Bata: Investors must wait for correction
Stock trades at 15% premium to its historic valuation
The stock of Bata India has surged 13 per cent after a healthy December 2018 quarter result, taking the one-year gains to about 98 per cent. The stock has outpaced the S&P BSE FMCG index that rose 4.7 per cent since February 12 and is up about 14 per cent in one year. This sharp rally could cap upside in the stock that now trades around 45 times its FY20 estimated earnings, 15 per cent higher than its average five-year valuation, even as the company's earnings outlook remains healthy, say analysts.
An expected rise in advertising spends from 0.7 per cent of revenue in CY13 (earlier Bata followed calendar year) to 3 per cent in FY20 with focus on celebrity endorsement is likely to increase footfalls, Girish Pai, head, research at Nirmal Bang said in a report. This would get a leg up from technology initiatives, currently at a pilot stage, to convert these footfalls through better inventory management, he adds.
Also, preference to purchase through the e-commerce channel has been rising, giving additional benefits to consumer stores such as Bata. From an expected 4 per cent in FY19, Bata’s revenue-contribution of this distribution channel is aimed at 15 per cent in five years. Although, a muted performance of the wholesale channel can prove a downside risk to volume growth. Given this backdrop, analysts estimate Bata to clock about 15 per cent annual growth in net sales over the next two years.
While rising advertising spends and investment in new technology could cap operating margins, gross margin expansion would help partially offset this pressure. Gross margin should benefit from volume discount by raw material vendors, change in revenue mix with rising traction of highprofitable premium products and women's wear (repositioning Bata for youth), to add more. In December 2018 quarter too, Bata saw good discount from vendors, which is likely to continue at least till September 2019.
Bata's Ebitda margin is expected to rise to 18 per cent by FY21 from around 17 per cent during April-December 2018. Thus, net profit is likely to rise faster (vis-à-vis revenues) by 19 per cent annually during FY19-FY21. Gordon Fraser of BlackRock, who made the call to load up on Brazilian companies just before an election-spurred rally late last year, predicts emerging-market (EM) equities will recover most of their 2018 losses this year.
In the face of a slowing global growth, the Federal Reserve is unlikely to raise rates this year, causing the dollar to weaken and improving the flows into EMs, said Fraser, a developing-market equities fund manager.
He is betting on the companies gaining from a weak US currency, and those tied to China advancing on prospects of an improvement in the economy.
“Markets should recoup most, if not all, of their losses from last year,” Fraser, who helped manage the firm’s approximately $40 billion of active EM equities in 2018, said. “All the key challenges EMs had last year have been surmounted, and the global liquidity has returned to EMs’ favour.”
Signs of improving liquidity include falling rate differentials between the US and other markets, rate cuts and talk of similar actions at other central banks, and China’s various measures to support its economy, he said. The risks from a US- China trade war have also subsided, he added.
Fraser, who says they want to buy when there’s a crisis, saw his portfolio gain as Brazil equities surged following the victory of Jair Bolsonaro in October, after buying them in June and July.
He subsequently took profits from the Brazil market’s rally. He also went underweight on stocks in Turkey months before the blow-up in the Turkish lira in 2018.
Fraser’s main fund had an annualised total return of 18 per cent in the past three years through January, compared to 15 per cent in the EM gauge, according to the firm.