Best Feet Forward

One must be curious to know more about this leading manufacturer of footwear in India - Bata India Ltd. (BIL) - after a glimpse of its long-term growth prospects in our October issue. The company has consolidated its position as a market leader after witnessing a successful turnaround in 2005. BIL is a part of the Bata Shoe Organisation (BSO), which holds around 52 per cent stake in the company. BIL owns brands such as Hush Puppies, Weinbrenner, North Star, Power, Marie Claire, Bubble Gummers, Ambassador, Comfit and Wind. The company's product portfolio includes shoes of different make such as leather, rubber and canvas, and accessories. It also has a range of safety shoes for industrial use and supplies to hospitals, military forces, airlines and other industries.

BIL was a loss-making entity until CY04 and its losses over CY02-04 were primarily attributed to excess staff at its factories and unionisation of employees. This resulted in employee costs reaching a decadal high of 28.3 per cent of net sales in CY03. The company, however, started its restructuring activity from CY04 and took various steps to rationalise costs which included voluntary retirement scheme (VRS), outsourcing labour intensive operations, closing down its cash drain stores and opening commission stores.

Through VRS, the company got rid of its high-cost employees and also improved its productivity. Over the last five years, BIL completely repositioned its stores by closing down its cash drain stores, opening new formatted large stores and remodeling old small stores.

As employee costs were high, it resorted to outsourcing of low value items like rubber, canvas and plastic footwear and utilised the capacity to produce higher value leather footwear. The company completely outsourced its requirement of low value plastic footwear. Share of outsourced products increased from 21.2 per cent of sales in CY01 to 30.6 per cent in CY10. With a higher share of outsourced products, the issues related to higher employee costs would effectively be managed by BIL.

In order to further reduce the impact of higher employee costs, the company is setting up more and more outlets in the form of K-stores (commission stores) since the past three-and-a-half years. In case of a K-store, the company appoints an agent who runs the store and bears all employee costs associated with it, while the company bears all other costs such as store rent, furniture etc.

Strengths
BIL has turned around its fortunes by adopting various employee cost rationalisation measures, outsorcing strategy and added focus on branding, distribution and working capital management. Further, its focus on the leather segment where margins as well as realisations are higher as compared to rubber, canvas and plastic shoes, translated into better margins. From operating losses of Rs 39.13 crore, BIL has come a long way with an operating profit margin of 13.7 per cent (CY10), a jump of 8.9 percentage points over CY05-10.
* The impact of company's restructuring exercise is clearly reflected in its return ratios. Both return on capital employed (RoCE) and return on net worth of BIL trebled and averaged around 25.3 per cent and 20.1 per cent over six years.
* The company also sells accessories such as ladies bags and men's belts from its stores. These products have started adding to the top line as well as the margins, contributing around 3 per cent of the company's sales. BIL does not have to bear any additional cost on marketing or administration for selling these accessories.
* Men's footwear accounts for almost 58-59 per cent of the market with women's shoes constituting 30 per cent and kid's footwear making up the rest. The women section is mostly driven by unorganised market and BIL has been focusing on this segment in recent times due to its high margin and growth opportunity.

Growth drivers
* The company plans to open 150-200 stores in the next two years with a focus on new locations. This is expected to take the store count to around 1,450 by CY13. More than 85 per cent of its stores have been renovated and only 2-2.5 per cent remain as cash drain stores. With plans to open 70-100 large format stores per year, the revenue per store of BIL is expected to increase. This is also expected to expand the company's reach in tier II and tier III cities.
* The free cash flow of the company registered a growth of 8.5 over CY05-10. Going forward, the free cash flow is expected to increase further as renovation and cash drain store restructuring is almost completed and the company is likely to incur capital expenditure only on opening of new large format stores.
* BIL had cumulative 309 acres of land in Batanagar, Kolkata. As part of the restructuring, it sold its investment and rights in the joint development agreement and realised a sum of Rs 1,094 million in Q1CY11. This amount is likely to be utilised by the company to acquire few high rental stores in key metros.

Concerns
* With the entry of many multinational companies in domestic market, BIL is expected to face significant challenges in terms of pricing, footwear design, collection and higher branding.
* Rubber and leather prices play an important role in the pricing of footwear. Major volatility in prices of rubber and leather may affect the margins of the company in future.

Valuation
The stock's consolidated price-to-earnings (PE) is currently trading at a discount of 22.9 per cent to its five-year median PE of 26.4. Its asset turnover ratio improved to 3.1 from 2.2 over CY05-10. With a skimpy debt-to-equity ratio of 0.21 times, the stock trades at a price-to-earnings to growth (PEG) ratio of 0.36. Its earnings per share has registered a five-year CAGR of over 55 per cent.
The company is trading at fair valuations and its better product mix, a virtual debt-free status and improving profitability complement its growth.