Premium portfolio gives strong grip to Bata rerating

Analysts expect its margin, earnings growth to see more pressure

As the economy gets unlocked in phases, the sentiment towards discretionary sectors is also likely to improve.

However, for footwear, the product mix is playing a key role. Analysts believe the premium footwear segment will see delayed recovery due to muted demand and, in turn, will put a lid on earnings. Therefore, after gaining 9.4 per cent over a month till September 3, the stock of Bata, which has a higher share of the premium footwear portfolio, has shed about 8 per cent in the past five trading sessions. In comparison, its peer Relaxo Footwears and the BSE Sensex are down less than 2 per cent during the same period.

According to Suvarna Joshi, senior research analyst at Axis Securities, “From 2015-16, Bata has scaled up its premium portfolio, which is sharply hit amid the Covid-19 pandemic and will see delayed recovery.”

Given around 50 per cent revenue contribution from the premium portfolio, Joshi believes Bata’s margin and earnings growth will see relatively more pressure than players like Relaxo Footwears, which has a higher share of the low-end portfolio. The domestic brokerage has a ‘sell’ rating on Bata and a ‘buy’ on Relaxo.

Analysts at ICICI Direct, who have a ‘hold’ rating on Bata, say, “Formal and fashion footwear demand is likely to remain muted in the near term due to fewer social gatherings. We expect demand recovery to be gradual.”

Bata’s relatively weaker performance in the June quarter vis-à-vis Relaxo Footwears clearly underlines the impact of the higher premium portfolio. While Bata’s revenue fell 84.7 per cent year-onyear (YOY) to ~134.8 crore, it reported ~86.1 crore of losses at the earnings before interest, tax, depreciation, and amortisation (Ebitda) level.

On the other hand, Relaxo’s revenue declined 43.9 per cent YOY to ~363.6 crore and it posted an Ebitda of ~57 crore — a decline of 46.4 per cent YOY.

This also justifies the Street’s reluctance to give a higher price-earnings multiple to the Bata stock. At around 42x its 2021-22 estimated earnings, Bata’s stock is currently trading at 16 per cent discount to Relaxo Footwears.

What is also hurting Bata’s recovery is its higher reliance on retail distribution (84 per cent of revenue), which was severely hit by the lockdown. Analysts do not see significant improvement in consumer footfall even after lifting of the lockdown. Though Bata is expanding its wholesale channel, along with other distribution initiatives such as Bata Chatshop (via Whatsapp), and strengthening the omnichannel, to what extent these push offtake of the premium-segment footwear needs to be seen.

Overall, the pick-up in the premium segment is crucial for Bata’s rerating.