Bata India: Hold/Buy on declines

Recommendation: Hold/Buy on declines

Reshma Krishnan

BATA India's latest financial performance and the labour problems it faces point to an uncertain future for the company's stock in the near term.

While Bata enjoys a premium status in its sector, its future lies in its ability to solve the labour issues and resume proper supply to the market, which would then reflect positively in its stock price.

Bata's latest quarter results for the September-ended September 2000 indicate lacklustre performance resulting from lower production and higher costs. From a year-on-year perspective, its annual performance was mediocre. Sales grew 4.1 per cent to Rs 773.64 crore for the year ending December 1999 from Rs 743.17 crore in 1998. Profits grew at a similar rate to Rs 71.46 crore from Rs 50.46 crore the previous year. Operating profit margins increased from 6.79 per cent to 9.34 per cent.

Sales for the quarter-ended September 2000 went up by a measly 5.9 per cent to Rs 173.02 crore from the Rs 164.07 crore the same period last year. Net profit, on the other hand, fell by 89.56 per cent to Rs 38 lakh from Rs 3.64 crore. Expenses were also up by about 9 per cent. The performance for the nine months ending September 2000 was worse. The financials indicate a slowdown in sales volume that could be attributed to both a slowdown in the industry and a fall in production, as supply to wholesalers is being restricted to recover outstanding debts. Net profit fell by 49.71 per cent, with the total expenditure increasing by 1.5 per cent, despite the fall in sales.

Bata now faces three major issues. One, a major reason for the rise in costs and fall in sales is because of Bata's recurring labour problems. The company seemed to have resolved the problems in 1999, when there was a lockout at its main manufacturing plant at Batanagar in Calcutta. This resulted in a huge wage settlement which, in turn, could have affected profits especially in the latest quarter. Though the lockout was lifted in July 2000, the Peenya plant in Karnataka is yet to function. This could have caused the bottleneck on the supply side.

While Bata continues to be a dominant organised player in the domestic footwear market, it faces competition from the unorganised sector. This, to a large extent, is on account of the fact that Bata's target market is also catered to by the unorganised sector. This sector appears more competitive as it has the benefit of being unorganised and, thus, does not have to pay tax. This threatens Bata's margins. The industry, especially the lower middle-class target market, is highly price-sensitive. High margins are virtually impossible as rising costs exert pressure on them.

But the long-term issue is that the industry is witnessing a slowdown. Growth rate in the industry fell from 20.6 per cent in 1995-96 to an insignificant 5.5 per cent in 1999 and production by 32.4 per cent. The company's sales declined from an average year-on-year growth of 10 per cent to 4.1 per cent in 1999.

But Bata still has many sustainable strengths. The brand continues to command a high premium. It stands for durability and value for money in its target market. Its level of market penetration in both the rural and the urban areas gives it an edge over competition. The operations and marketing strategies seem to have ensured this successful trend. Despite its weaknesses, Bata continues to be strong financially and operationally since its turnaround in 1996. The liquidity is high and its debt-to-equity is under control.

However, Bata's long-term success will depend on the cooperation from the labour unions. One of the reasons why the Peenya plant is not operational is that the company realises that outsourcing is cheaper and will result in higher margins. But this is really not the case. With a slowdown in the industry's growth, Bata needs to reposition itself. Part of the slowdown in sales has come from the cutback of supplies to wholesalers to reduce outstandings. This could be a temporary setback.

Given these factors, Bata's poor performance already appears to have been factored into the stock price. Though near-term performance may continue to be clouded by the unresolved labour issues, investors with a long-term investment horizon of over three years can continue to hold the stock because of the company's satisfactory long-term prospects. But fresh investments can be avoided at this juncture.