Nuvama initiates ‘hold’ rating on Bata India, sets target price at Rs 1,548

Brokerage firm Nuvama Institutional Equities has initiated coverage on Bata India with a ‘hold’ rating and given a target price of Rs 1,548 a share.

Despite taking several initiatives over the past two decades to revive growth, Bata India’s overall growth has lagged behind its peers, despite pockets of improvement. Nuvama attributes this jagged growth trajectory to legacy brand perception, muted marketing spend, and limited wholesale/online mix.

While Bata India continues to take steps to improve growth, a definitive change in its perception as an aspirational brand is necessary for sustained growth. However, this is a difficult task to accomplish. Although increased online/wholesale contributions may provide some incremental growth, it is unlikely to significantly alter the company’s trajectory, Nuvama said.

The current portfolio of Bata may restrict the potential increase in benefits from the online channel. The value-driven wholesale channel may not yield significant gains for Bata, as this is not a category where the company, has a strong presence. To drive growth, it will be crucial to increase same-store sales growth (SSSG). Although there has been some improvement in brand perception, Bata still has a long way to go to achieve an aspirational status, the report added.

“We are building in an 11 percent revenue CAGR for FY23–25 (FY19–25:6 percent) factoring in retail channel’s 9 percent CAGR. Online/ wholesale is expected to clock a CAGR of 23 percent/12 percent to reach a revenue share of 9 percent/16 percent by FY25. We reckon EBITDA margin (pre-Ind AS) shall rise 150bp over FY23–25 to 15.2 percent (FY19: 16.7 percent) driven by operating leverage, whereas gross margin would contract marginally due to channel mix,” Nuvama said in its recent note.

“The stock, similar to the business, has also seen various valuation cycles. Based on our growth outlook, we reckon the fair multiple for Bata is higher than what it traded at during April 2015–September 2017 (31x), but lower than the average following the management change, i.e. 43x from September 2017–December 2019. Accordingly, we value the stock at 40x FY25E EPS,” Nuvama report said.