The Hindu Business Line : Bata: Hold/Avoid fresh exposures

BATA may be one of the older companies to set foot in India, but a look at its financial performance reveals that it continues to carry a bite that hurts.

A combination of depressed market conditions and its own internal problems took the sheen off its numbers. In the current circumstances, investors can consider holding on to the stock and avoid fresh exposures.

Dulled shine

There is no shine in the numbers for the quarter ended June 2002.

Compared with the corresponding previous quarter, net sales (excluding other income) has fallen to Rs 205.84 crore from Rs 221.57 crore, a 7 per cent drop.

This has also been accompanied by an escalation in costs. Total expenditure, reckoned as a percentage of net sales, is in excess of 97 per cent compared to about 94 per cent for the same quarter last year.

The combination of a shrinking topline accompanied by rising costs came as a double whammy on the profitability, at both the operating and net levels. Operating profit slumped from Rs. 13.08 crore last year to Rs 7.2 crore this year, representing a fall of about 45 per cent.

Profit after tax dropped to Rs 2.1 crore from Rs 5.56 crore in the last year, a steep fall of 62 per cent.

The figure for this year would have been worse, but for the tax credit of Rs 0.61 crore, which gave the bottomline a leg up. W

hile these numbers are not to feel kicked about, it is pertinent to bear in mind that the company has brought a semblance of respectability to its bottomline after posting a loss of Rs 4.2 crore in the quarter that ended this March.

The lacklustre financial performance reflects the issues that confront the company within as also the external business environment.

However, the company has charted a road map that should enable it to counter the downturn.

Sprucing up its act

Labour problems, for instance, have been the company's Achilles heel. A lockout was declared at one of its manufacturing units in Peenya (near Bangalore) last October, and was lifted this January after a settlement was arrived at with the workers. At about 20 per cent of the total expenditure, labour costs are a drag on profitability.

The company has also transferred two of its loss-making units in Bihar and Haryana to BDCL Enterprises Private Ltd (BDCL) and Fashion Shoe Private Ltd (FSPL) respectively. Both BDCL and FSPL are independent entities that would receive commercial and management support from Bata.

This restructuring move is likely to help the company reduce much of its labour-related problems and provide it with a cost-effective production base.

Further evidence of the company tightening up on costs is manifest in its decision to consider outsourcing from countries such as China where the cost of manufacture is typically lower.

This would provide Bata with the edge to compete in the price-sensitive segment.

Product access

On the product front, its technical tie-up with its parent, Bata of Toronto, would provide it with access to the entire product bouquet of the latter and draw on international experience. This would be an advantage considering that competition is snapping at Bata's heels. At the premium end of the product segment, companies such as Woodland, Gaitonde and Lotus Bawa are giving Bata a run for its money.

Ditto in the popular segment where companies such as Liberty, Action and Phoenix compete with Bata for customer attention.

Bata has embarked on a strategy to target the semi-urban and rural markets to drive volume growth and profitability.

Bata, with a product range that straddles multiple price points to suit the pocket of every customer, is ideally positioned to penetrate this market. Its distribution strength — with a combination of wholesalers and retailers, with plans to add wholesale depots to cater to the newly identified markets — would prove an asset in its initiative.

The company is also reclassifying its retail stores to move in lockstep with changing customer preferences, which is emblematic of its intent of being market-oriented as opposed to manufacturing-focussed.The company's shareholders have also approved the enabling resolution for buyback of shares.

Interestingly, on the day this was approved, the stock posted a sharp surge in price on the back of substantial trading volumes. It also sparked speculation that a stake increase by the foreign parent through an open offer was in the offing.

The management of the Indian outfit subsequently dismissed this notion. If the parent decides to come out with an open offer at a fair premium to the market price, it would serve as a good exit option for investors. For a company confronted by a customer who has an array of alternatives to choose from, a falling topline and a shrinking bottomline, Bata has consciously chosen to restructure itself to remain a part of the consumers' "evoked set''. While these actions are encouraging, what would be of greater import is the upshot of these moves in the marketplace.

While the company has sent out the signal that it is capable of walking the talk, it needs to categorically demonstrate this. If it does not, then Bata would the boot is well and truly on the other foot. The July-September quarter would be crucial for the company, as it would partly capture the repercussions of its new initiatives.

Therefore, it would be prudent for investors to see how these restructuring plans pan out before contemplating further action. The stock now trades at Rs 37.

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