20% Housing non alcoholic
Health goods
and medical 17% beverages
0% services 26%
Transport
FY12 FY13 FY14 FY15 7% 7%

Source: Company, Ambit Capital research Source: Alibaba Inc, Ambit Capital research

Exhibit 57: Chinese footwear companies recognised the e-commerce impact but have not been able to mitigate it
Commentary on ecommerce/
2013 2014 2015
competition
As retail channels continued to evolve
rapidly, revenue was impacted. Whilst From a longer-term strategic
Same store volume was slightly down,
the foot traffic in department stores prospective, the Group has made
which was closely related to the weak
was diluted, the fast-growing shopping a decision to enter the fashion
Belle International foot traffic in the department store
mall channel and e-commerce channel apparel category and is in the
channel as well as overall sluggish
have not become effective retail process of cultivating relevant skills
consumer sentiment.
channels for and talent in this field.
quality footwear products.
Chinese economy has
Consumption sentiment is still weak
entered into a new normal as
and takes time to improve. Inflationary During the year, stiff competition from
the growth continued to
pressure of operating costs including local regional players and online
Daphne International decelerate. E-commerce channel
staff and rental costs. Competition retailers, as well as rising operating
continued its high growth, and
from e-commerce. More intense costs persisted, if not intensified.
therefore intensified the
competition from regional players.
competition with retailers.
Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 25


Bata India

DCF valuationa decade of weakening franchise


We build our DCF model for three phases, which reflect the stages of normalisation,
increased royalty and improvement in margins led by changes in business model. In
each of these phases our assumptions on revenue growth, gross margins and royalty
undergo a change. Consequently, we arrive at a DCF based price target of ` 388
implying 23.5x FY17E EPS
FY16E-19E: Phase of normalisation along with A&P spend
Until FY17E, the company will have inventory management issues and this will weigh
on the earnings, although releasing cash flow. We also build in higher A&P spend
beginning FY17E, as years of under-investment in the brand will have to be corrected
to enable it to compete with stronger brands on e-commerce.
Exhibit 58: Gross margins will normalise in FY18E but A&P spends will increase

Gross Margin (LHS)


55.0% Advertisement and Sales Promotion (as a % of Sales) (RHS) 3.0%
Royalty (as a % of Sales) (RHS)
2.5%
54.0%

2.0%
53.0%
1.5%
52.0%
1.0%

51.0%
0.5%

50.0% 0.0%
FY16E FY17E FY18E FY19E
Source: Company, Ambit Capital research

Exhibit 59: Inventory days and sales growth both will recover due to base effect

Inventory Days (RHS) Sales growth (LHS)


20.0% 250

15.0%
200
10.0%

5.0% 150

0.0% 100
-5.0%
50
-10.0%

-15.0% 0
FY16E FY17E FY18E FY19E

Source: Company, Ambit Capital research

FY20E-25E: Increased royalty and A&P spend


We build in an increase in royalty from FY20, as the existing royalty agreement ends
in CY19. In most other countries where Bata operates, it pays royalty of 3-4% (on
sales) to its parent company. Consequently, we build in a significant jump in royalty
rates over FY20E-25E.

December 09, 2015 Ambit Capital Pvt. Ltd. Page 26


Bata India

Exhibit 60: India has currently the lowest royalty Exhibit 61: . amongst other Bata companies in Asia

20.0% 5.0% 15.0% 6.0%


15.0% 4.0%
3.0% 10.0% 4.0%
10.0%
2.0%
5.0% 5.0% 2.0%
1.0%
0.0% 0.0% 0.0% 0.0%

CY14/FY15
CY08

CY09

CY10

CY11

CY12

CY13

CY14/FY15
CY08

CY09

CY10

CY11

CY12

CY13
Bata Pakistan's PAT Margin (%) (LHS) Bata Indonesia's PAT Margin (%) (LHS)
Bata India's PAT Margin (%) (LHS) Bata Bangladesh's PAT Margin (%) (LHS)
Bata Pakistan's royalty (as a % of Sales) (RHS) Bata Indonesia's royalty (as a % of Sales) (RHS)
Bata India's royalty (as a % of Sales) (RHS) Bata Bangladesh's royalty (as a % of Sales) (RHS)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 62: Royalty payout is likely to increase from FY20E, as the current agreement
expires

10.0% PAT Margins Royalty (as a % of Sales)

8.0%

6.0%

4.0%

2.0%

0.0%
FY15 FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Source: Company, Ambit Capital research

FY26E-30E: Reversion to peak margins


We build in reversion for peak margins during this period on the basis of corrective
measures taken on brand positioning and rational store opening strategy.
Exhibit 63: Reversion to peak margins will be delayed due to increase in royalty

140,000 30.00%
120,000 25.00%
100,000
20.00%
80,000
15.00%
60,000
10.00%
40,000
20,000 5.00%

0 0.00%
FY26E FY27E FY28E FY29E FY30E

Net Turnover (Rs mn) (LHS) EBITDA Margins (%) (RHS) RoE (%) (RHS)

Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 27


Bata India

Cross-cycle valuations At historical averages indicates


de-rating cycle yet to begin
Bata trades higher than its historical average of 30x one-year forward earnings. The
historical average of 30x was backed by improved asset turns, translating into
improvement in earnings growth and RoE; but this was largely on the back of
improved product mix/higher ASP and not volume growth, thus making it
unsustainable. During this phase, the valuations reflected brand equity which actually
was distribution equity. With distribution equity eroding, asset turns are unlikely
improve to return to their peak of CY13 and RoEs will continue to remain well below
its historical peak given the LTL growth headwinds, margin pressures from increased
ad spend in more competitive environment and increased K scheme commission
outlay. Therefore, existing assets itself will struggle to generate incremental revenues
and improve margins, resulting in sub-optimal RoE.
In China, Belle International and Daphne International both have seen a similar cycle
valuation de-rating, as they struggled with declining growth and deteriorating RoE.

Exhibit 64: Batas one-year forward P/E band chart Exhibit 65: Batas one-year forward EV/EBITDA band chart

60 28
55 25
50
45 22
40 19
35 16
30
25 13
20 10
15 7
10
5 4
- 1
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15

One-yr fwd P/E 5-yr avg P/E One-yr fwd EV/EBITDA 5-yr avg EV/EBITDA

Source: Company, Ambit Capital research, Bloomberg Source: Company, Ambit Capital research, Bloomberg

Exhibit 66: Lower asset turns and earnings growth are the new normal

3.5 100%
3.0 80%
2.5 60%
2.0 40%
1.5 20%
1.0 0%
0.5 -20%
0.0 -40%
CY09 CY10 CY11 CY12 CY13 FY15 FY16E FY17E FY18E
Asset turnover (x) Core Earnings growth (RHS) RoE (RHS)

Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 28


Bata India

Exhibit 67: Daphnes and Belles multiples have de-rated significantly

20

15

10

0
May-11

May-12

May-13

May-14

May-15
Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Nov-15
Daphne's one yr fwd P/E Daphne's 5 year avg P/E
Belle's one yr fwd P/E Belle's 5 year avg P/E
Source: Company, Ambit Capital research, Bloomberg

Exhibit 68: Lower assets and PAT margins turns have Exhibit 69: Belle has managed to maintain asset turns but
affected Daphnes RoE drastically a fall in PAT margins has led to an RoE decline

Asset turnover (LHS) Asset Turnover (LHS)


Return on Common Equity (RHS) Return on Common Equity (RHS)
PAT margin (RHS) PAT margin (RHS)
1.55 30.00% 1.25 25.00%
1.5 25.00% 20.00%
1.45 1.2
20.00%
1.4 15.00%
15.00% 1.15
1.35 10.00%
10.00%
1.3 1.1
5.00% 5.00%
1.25
1.2 0.00% 1.05 0.00%
CY10 CY11 CY12 CY13 CY14 CY11 CY12 CY13 FY14 FY15

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 70: Peer comparison of shoe manufacturers in India and overseas


MCap EV/EBITDA P/E CAGR FY15-17 ROE ROCE
Particulars
FY15/ FY16/ FY17/ FY18/ FY15/ FY16/ FY17/ FY18/ FY15/ FY16/ FY17/ FY18/ FY15/ FY16/ FY17/ FY18/
USD mn SALES EBITDA EPS
CY14 CY15 CY16 CY17 CY14 CY15 CY16 CY17 CY14 CY15 CY16 CY17 CY14 CY15 CY16 CY17
Crocs Inc 782 7.9 22 11.8 7.8 - 44.96 43.2 17.8 -2.4 47.5 -37.0 -3.6 -3.8 7.6 17 23.8 21.8 1.6 -

Liberty Shoes Ltd 53 11 9.3 7.7 6 0.2 0.2 0.1 0.1 16.2 19.1 24.4 11.9 12.8 15.3 17.6 19.4 - 17.2 -
Relaxo Footwear
886 27.0 24.9 20.1 15.9 58.9 41.6 31.7 26.6 21.0 24.9 36.2 32.0 28.6 28.3 27.7 19.7 16.1 19.5 23.8
Ltd
Belle International
7,585 5.6 5.7 5.6 5.4 12.1 12.1 11.8 11.3 4.5 0.7 1.6 18.6 18.4 17.5 16.8 20.5 18.5 16.8 18.4
Holdings
Daphne
Internatonal 289 6.0 5.3 3.8 2.9 12.7 41.2 16.6 8.7 -6.1 -1.7 -12.5 3.5 1.1 2.6 4.8 22.4 19.2 6.8 4.0
Holdings
Bata India Ltd. 935 17.3 24.2 17.9 15 28.3 43.8 32.5 26.8 3.0 -3.6 -3.6 21.4 14.9 18.1 19.4 30.9 17.2 21.8 23.0

Source: Bloomberg, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 29


Bata India

Risks and catalysts


Key risks
Whilst the issues plaguing Bata are multiple and structural in nature, the risks to our
SELL stance are:
Improvement in LTL growth and store sales: Significant LTL growth led by a
revamp in the product portfolio of over 10% in FY17E which is above our estimates of
5% will drive revenue growth and lead to better absorption of fixed costs. Moreover, it
will also reduce the likelihood of K scheme commission going up, as LTL growth will
translate into higher K scheme commissions.
Exhibit 71: Sensitivity of LTL growth to EPS
LTL growth EPS
15% 18.86
9% 15.67
5% 13.85
0% 11.12
Source: Ambit Capital research

Change in strategy: Batas product portfolio changes towards lower-priced products


through its wholesale channel have the potential to meaningfully drive volumes
(absent since CY11), translating into higher assets turns and RoE.
E-commerce competition wanes: In the event competition from e-commerce wanes
by FY16E and foreign brands go slow on e-commerce activities, Bata will be able to
recover market share sooner and hence deliver better LTL growth and margins.

Catalysts
Increasing competition: Increased competition across footwear categories from
sports to formal in the e-commerce space is a threat to 12% of Batas revenues and
hence poses an earnings risk in FY17E.
Inventory pile-up will constrict gross margins: Nine months of inventory at the
end of 2HFY16 places `2bn of excess inventory susceptible to markdowns and write-
offs, impacting earnings in FY16E and FY17E.
Operating costs will increase: Note that 35% of sales is fixed costs and makes the
business vulnerable to an earnings spiral in the event of minor market share loss.
Moreover, we expect the K scheme commission to increase by 100bps to keep the
scheme sustainable for the store manager and ad spend to increase by 5 bps in
FY17E for brand rejuvenation.

December 09, 2015 Ambit Capital Pvt. Ltd. Page 30


Bata India

Exhibit 72: Key Assumptions


Particulars (` mn unless otherwise stated) FY15 FY16E FY17E FY18E Comments
We assume improvement in inventory days from FY17E
Inventory days (x) 237 234 200 190
as company liquidates excess inventory.
Store additions (no.) 159 100 100 100 As guided by the company
We anticipate an increase in ad spends given the
Ad spends (as a % of revenue) 1.0% 1.6% 2.0% 2.5%
challenges in growing top line
Rent (as a % of revenue) 13.9% 13.7% 13.2% 13.2%
Employee cost - K scheme commissions We anticipate an increase in commission rates given the
7.0% 7.0% 8.0% 8.0%
(as a % of store revenue) unfavourable economics for a K scheme store manager
LTL growth -2.7% -5.5% 8.7% 4.4% LTL growth will spike in FY17E due to low base
Revenue ` per sq ft 7,002 6,578 7,053 7,285
Revenues 26,940 24,417 28,582 32,030
EBITDA (` mn) 3,666 2,612 3,404 3,971
Margins improve in FY18E due to resolution of inventory
EBITDA margins 13.6% 10.7% 11.9% 12.4%
issues by FY17E
Others
Depreciation 793 776 833 922
Interest 18 12 0 0
PAT 2,313 1,498 2,014 2,445
PAT margin 8.6% 6.1% 7.0% 7.6%
Cashflow parameters
CFO 1,188 1,710 4,122 3,027
Capex includes capex for 100 stores each year and back
Capex 1,465 951 950 950
end capex
FCF 47 759 3172 2077
Balance Sheet
WC turnover (X) 5.6 5.5 6.5 7.2
Gross block turnover (X) 3.1 3.1 3.2 3.3
Debt: Equity (X) - - - -
RoCE 30.9% 17.2% 21.8% 23.0%
RoIC* 33.2% 17.7% 24.3% 31.0%
ROE 21.4% 14.9% 18.1% 19.4%
Source: Company, Ambit Capital research

Exhibit 73: Explanation of flags


Segment Score Comments

Batas accounting is clean give its high CFO/EBITDA ratios and cash yields over the years. The company
Accounting GREEN
is audited by a quality audit company.
Predictability RED Recent internal and external disruptions have led to volatile revenue and earnings.
Earnings have been downgraded after the 2QFY16 earnings on the back of poor revenue and earnings
Earnings momentum RED
growth and inventory pile-ups.
Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 31


Bata India

Balance Sheet
Year to March (` Mn) CY13 FY15 FY16E FY17E FY18E
Share capital 643 643 643 643 643
Reserves and surplus 7,756 9,569 10,483 11,795 13,399
Total Networth 8,399 10,212 11,126 12,438 14,042
Loans - - - - -
Deferred tax liability (net) - - - - -
Sources of funds 8,399 10,212 11,126 12,438 14,042
Net block 2,475 3,077 3,252 3,368 3,396
Capital work-in-progress 237 482 482 482 482
Investments - - - - -
Cash and bank balances 2,558 2,101 2,263 4,733 5,969
Sundry debtors 509 584 602 705 790
Inventories 5,827 7,047 7,514 7,361 7,670
Loans and advances 1,413 2,087 1,636 1,915 2,146
Total Current Assets 10,419 11,926 12,147 14,869 16,748
Current Liabilities 4,531 5,396 5,377 5,863 6,150
Provisions 891 762 264 1,304 1,320
Current liabilities and provisions 5,421 6,158 5,641 7,167 7,470
Net current assets 4,998 5,768 6,506 7,702 9,278
Miscellaneous expenditure
Application of funds 8,399 10,212 11,126 12,438 14,042
Source: Company, Ambit Capital research

Income Statement
Year to March (` Mn) CY13 FY15 FY16E FY17E FY18E
Revenue 20,652 26,940 24,417 28,582 32,030
yoy growth 12% 30% -9% 17% 12%
Total operating expenses 17,432 23,274 21,805 25,177 28,060
EBITDA 3,220 3,666 2,612 3,404 3,971
yoy growth 17% 14% -29% 30% 17%
Net depreciation 592 793 776 833 922
EBIT 2,627 2,873 1,836 2,571 3,048
Interest and financial charges 13 18 12 - -
Other income 315 434 316 435 602
PBT 2,929 3,289 2,140 3,006 3,650
Provision for taxation 920 976 642 992 1,204
Adj PAT 1,909 2,313 1,498 2,014 2,445
yoy growth 11% 21% -35% 34% 21%
Reported PAT 1,909 2,313 1,498 2,014 2,445
EPS (`) 15 18 12 16 19
DPS (`) 6.5 6.5 4.5 5.5 6.5
Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 32


Bata India

Cash Flow Statement


Year to March (` Mn) CY13 FY15 FY16E FY17E FY18E
PBT 2,929 3,289 2,140 3,006 3,650
Depreciation 592 793 776 833 922
Interest paid (net) (172) (232) 12 - -
CFO before change in WC 3,641 3,838 2,928 3,839 4,572
Change in working capital (609) (1,215) (576) 1,275 (341)
Direct taxes (paid)/refund (1,106) (1,435) (642) (992) (1,204)
CFO 1,188 1,710 4,122 3,027 3,659
Net capex (787) (1,336) (951) (950) (950)
Net investments (515) - - - -
Interest received 120 199 - - -
CFI (682) (1,140) (951) (950) (950)
Proceeds from borrowings - - - - -
Change in share capital - - - - -
Interest & finance charges paid (13) (18) (12) - -
Dividends paid (449) (487) (585) (701) (842)
CFF (462) (504) (596) (701) (842)
Net increase in cash 681 (457) 163 2,471 1,235
Opening cash balance 1,876 2,557 2,100 2,263 4,733
Closing cash balance 2,557 2,100 2,263 4,733 5,969
FCF 400 374 3,171 2,077 2,709
Source: Company, Ambit Capital research

Ratio analysis
Year to March CY13 FY15 FY16E FY17E FY18E
Revenue growth 12.1 30.4 (9.4) 17.1 12.1
EBITDA growth 17.1 13.9 (28.8) 30.3 16.6
PAT growth 10.9 21.2 (35.2) 34.4 21.4
EBITDA margin 15.6 13.6 10.7 11.9 12.4
EBIT margin 12.7 10.7 7.5 9.0 9.5
Net margin 9.2 8.6 6.1 7.0 7.6
RoCE (%) 34.1 30.9 17.2 21.8 23.0
RoE (%) 28.5 21.4 14.9 18.1 19.4
Source: Company, Ambit Capital research

Valuation parameters
Year to March CY13 FY15 FY16E FY17E FY18E
P/E (x) 33.5 27.6 42.6 31.7 26.1
P/B(x) 7.6 6.3 5.7 5.1 4.5
Debt/Equity(x) - - - - -
Net debt/Equity(x) (0.3) (0.2) (0.2) (0.4) (0.4)
EV/Sales(x) 3.2 2.3 2.5 2.1 1.8
EV/EBITDA(x) 17.9 16.9 23.6 17.4 14.6
Source: Company, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 33


Bata India

Institutional Equities Team


Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Research
Analysts Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 nitinbhasin@ambitcapital.com
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadeshmehta@ambitcapital.com
Abhishek Ranganathan, CFA Retail / Mid-caps (022) 30433085 abhishekr@ambitcapital.com
Achint Bhagat, CFA Cement / Roads / Home Building (022) 30433178 achintbhagat@ambitcapital.com
Ashvin Shetty, CFA Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 deepeshagarwal@ambitcapital.com
Dhiraj Mistry, CFA Consumer (022) 30433264 dhirajmistry@ambitcapital.com
Gaurav Khandelwal Automobile (022) 30433132 gauravkhandelwal@ambitcapital.com
Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Girisha Saraf Mid-caps / Small-caps (022) 30433211 girishasaraf@ambitcapital.com
Karan Khanna Strategy (022) 30433251 karankhanna@ambitcapital.com
Kushank Poddar Technology (022) 30433203 kushankpoddar@ambitcapital.com
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankajagarwal@ambitcapital.com
Paresh Dave, CFA Healthcare (022) 30433212 pareshdave@ambitcapital.com
Parita Ashar, CFA Metals & Mining (022) 30433223 paritaashar@ambitcapital.com
Prashant Mittal, CFA Derivatives (022) 30433218 prashantmittal@ambitcapital.com
Rakshit Ranjan, CFA Consumer (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / Financial Services (022) 30433181 ravisingh@ambitcapital.com
Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 riteshgupta@ambitcapital.com
Ritesh Vaidya, CFA Consumer (022) 30433246 riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Automobile (022) 30433292 ritumodi@ambitcapital.com
Sagar Rastogi Technology (022) 30433291 sagarrastogi@ambitcapital.com
Sumit Shekhar Economy / Strategy (022) 30433229 sumitshekhar@ambitcapital.com
Utsav Mehta, CFA E&C / Industrials (022) 30433209 utsavmehta@ambitcapital.com
Vivekanand Subbaraman, CFA Media (022) 30433261 vivekanands@ambitcapital.com
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 sarojini@panmure.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / USA (022) 30433053 diptimehta@ambitcapital.com
Hitakshi Mehra India (022) 30433204 hitakshimehra@ambitcapital.com
Krishnan V India / Asia (022) 30433295 krishnanv@ambitcapital.com
Nityam Shah, CFA USA / Europe (022) 30433259 nityamshah@ambitcapital.com
Parees Purohit, CFA UK / USA (022) 30433169 pareespurohit@ambitcapital.com
Praveena Pattabiraman India / Asia (022) 30433268 praveenapattabiraman@ambitcapital.com
Shaleen Silori India (022) 30433256 shaleensilori@ambitcapital.com
Singapore
Pramod Gubbi, CFA Director Singapore +65 8606 6476 pramodgubbi@ambitpte.com
Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.com
USA / Canada
Ravilochan Pola - CEO Americas +1(646) 361 3107 ravipola@ambitpte.com
Production
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Sharoz G Hussain Production (022) 30433183 sharozghussain@ambitcapital.com
Joel Pereira Editor (022) 30433284 joelpereira@ambitcapital.com
Nikhil Pillai Database (022) 30433265 nikhilpillai@ambitcapital.com
E&C = Engineering & Construction

December 09, 2015 Ambit Capital Pvt. Ltd. Page 34


Bata India

Bata India (BATA IN, SELL)

800
700
600
500
400
300
200
100
0
Nov-12

Mar-13

May-13

Sep-13

Nov-13

Mar-14

May-14

Sep-14

Nov-14

Mar-15

May-15

Sep-15

Nov-15
Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15
BATA INDIA LTD

Source: Bloomberg, Ambit Capital research

December 09, 2015 Ambit Capital Pvt. Ltd. Page 35


Bata India

Explanation of Investment Rating


Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically,
and, in some cases, in printed form.

Additional information on recommended securities is available on request.


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5. This Research Report is issued for information only and the 'Buy', 'Sell', or Other Recommendation made in this Research Report such should not be construed as an investment advice to any
recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities and should not be intended or treated as a substitute for necessary review or validation or any professional advice.
Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or
subscribe for any investment or as an official endorsement of any investment.
6. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in
whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including
United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract,
and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.
7. Ambit Capital Private Limited is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014.
Conflict of Interests
8. In the normal course of AMBIT Capitals business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one clients interests conflicting
with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients interests are protected. AMBIT Capital has policies and
procedures in place to control the flow and use of non-public, price sensitive information and employees personal account trading. Where appropriate and reasonably achievable, AMBIT Capital
segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and
should make informed decisions in relation to AMBIT Capitals services.
9. AMBIT Capital and/or its affiliates may from time to time have or solicit investment banking, investment advisory and other business relationships with companies covered in this Research Report and
may receive compensation for the same.
Additional Disclaimer for U.S. Persons
10. The research report is solely a product of AMBIT Capital
11. AMBIT Capital is the employer of the research analyst(s) who has prepared the research report
12. Any subsequent transactions in securities discussed in the research reports should be effected through Enclave Capital LLC. (Enclave).
13. Enclave does not accept or receive any compensation of any kind for the dissemination of the AMBIT Capital research reports.
14. The research analyst(s) preparing the email / Research Report/ attachment is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that
therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with
U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
15. This report is prepared, approved, published and distributed by the Ambit Capital located outside of the United States (a non-US Group Company). This report is distributed in the U.S.by Enclave
Capital LLC, a U.S. registered broker dealer, on behalf of Ambit Capital only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the
Exchange Act)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through Enclave Capital LLC (19
West 44th Street, suite 1700, New York, NY 10036).
16. As of the publication of this report Enclave Capital LLC, does not make a market in the subject securities.
17. This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information
contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or
responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of
this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and
market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this
document, you agree to be bound by all the foregoing provisions.
Additional Disclaimer for Canadian Persons
18. AMBIT Capital is not registered in the Province of Ontario and /or Province of Qubec to trade in securities and/or to provide advice with respect to securities.
19. AMBIT Capital's head office or principal place of business is located in India.
20. All or substantially all of AMBIT Capital's assets may be situated outside of Canada.
21. It may be difficult for enforcing legal rights against AMBIT Capital because of the above.
22. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2
Canada.
23. Name and address of AMBIT Capital's agent for service of process in the Province of Montral is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montral, Qubec H3B 2C3 Canada.
Additional Disclaimer for Singapore Persons
24. This Report is prepared and distributed by Ambit Capital Private Limited and distributed as per the approved arrangement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP
289) and Paragraph 11 of the First Schedule to the Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore.
25. This Report is only available to persons in Singapore who are institutional investors (as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore (the SFA). Accordingly, if a
Singapore Person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform Ambit Singapore Pte. Limited.
Disclosure
26. NIL
Analyst Certification
Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views
about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this
report.

Copyright 2015 AMBIT Capital Private Limited. All rights reserved. Ambit Capital Pvt. Ltd.
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Lower Parel, Mumbai 400 013, India.
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www.ambitcapital.com

December 09, 2015 Ambit Capital Pvt. Ltd. Page 36

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