Bata India: Sell

Recommendation: Sell

Reshma Krishnan

Bata India is foot sore. Demand slowdown and labour problems on have pinched it badly. A new labour settlement and a change in management have not made it any easy.

Some changes have been effected in Bata India's management over the past six months. Mr Fernando Garcia of Bata Ltd, Toronto, was recently appointed Managing Director, in the place of Mr Chandu Morzaria, who took over as regional executive to oversee Bata's operations in Asia. This and some speculation over the possibility of a stake hike by the parent propped up the stock price for a while. The talk of stake hike was quashed.

Bata India's performance for the third quarter ending September, was dismal with a 5 per cent drop in sales and a net loss of Rs 4.45 crore. Figures for the nine-month period, ending September, are no better. Investors may pare exposure in the stock.

Topline growth was negative. Sales for the quarter ending September 2001 was down 5.45 per cent to Rs 163.61 crore from Rs 173.02 crore, affected by the general slowdown in demand across industry sectors. There was already little growth in the sector and the recession has only made it worse.

Second, the festering labour problem at its Peenya plant, near Bangalore. The lifting of the lockout in July was expected to end Bata's troubles. But another lockout was declared in October, affecting production and sales.

The decline in sales was not accompanied by a proportionate fall in expenses. The latter fell by less than one per cent to Rs 165.23 crore, leading to an operating loss. Therefore, the company slipped back into the red in the third quarter after a small recovery in the second. It made an operating loss if Rs 1.62 crore for the quarter ending September against a profit of Rs 6.65 crore for the corresponding previous quarter.

Interest costs fell to Rs 2.17 crore. With production affected the working capital requirement may have dropped, leading to savings in interest costs. The net loss for the third quarter ending September was Rs 5.89 crore against a net profit of Rs 38 lakh for the corresponding previous period.

The figures for the nine months ended September 30, were no better. Sales fell marginally to Rs 562.04 crore against Rs 563 crore for the corresponding previous period. The trend in growth has been inconsistent from quarter to quarter. In the first quarter, sales growth fell mainly due to the lockout; in the second, the small rise in sales suggested that the company might get back on track. Sales rose despite a cutback in production to clear stocks. However, the trend reversed in the third quarter.

Operating profit for the nine months ending September fell 61 per cent to Rs 12.92 crore against Rs 33.14 crore in the corresponding previous period. This was on the back of a steep fall in the already-thin margins, to 2.50 per cent from 5.89 per cent. The expenditure on technical collaboration was substantial at Rs 9.38 crore, and this ate into the profits. There was no tax burden because of the losses in the first and third quarters. But the tax saving was not enough to stem the sharp fall in operating margins.

It is unlikely that Bata India can post a strong enough recovery to make up for the poor performance in the first nine months. The earnings per share is negative and investors can use any small rally to exit the stock.