In its latest quarterly report Bata India (NS:) delivered mixed results that were slightly better than Goldman Sachs expected but lagged its industry peers. The company’s revenue grew 2.5% year over year (YoY) in the fourth quarter, beating Goldman Sachs’ (NYSE:) estimate of flat growth but falling short of Metro Brands’ (NS:) impressive 11% YoY growth. .
Since FY22, Bata’s new management has focused on developing its product portfolio to accelerate revenue growth, but has failed to deliver significant results. Even though Bata was aiming for double-digit revenue growth, it managed to grow at only 1% in FY24, with a compound annual growth rate (CAGR) of 3.5% from FY19 to FY24.
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During its fourth-quarter earnings call, Bata management said it plans to cut about 20% of its product mix across stores in the second half of FY25. This significant reduction, aimed at eliminating duplication, indicates the need for further portfolio adjustments before achieving the target double-digit earnings growth.
Bata’s franchise and e-commerce channels were growth drivers, while the company-owned (COCO) channel and distribution network were underperformers. The COCO channel, which accounts for about 70% of Bata’s revenue, posted weak same-store sales growth (SSSG) of 2.5% YoY despite a 4% increase in the number of stores. This poor performance continued despite a number of strategic efforts, including closing unprofitable stores, expanding the product portfolio, increasing advertising and promotional spending, investing in enterprise resource planning (ERP) systems, and store renovations.
In the distribution sector, which mainly caters to the mass market, consumer demand remains weak, especially for products priced below Rs 500. While prices have remained stable over the past 5-6 quarters, the mass discretionary segment continues to struggle with inflation and rising prices squeezing the wallets of middle-income consumers. However, Bata expects some recovery in this segment starting from the second half of FY25 as affordability improves.
Goldman Sachs has adjusted earnings per share (EPS) estimates for Bata, cutting them by around 5-7% for FY25-26, reflecting a delayed recovery in the company’s growth trajectory. They now forecast YoY revenue growth of around 7% in FY25 and 8% in FY26, versus the consensus estimate of 10-11%.
Bata is valued at a long-term average price/earnings (P/E) multiple of 45x, which represents a 30% discount to the valuation of Metro Brands’ core business. Consequently, Goldman Sachs maintains its 12-month price target for Bata at Rs 1,470 and a neutral rating, citing limited upside potential against the sector.
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While Goldman Sachs is slightly bullish, estimating an upside of 7%, InvestingPro’s proprietary financial models estimate an upside of 4% to INR 1,431 per share. This fair value was calculated after considering 13 models and then averaging all of them to eliminate any deviations from the estimate.
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Even the average analyst’s target of 20 is also not exactly high at just INR 1,471. All these low valuation gaps could be a good sign to wait for another correction in case investors want to bet on Bata India. This is a good framework for investors to follow in their investment journey..
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