Flash Note

Consumer Durable l India Research

Bata India Ltd

Reco: BUY Target Price: INR419 Upside: 21%

CMP : INR 346 Q3CY10 results – Growth story intact

Nifty 5,988
Q3 earnings highlights
Earnings growth was in line with expectations: Bata’s PAT grew 58% to INR207mn,
Sensex 19,941
in line with our forecast. EBITDA margin rose 330bp, led by the company’s stringent
cost control measures, a favourable product mix, and restructuring of retail formats.
Stock data
Revenue growth supported by expansion of store network: Bata opened more than
Sector Consumer Durable 15 large format stores across India in Q3, taking the total count to ~100; this
Reuters Code BATA.BO underpinned its revenue growth during a lean Q3.
Bloomberg Code BATA IN
No. of shares (mn) 66
Key catalysts
Expanding retail footprint in franchisee model: Expansion of the retail network (60
Market Cap (INRbn) 22
stores each year on a base of 1,200 stores), primarily in the revenue sharing/franchisee
Market Cap (USDmn) 497
model, should bring about reduction in rental costs, providing upside risk to our
Avg 6m Vol. 370,048
estimates.
Ringing cash bells: Bata will receive INR1bn (INR16/share) and 640,000 sq ft of
Stock performance (%)
constructed space for transfer of certain share in Riverbank Holding Pvt Ltd (RHPL – its
52-week high / low INR363/163 JV with CMG) to Calcutta Metropolitan Group (CMG), to develop 262 acres land at
1M 3M 12 M Batanagar, West Bengal. We do not factor this into our estimates due to an uncertain
timeline.
Absolute (%) 0 23 88
Relative (%) 1 12 67 Outlook and Valuation
Considering improving demand, increasing footfalls, and the ongoing festive/wedding
Shareholding pattern season, we remain positive on growth of Indian organised retailers. Bata’s cost-cutting

Public &
measures and shift to a revenue-sharing/franchisee model for store openings should
others
19%
drive expansion in margins and earnings CAGR of 21% over CY09-CY12E. We have a
DIIs Promoters
17% 51% positive growth outlook for Bata given its almost debt-free balance sheet (D/E of 0.07x)
FIIs and expectation of strong cash flows. We believe that its high return ratios, compared
13%
with peers, and a product portfolio, which caters to a wider consumer base, would drive
its valuation. Hence, we have a Buy recommendation on the stock with a target price of
INR419, based on SOTP methodology. We arrive at our target price by valuing CY11
core earnings of INR15.8 at 25x and expected cash per share by end-CY11 at INR25.
Nifty and stock movement
400 6500
Key Risks
6000
330

5500
Competition from international retail players, which have either entered or plan to enter
260
5000
the Indian market in a big way, and from cheaper imports and small regional players.
190
4500
Key financials (Y/e Dec) CY09 CY10E CY11E CY12E
120 4000
Revenues (INR mn) 10,917 12,283 13,919 15,564
Aug-10

Sep-10
Jan-10

Jun-10
May-10

Jul-10
Feb-10

Mar-10
Oct-09

Apr-10

Oct-10
Nov-09

Dec-09

Bata India Nifty EBITDA (INR mn) 1,238 1,558 1,800 1,990
EPS (INR) 10.5 13.7 16.3 18.4
28 October 2010
Growth (%) 10.7 30.8 19.3 12.4
RoE (%) 21.8 24.2 24.3 23.2
Ankit Jain
RoCE (%) 32.4 37.1 37.8 35.8
Research Analyst
PE (x) 33.1 25.3 21.2 18.8
+91 22 42208930
a1.jain@pugsec.com P / BV (x) 7.5 6.2 5.1 4.3
Source : Company, PUG Research

Bata India Ltd– Q3CY11 Flash Note 1

28 October 2010 l PUG Institutional Research

Key result highlights

 Q3 revenue grew 12.7% on a high base in Q3CY09 (during when Dussehra fell last year), mainly driven by
addition of large format stores during 9MCY10.

 Measures adopted to reduce employee expenses and savings on rentals resulted in EBITDA margin
expansion of 330bp in Q3.

 Increase of 183.9% in other income, negligible interest cost, and trickle-down impact of EBITDA led to
robust 57.6% growth in adjusted PAT.

Quarterly financial highlights

(INR mn) Q3CY10 Q3CY09 YoY (%) 9MCY10 9MCY09 YoY (%)
Net Sales 2,942 2,611 12.7 9,070 8,028 13.0
EBITDA 374 245 52.5 1,100 779 41.3
EBITDA Margin (%) 12.7 9.4 12.1 9.7
Interest (1) (8) (85.0) (6) (32) (79.9)
Depreciation (89) (64) 40.0 (227) (183) 24.3
Other Income 25 9 183.9 48 52 (6.0)
PBT 308 182 69.4 915 616 48.6
Tax (101) (50) 100.0 (306) (198) 54.5
Adjusted PAT 207 131 57.6 610 418 45.7
EPS (INR.) 3.2 2.0 57.6 9.5 6.5 45.7
Source : Company, PUG Research

Peer comparison
Share price Mkt Cap PE (x) Yield (%) RoE (%) EPS growth (%)
Company
(INR) (Rs mn) CY10E CY11E CY10E CY11E CY10E CY11E CY10E CY11E
Bata India 337 21,669 21.2 18.8 1.0 1.2 24.2 24.3 56.1 12.4
Pantaloon Retail* 480 95,910 32.5 28.7 0.2 0.2 9.9 10.8 57.6 13.1
Titan Industries* 3,579 158,916 45.8 36.6 0.6 0.8 42.4 39.6 33.2 25.0
Shoppers Stop* 685 23,908 36.7 27.8 0.3 0.4 23.1 24.1 87.5 32.1
*numbers are adjusted to match the calendar year Source: PUG Research, Reuters

Bata India has a strong brand value with ~35% market share in the Indian branded footwear market. The
company is focusing on expanding its retail presence and improving product quality, its collection as well as
customer service. With a product portfolio across mass and premium consumer segments, we believe Bata is
best placed, compared with other footwear players such as Liberty India, Relaxo Footwear and Mirza
International. The management is also focusing on expanding its non-retail (wholesale and institutional)
operations to drive volume growth while it adds 60 new stores annually in its retail operations.
Considering growth in Bata’s retail network through large format franchisee stores and focused retailing of
higher-margin footwear and accessories products, we expect the company’s return ratios to be higher than
those of most other organised retailers. We estimate Bata to generate free cash flows of INR1bn each in CY11
and CY12, driven by lower interest cost and less capex and working capital requirements.
Furthermore, according to the revised agreement with Calcutta Metropolitan Group in April 2010, Bata would
receive INR1bn in cash and 640,000 sq ft of constructed space at Batanagar for dilution of its stake in its JV
with CMG. Although the timeline for this is not yet clear, it would engender potential upside to our estimates and
add substantially to shareholder value.

Bata India Ltd– Q3CY11 Flash Note 2

 28 October 2010 l PUG Institutional Research

Valuations
We expect Bata’s revenue and earnings to grow in double-digit over CY09-CY12. A debt-free balance sheet
and robust cash generation should result in expansion of return ratios. We expect ROE and ROCE to increase
130bp and 340bp to 23.2% and 35.8% respectively over CY09-CY12. We believe that high return ratios
compared with peers, the company’s focus on retailing, and a product portfolio catering to wider consumer base
should drive its valuation. Hence, we have a Buy recommendation on the stock with a target price of INR419,
based on SOTP methodology (core business: 25x CY11E earnings of INR15.8, which yields INR394; and
expected cash per share at end-CY11E: INR25).

Bata India Ltd - Valuation (SOTP)

Core EPS CY11(E) INR 15.8
P/E CY11(E) assumed (x) 25.0
Per share value for Bata shareholders INR 394
Cash on books at the end of CY11E INR mn 1,618
Per share cash value INR 25
SOTP (Target price) INR 419
Source : PUG Research

One-year forward PE band based on core EPS

800.0

600.0

400.0

200.0

0.0

Jul-10
Jan-05

Jun-07

Jan-08
Aug-05

Nov-06

Sep-08

Dec-09
Mar-06

Apr-09

Price (INR) 7.0x 14.5x 22.0x 29.5x 37.0x 44.5x

Source: Company, Reuters, PUG Research

Risks to our call

 Bata India faces stiff competition from foreign retail players that have either entered or are planning to enter
the Indian footwear market in a big way. This could be a risk to our revenue growth estimates.

 Cheap Chinese, Korean and Taiwanese footwear imports and small-medium domestic enterprises (with low
cost of production and price advantage) also pose some competition.

Bata India Ltd– Q3CY11 Flash Note 3

 28 October 2010 l PUG Institutional Research

About Bata India

Bata India (Bata) manufactures and markets footwear and accessories. The company is promoted by Bata B N
B V, which holds 51% stake in the Indian arm. Bata manufactures leather, rubber, canvas, and PVC shoes. It
offers a selection of men, ladies, children, schools, sports, canvas, and Hawaii footwear. It also offers
accessories such as socks, polishes, belts, brushes, and school bags. The company’s production units are in
Batanagar (West Bengal), Faridabad (Haryana), Bataganj (Bihar), Mokamehghat (Bihar), Peenya (Karnataka),
and Hosur (Tamil Nadu). It also has two tanneries for leather supply in Mokamehghat (Bihar) and Batanagar
(West Bengal).

Bata is the largest footwear retailer (with 35% market share) in India with 1,200 stores across the country. It has
licensed brands (Hush Puppies and Dr Scholl, licensed respectively from Wolverine Worldwide and Dr Scholl’s)
besides those of its parent (such as Power, Marie Claire and Bubble gummers).

The company has a 50:50 JV with CMG, RHPL, to develop 262 acres of land at Batanagar, West Bengal. Bata
has the legal title over the land at Batanagar, which has been split into two parts — the IT SEZ of 25 acres will
be developed by RHPL and the remaining 237 acres will be developed by Riverbank Developers Pvt. Ltd.

Bata’s subsidiaries include Bata (Australia), Bata (New Zealand), Bata (UK) and Bata (France), Bata Properties
and Coastal Commercial & Exim.

Projects under RHPL and RDPL

Residential Units to be Tentative pricing
Project Expected start Expected completion
developed (Rs/sq ft)*
Work can start only after
completion of employee 2,600 – 4,900 + PLC Three years post start of
The Princep 1400
rehabilitation, may be by project.
2011.
Lake Town 900 2,200 – 4,400 + PLC Post 2014
Golf Greens 900 2011 - 2012 2,400 – 4,600 + PLC 2014 - 2015
Mandeville 100 2011 - 2012 3,600 – 7,300 + PLC 2014 - 2015
SEZ
2011 - 2012 ~35 (average rentals) 2014 - 2015
(Est. cost – Rs 5.5 bn)
Esplanade 2011 - 2012 ~30 (average rentals) 2014 - 2015
Rental annuity, no
Hotel (D:E::60:40) 2012 - 2013
definite amount fixed yet
Source : Company, PUG Research

Bata India Ltd– Q3CY11 Flash Note 4

 28 October 2010 l PUG Institutional Research

Financial Summary
Profit and loss statement (INR mn) Cash flow statement (INR mn)
Year ending 31 Dec CY09 CY10E CY11E CY12E Year ending 31 Dec CY09 CY10E CY11E CY12E
Income from operations 10,917 12,283 13,919 15,564 Profit before tax 1,003 1,313 1,566 1,761
Total operating expenses (9,678) (10,725) (12,119) (13,573) Depreciation, Amortisation etc. 118 328 353 378
EBITDA 1,238 1,558 1,800 1,990 Less: Changes in W.C. 81 (113) (54) (146)
Depreciation (279) (328) (353) (378) Tax (320) (735) (563) (616)
EBIT 959 1,230 1,447 1,612 Net Operating Cash Flow 881 793 1,302 1,377
Interest expenses (41) (8) (7) (7) Capex (248) (200) (200) (200)
Other income 84 91 126 156 Investments (83) 0 0 (0)
Profit before tax and extraordinary 1,003 1,313 1,566 1,761 Investing cash flows (331) (200) (200) (200)
Extraordinary income Increase in equity 61 0 0 0
Profit before tax 1,003 1,313 1,566 1,761 Debt raised/ (repaid) (196) (175) 25 (25)
Provision for tax (330) (433) (517) (581) Dividends (188) (226) (263) (301)
Net profit 672 880 1,049 1,180 Others 67 0 0 0
Preference dividend 0 0 0 0 Financing cash flow (255) (401) (238) (326)
Reported PAT 672 880 1,049 1,180 Net change in cash 295 192 864 851
Adjusted Profit 672 880 1,049 1,180 Closing cash balance 562 754 1,618 2,469

Balance sheet (INR mn) Key ratios (%)

Year ending 31 Dec CY09 CY10E CY11E CY12E Year ending 31 Dec CY09 CY10E CY11E CY12E
Equity Capital 643 643 643 643 Diluted EPS (INR) 10.5 13.7 16.3 18.4
Reserves and surplus 2,700 3,317 4,065 4,869 Dividend per share (INR) 3.0 3.5 4.0 5.0
Shareholders funds 3,343 3,959 4,708 5,511 Book value per share (INR) 46.1 55.7 67.4 79.9
Minorities ROE 21.8 24.2 24.3 23.2
Borrowings 250 75 100 75 ROCE 32.4 37.1 37.8 35.8
Others (256) (256) (256) (256) Net debt/Equity (9.4) (17.2) (32.3) (43.6)
Total Liabilities 3,337 3,778 4,551 5,330 Dividend payout 33.6 29.9 28.7 31.9
Growth
Goodwill Revenues 10.6 12.5 13.3 11.8
Gross block 3,749 3,949 4,149 4,349 EBITDA 43.7 25.8 15.5 10.6
Depreciation (2,446) (2,773) (3,126) (3,504) EBIT 33.2 26.6 19.1 12.4
Net block 1,303 1,175 1,023 844 Net profit 10.7 30.8 19.3 12.4
Capital WIP 6 6 6 6 Diluted EPS 10.7 30.8 19.3 12.4
Total fixed assets 1,309 1,181 1,029 850 Margins
Investments 172 172 172 172 EBITDA 11.3 12.7 12.9 12.8
Other non-current assets EBIT 9.6 10.8 11.3 11.4
Inventories 2,775 2,985 3,230 3,610 Net profit 6.4 7.2 7.6 7.6
Sundry debtors 252 282 315 348
Cash equivalents 562 754 1,618 2,469 Valuation ratios
Other current assets 558 581 658 736 Year ending 31 Dec CY09 CY10E CY11E CY12E
Total current assets 4,147 4,601 5,821 7,163 Diluted P/E (x) 33.1 25.3 21.2 18.8
Sundry creditors 1,805 1,938 2,215 2,537 Price/BV(x) 7.5 6.2 5.1 4.3
Other current liabilities 487 239 256 319 Market cap/sales (x) 2.0 1.8 1.6 1.4
Total current liabilities 2,291 2,177 2,471 2,856 EV/sales (x) 2.0 1.8 1.5 1.3
Net current assets 1,855 2,424 3,350 4,307 EV/EBITDA (x) 17.7 13.8 11.5 10.0
Total Assets 3,337 3,778 4,551 5,330 Dividend yield (%) 0.9 1.0 1.2 1.4

Bata India Ltd– Q3CY11 Flash Note 5

 28 October 2010 l PUG Institutional Research

Rating System (In Absolute Terms)

BUY = Expected to give a return of 10% or more over a 12 months' time frame.
HOLD = Expected to give a return of -10% to +10% over a 12 months' time frame.
SELL = Expected to give a return of -10% or lower over a 12 months' time frame

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Bata India Ltd– Q3CY11 Flash Note 6