MOSL: BATA INDIA (Downgrade to Sell)- Premiumization to support margin expansion-However, SSS growth muted

​BATA INDIA: Premiumization to support margin expansion; However, SSS growth muted; downgrade to Sell on rich valuations

(BATA IN, Mkt Cap USD1.5b, CMP INR748, TP INR578, 23% Downside, Downgrade to Sell)

• Hiccups in wholesale business: The transition to GST has had an industry-wide impact, with destocking at the wholesale level. BATA too witnessed subdued offtake in 1HFY18 on account of non-compliant wholesalers, which resulted in a ~12% YoY decline in wholesale business in 1HFY18. However, the retail business grew ~9% YoY and since retail contributes over 80% of overall revenue, BATA managed to post an overall growth of 6% YoY in 1HFY18. Growth was also aided by an early festive season. With GST netted off from the topline, we expect similar growth of 6% YoY in 2HFY18.
  
• Betting high on premiumization of products: Lately, BATA’s focus has been on premiumizing its products, with new launches in its AW17 collection (Hush Puppies, Naturalizer, European Collection, Power International Range, North Star). It has also forayed into collections of casual, daily-wear, sports and outdoor sub-categories for the 10-14 year age group. The intent is to expand average realization through premiumization and increase the revenue contribution of premium products from 30% to ~45% in FY18. However, with subdued growth in 1HFY18, we expect the ramping up of premium products’ contribution to get pushed to FY19, with marginal margin expansion of ~70bp in FY18 to 12% and 100bp thereafter to 13% in FY19.
  
• Going aggressive on store expansion: BATA has opened 50 franchisee stores so far in FY18 and expects to open another 300 in the next three years primarily in tier-II and tier-III cities. It also has aggressive plans to expand its retail base by opening ~100 new Bata stores in FY18 – it has already opened 29 new stores in 2QFY18 and 67 stores in 1HFY18, and is well on track to achieve its annual target. However, the company has been underperforming on same-store sales (SSS) growth – in 2QFY18, it posted SSS growth of ~4%, pulling down the SSS growth for 1HFY18 to ~6%.