Initiating Coverage | 3 June 2013
Sector: Consumer
Bata India
All the right steps
Niket Shah
(Niket.Shah@MotilalOswal.com); +91 22 3982 5426
Investors are advised to refer through disclosures made at the end of the Research Report.

Bata India
Bata India: All the right steps
Page No.
Summary
........................................................................................................
3-4
Story in charts.................................................................................................... 5
A foreign brand's success story in India
...........................................................
6
Massive restructuring - Bata's recipe for success
........................................
7-8
Post restructuring, focus on aggressive growth
........................................
9-10
Strong retail presence set to strengthen further
....................................
11-12
Outsourcing, K Stores expansion to check employee cost
.....................
13-16
Gross margin expansion on the cards
......................................................
17-19
Strong brand, to scale up with focused branding
...................................
20-21
Indian footwear industry
..........................................................................
22-24
Global footwear industry
..........................................................................
25-26
Financial outlook
.......................................................................................
27-28
Valuation and view
..........................................................................................
29
Key risks
............................................................................................................
30
Management details
........................................................................................
31
Financials and valuation
...........................................................................
32-33
3 June 2013
2

3 June 2013
Update | Sector: Consumer
Bata India
BSE SENSEX
S&P CNX
19,610
5,939
CMP: INR811
All the right steps
TP:INR975
Buy
Expect strong earnings and growth visibility
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
BATA IN
64.3
52.1/0.9
989/688
5/-13/-29
Restructuring leads to sales CAGR of 14.7% over CY05-12, with EBITDA and PAT growth
of 47.6% and 51.6%.
Focus on aggressive growth by expanding presence in Tier II, III cities and rural India.
Outsourcing, K Stores expansion to contain employee cost; Margins set to increase.
Bata India (BATAIN) trades at a PE of 26.4x/20.8x/16.5x CY13E/14E/15E EPS. We value
the stock at 25x CY14E EPS and arrive at a target price of INR975, with a Buy rating.
Financial summary (INR b)
Y/E December 2013E 2014E 2015E
Sales
EBITDA
NP
EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
EV/Sales (x)
RoE (%)
RoCE (%)
Valuation
P/E (x)
P/BV (x)
EV/EBITDA (x)
21.1
3.1
2.0
30.7
14.8
2.3
25.6
37.8
26.4
6.2
15.9
25.0
3.8
2.5
39.0
26.8
1.9
26.7
39.3
20.8
5.0
12.5
1.0
29.6
4.7
3.2
49.2
26.2
1.5
27.3
40.1
16.5
4.1
9.8
1.1
Strong brand + aggressive store expansion to drive market share
Backed by eight decades of operation, Bata enjoys strong brand equity in India
and is the market leader with ~16% share in the organized footwear segment. It
has a strong distribution network of 1,388 stores comprising of 250 MEP stores
(Market Extension Programme), 450 K Stores, 31 exclusive Hush Puppies, 28 SIS
stores, 10 exclusive Footin stores and balance being company-owned stores. It
also serves the non-retail segment (institutional and defence through its urban
wholesale division with 180 large distributors and 30,000 direct dealers spread
across India. It plans to open 100 new large format stores (3,000 sq ft) every year
over the next two years (75% to be K stores), which include adding 15-20 exclusive
Hush Puppies stores and 10-15 Footin stores which will drive growth and market
share gain.
131.4 161.1 199.8
Focus on retail segment - the right strategy going forward
Bata derives ~85% of revenue through retail networks, 14.2% from non-retail
channels (dealers/institutional/industrial sales) and balance 0.8% through
exports. Over the last six years, retail segment posted 20% CAGR, exports 5.6%
and the wholesale business growing at 2.2% over CY06-12. Company realizes 40%
of revenue from South India and the North, East and Western regions contribute
20% each. About 80-90% of the retail revenue is from Tier I and II cities, presenting
a huge opportunity to tap rural and semi-urban markets, which are mainly serviced
through dealer networks. Bata has been present in towns with a population of
500,000 and above and plans to expand to 400 plus cities, with a population of
more than 100,000, to improve presence in Tier III and rural markets through the
wholesale division.
Divid. Yield (%) 0.9
Shareholding pattern (%)
As on
Mar-13 Dec-12 Mar-12
Promoter 52.01
52.01 52.01
Dom. Inst 10.24
10.19 14.02
Foreign
20.2
20.43 17.12
Others
17.56
17.37 16.85
Stock performance (1 year)
Increased contribution from women and child segment to drive growth
To increase the contribution from women and child footwear segments, Bata
increased the display area for both segments across all stores, complimented by
launching newer trendy designs under brands like Marie Claire, Hush Puppies,
North Star etc. This improved the contribution of high margin women's segment
from 25% in CY08 to ~35% in CY12. Also, to increase child segment contribution
from 8-9% of sales to 12-13% over the next few years, it recently in-licensed the
Angry Birds trade mark from Rovio and is selling 10,000 pieces a week.
3

Bata India
Premiumization to drive sales per store
Company intends to increase sales per store by improving value mix with a focus on
the high margin leather segment that includes accessories such as ladies bags, caps,
belts among others. With parent Bata Shoe Organization (BSO) enjoying 20% market
share worldwide in the industrial shoes segment, Bata plans to leverage the expertise
and technology in India for industrial and defence shoes. The defence sector requires
12m footwear every year, which is supplied by unorganized players, thus providing
greater scope for an organized player like Bata. Company recently got a large order
from the Indian Air Force.
Gross margin expansion on the cards
To improve margins, Bata phased out INR69/pair rubber Hawaiians' (a low margin)
and shifted to Sunshine range (INR199-399) with better margins. It increased focus
on high value products within the leather segment such as Hush Puppies (growing at
40%). Leather contribution is set to increase from 72% of sales in CY12 to 76% going
forward, thereby improving margins. Bata's plans to increase contribution from
accessories segment (60% gross margin) comprising of belts, ladies bag, wallets,
caps from 5% in CY12 to 10% over few years. It launched a programme from FY13 to
modernize three factories (Patna, Batanagar and Bangalore) over FY13-15, with a
total capex of INR500m, and expects to improve gross margin by 500bp.
Massive restructuring places Bata on a strong footing
Bata scripted a successful turnaround story in 2005, post three consecutive years of
losses. Key initiatives were: 1) revamp of retail operations from CY05-12 by opening
718 new large format stores, remodeling of 296 stores and closure of 524 cash-drain
stores, 2) extended working hours and keeping stores open on Sundays lead to sales
improvement, 3) drastic reduction in employee headcount (9,631 in CY05 to 5,162 in
CY12) by providing voluntary retirement and option to move to K Stores format and
4) outsourcing labor-intensive operations to prune costs.
Valuation and view
We estimate Bata's revenue would increase by ~17% and net profit by ~22.5% over
CY12-15E. It has a strong balance sheet, with cash of INR1.9b and healthy return
ratios of 27% RoE and 39% RoCE in CY12. With limited capex of INR2b over the next
three years, we believe the company will generate free cash flow in excess of INR5.9b
over CY13-15E. All these factors make a strong case for re-rating. At CMP of INR811,
Bata trades at a PE of 26.4x/20.8x/16.5x CY13E/14E/15E EPS. We value the stock at 25x
CY14E EPS and arrive at a target price of INR975, with a
Buy
rating.
3 June 2013
4

Bata India
Story in charts All the right steps
#1
#2
#3
Realization across segment on uptrend driven by
price increases and change in product mix.
Increase in outsourcing to reduce employee cost
percentage sales further.
Incremental demand in leather footwear to be
met through outsourcing.
#4
#5
#6
Increase in rubber segment outsourcing to
improve margins going forward.
Focus to improve revenue/store to lead to
operating leverage and better margins.
Outsourcing in volume terms expected to
increase further, thereby improving margins.
#1 Segment-wise realizations
#2 Employee cost percentage sales to improve further
#3 Outsourcing in leather to continue going forward
#4 Outsourcing in rubber and canvas to increase going forward
#5 Revenue per store on an increasing trend (INR m)
#6 Outsourcing v/s inhouse
Source: Company/MOSL
3 June 2013
5

Bata India
A foreign brand's success story in India
Bata, a 51% subsidiary, is the largest company for BSO for sales pairs and the second
largest in revenue (15% of BSO revenues).
It has cornered ~16% market share in the organized sector and almost 99% of revenue is
from the domestic market, with exports accounting for the balance.
Bata sells 50m pair of shoes every year serving 1.5lac customers everyday.
Bata Shoe Organization (BSO) is a large shoemaker that traces its history back to 1894
and a Czech cobbler named Tomas Bata. With more than 30,000 employees, 5,000
international retail stores and a presence in over 90 countries and five continents.
Bata, a 51% subsidiary, is the largest company for BSO for sales pairs and the second
largest in revenue (15% of BSO revenues). Company went public in 1973 and changed
its name to Bata India Ltd. It has cornered ~16% market share in the organized sector
and almost 99% of revenue is from the domestic market, with exports accounting for
the balance. Company receives guidance and managerial support for its functions
including purchase, manufacturing and training of managers from BSO for a technical
fee of 1.5% of gross revenue.
Bata India has a retail network of 1,388 stores spread across 500 cities, which gives it
a reach/coverage that no other footwear company can match, and employs more
than 7,000 people. Company also has 16 wholesale depots spread across the country,
with more than 30,000 dealers. It sells more than 50m pairs of shoes every year and
also serves 150,000 customers every day. Bata has the widest footwear retail network
in India, with 40% exposure in South India and 20% each in other three regions.
Company has capacity to manufacture 64m pairs of shoes across five plants located at
Batanagar, Faridabad, Bangalore, Patna and Hosur supported by two tanneries for
leather supply in Bihar and West Bengal. Although global brands such as Adidas and
Reebok are trying to catch up with India's young urban population, Bata figures as the
first choice for footwear across India for all age groups.
Bata's brands in India
Bata sells a wide range of footwear in canvas, rubber, leather and plastic catering to
masses. Company has licensed brands (Hush Puppies and Dr Scholl, licensed
respectively from Wolverine Worldwide and Dr Scholl's) besides those of its parent
(Power, Marie Claire and Bubblegummers).
It has also built brands like Weinbrenner, North Star, Bubblegummers, Ambassador,
Comfit, Mocassino and Wind India. For the women's segment, Bata's popularity
continues to grow with the trendy Marie Claire range. The youth focused brand North
Star and specialty outdoor brand Weinbrenner present new trendy designs with an
increased focus on casual styles. The new dress shoe collection under its famous
Ambassador and Mocassino brands has seen significant demand.
3 June 2013
6

Bata India
Massive restructuring - Bata's recipe for success
Restructuring helps to post sales CAGR of 14.7% over CY05-12, with EBITDA
and PAT growth of 47.6% and 51.6%
A comprehensive revamp of retail operations by remodeling existing outlets and closing
down cash-drain stores. During CY05-12, Bata added 718 stores, closed down 524 and
remodeled 296, thus taking the total count to 1,388 stores from 1,174 in CY05.
Extended working hours from 10am to 9pm, instead of 10am to 7pm, and keeping stores
open on Sundays lead to sales improvement and better inventory management.
Drastic reduction in employee headcount from 9,631 in CY05 to 5,162 in CY12.
Outsourcing labor-intensive operations to prune costs.
Extensive retail restructuring...
As part of the retail restructuring plan of CY04, Bata opened new stores, remodeled
existing outlets and closed cash-drain stores to offer a graded choice of products to
diverse consumer segments. At the top were flagship stores situated in upmarket
locations in metro cities, with a product line targeted at the higher income groups.
The next in line, city stores, covering metros and mini-metros, cater to the needs of
the middle and high income groups. In the third tier are family stores in high traffic,
commercial locations, displaying basic and middle range footwear.
Retail structure
Parameter
Location
Target customers
Product profile
Store design
Flagship stores
Metros
Higher income groups
Top of the line brands,
fashionable shoe line
Air-conditioned, well
appointed with an
international look
City stores
Metros and mini metros
Fashion oriented upper
middle class groups
Targeted at buyers with
high aspirations
Non air-conditioned
Family stores
Commercial locations, high traffic
Low to middle class income groups
Basic and middle range, mass product
Non air-conditioned with a commercial look
Source: Company, MOSL
...extended working hours lead to sales improvement and inventory
management...
Most Bata stores were closed on Sundays and functioned from 10am-7pm on
weekdays. As buyers prefer to buy on a Sunday or post office hours on weekdays,
company lost on sales, which led to higher inventory build-up. Hence, it extended
the shopping hours and augmented its shoe line, including women and children's
collection. These initiatives enabled Bata to revitalize the brand and establish as one
of the largest footwear retail plays in India.
…complimented by mega store facelift led to turnaround
During CY05-12, Bata added 718 stores, closed down 524 and remodeled 296, thus
taking the total stores count to 1,388 from 1,174 in CY05. Hence, the share of revenue
from retail segment also increased from 67.3% in CY05 to 85% in CY12. The restructuring
helped it to post sales CAGR of 14.7% over CY05-12, with EBITDA and PAT growth of
47.6% and 51.6% respectively.
3 June 2013
7

Bata India
Revamping operations from CY05-CY09
No of stores
New stores
Closed
Remodelled
CY05
1,174
40
60
CY06
1,172
37
39
78
CY07
1,173
67
66
40
CY08
1,165
62
70
38
CY09
1,161
69
73
40
CY10
CY11
CY12
1,209
1,259
1,388
108
146
189
60
96
60
20
30
50
Source: Company, MOSL
3 June 2013
8

Bata India
Post restructuring, focus on aggressive growth
To expand presence in Tier II, III cities and rural India
Bata has a strong distribution network of 1,388 stores comprising of 250 MEP stores, 450
K Schemes, 31 exclusive Hush Puppies, 28 SIS, 10 exclusive Footin and balance being
company-owned stores.
Over the last three to four years, Bata focused to open large format stores with an
international layout and size of 3,000 sq ft and close down stores with less than 1,000 sq
ft area or turnover below INR5m.
It plans 100 new large format stores (3,000 sq ft) every year over the next two years,
which include adding 15-20 exclusive Hush Puppies and 10-15 Footin stores. Around 70-
75% of new openings will be in K Stores format.
Company realizes 40% of its revenue from South India, while the North, East and Western
regions contribute 20% each.
Large format stores - mantra for aggressive growth going forward
With the company on a strong footing, we believe management plans to focus on
aggressive growth. Over the last three to four years, Bata increased its focus to open
large format stores with international layout and a size of 3,000 sq ft and also close
down shops with less than 1,000 sq ft area or turnover below INR5m. Over the last
four years, it closed smaller shops and relocated to a larger format in the same locality.
We believe the large format stores will help display the shoe line collection across
segments and various brands. This not only helps to be a one-stop solution for brands
like Bata, Hush Puppies, Marie Claire, Ambassador, Power etc, but leads to efficient
inventory management.
What are K Stores?
K Stores denote commission stores. To encourage entrepreneurship, Bata introduced
K Stores two to three years ago. Under this scheme, existing employees are encouraged
to become entrepreneurs by enrolling for franchisee operations. Company provides
support for location, retail space, rent, furniture, stocks and promotional materials,
while the agent bears all employee costs associated with it. In return, the K Store
agent gets a commission of 7-8% depending on the turnover, which is much lower
than the cost of employee for a company-owned store which stands at 10-12%, thereby
leading to ~200bp margin improvement. Of the 100 new store additions planned over
next two years, management guided that 70-75% would be K Stores, which should
help to improve margins.
Strong distribution network…
Bata has 1,388 stores comprising of 250 MEPs, which is akin to the franchisee model
where dealers buy from Bata on cash-and-carry basis and no inventory is owned by
the company, 450 K Stores, 31 exclusive Hush Puppies, 28 SIS, 10 exclusive Footin and
the balance being company-owned stores. It also sells over 15m pair of shoes through
16 depots and 150 large distributors, thus catering to more than 30,000 wholesale
dealers.
3 June 2013
9

Bata India
…to improve through aggressive store expansions
Company plans to open 100 new stores every year over the next two years, which
include adding 15-20 exclusive Hush Puppies and 10-15 Footin stores. Around 70-75%
will be under K Stores format. Management guided that all new Bata stores will be in
the large format of 3,000 sq ft, with mapping of high street location to increase market
share. It also plans to open flagship stores of 1,000 sq ft in major metros and expand
the concept, store-in-store for Hush Puppies and aggressively add Footin stores
(significant success in Thailand) in the affordable fashion category targeted for youth.
It will focus on footwear with price points of INR400-1,000 with new inventory every
three to four months, thereby improving asset turnover.
Bata has a 10,000 sq ft store in Ahmedabad and Mumbai and plans to expand, going
forward. These stores have a premium ambience, wide variety of footwear and
accessories and elements like child play area. Company plans to open a 20,000 sq ft
store in Mumbai and other metros, going forward. A 20,000 sq ft store in Dhaka
(Bangladesh) is delivering annual revenue in excess of USD5m.
To expand presence in Tier II, Tier III cities and rural India
Bata increased brand penetration in smaller markets such as Ahmedabad, Coimbatore,
Jaipur, Trichy, Lucknow, Ujjain, Dhanbad, Nagpur, Hubli and Patiala among others. So
far it was present in towns with a population of 500,000 and above. Company plans to
expand to 400 plus cities with a population of more than 100,000 to improve presence
in Tier III and rural markets through the wholesale division. This will not only improve
penetration but also reduce rent cost as Tier II and III markets would have a lower
rent compared to Tier I. Bata plans to penetrate smaller cities and rural markets
through its dealer network, which is currently at over 30,000. Company realizes 40%
of revenue from South India, while North, East and Western regions contribute 20%
each.
3 June 2013
10

Bata India
Strong retail presence set to strengthen further
Non-retail segment, a scalable business model
Bata derives ~85% of its revenue through retail networks, 14.2% from non-retail channels
(dealers/institutional/industrial sales) and the balance through exports.
About 80-90% of the retail revenue is from Tier I and II cities, presenting a huge opportunity
to tap rural and semi-urban markets, which are mainly serviced through dealer networks.
Plan to increase sales per store by improving value mix by focusing more on the high-
margin leather segment that includes accessories such as ladies bags, caps and belts
among others.
With BSO enjoying 20% market share worldwide in the industrial shoes segment, Bata
plans to leverage on the expertise and technology in India for industrial and defence
shoes.
Strong retail presence - a sustainable growth model
Bata derives ~85% of its revenue through retail networks, 14.2% from non-retail
channels (dealers/institutional/industrial sales) and balance through exports. About
80-90% of the retail revenue is generated from Tier I and II cities, presenting a huge
opportunity to tap rural and semi urban markets, which are mainly serviced through
dealer networks. We believe with increased penetration in Tier II and III segments,
Bata will be able to grow in excess of 20% over the next three to four years in the
retail segment, which contributes 85% to its revenue.
Retail continues to drive growth
Bata
Retail
Exports
Wholesale
Total revenues
% of sales
Retail
Exports
Wholesale
% growth
Retail
Exports
Wholesale
CY05
4,769
69
2,245
7,083
67.3
1.0
31.7
CY06
5,301
108
2,293
7,702
68.8
1.4
29.8
11.2
56.5
2.1
CY07
6,164
94
2,417
8,675
71.1
1.1
27.9
16.3
-13.0
5.4
CY08
7,138
101
2,631
9,870
72.3
1.0
26.7
15.8
7.4
8.9
CY09
9,020
78
1,826
10,924
82.6
0.7
16.7
26.4
-23.1
-30.6
CY10
10,400
118
2,070
12,588
82.6
0.9
16.4
15.3
51.5
13.3
CY11
12,860
169
2,393
15,422
83.4
1.1
15.5
CY12
15,660
150
2,615
18,425
85.0
0.8
14.2
23.7
21.8
43.9
-11.5
15.6
9.3
Source: MOSL
Focus to increase sales per store to drive top line growth
With plans to open 100 large format stores over CY13-14, the focus is to increase
revenue per store, going forward. Management expects to achieve it by improving
the value mix of stores, with more focus on the high margin leather segment that
includes accessories such as ladies bags, caps and belts among others. Company's
thrust on Hush Puppies is a part of this strategy. Bata plans to increase the display of
women and child footwear across all stores given these segments are growing at a
faster rate. All these measures would lead to an increase in sales per store, thus
driving growth and margins.
3 June 2013
11

Bata India
Revenue per store on an increasing trend (INR m)
Source: Company, MOSL
Non-retail segment - scalable business model
Bata's non-retail segment comprises of urban wholesale, industrial and safety,
institutional sales and e- commerce.
Urban wholesale:
The division sells over 15m pair of shoes through 16 depots, 180
large distributors, with more than 30,000 dealers on pan India basis. Bata sells more
than 49m pairs of shoes every year and also serves 150,000 customers per day. It plans
to add more direct dealers in this segment to increase penetration in Tier III and rural
areas.
Industrial and safety segment:
The division caters to industries like construction,
steel, power etc, with special product features like impact and heat resistance, oil
resistance and use of lightweight materials. With BSO enjoying 20% market share
worldwide in the industrial shoes segment, Bata plans to leverage on the expertise
and technology in India. A first time launch of a product with PU-rubber sole for
chemicals and smelter industry in 1QCY13 has been well-received.
Institutional sales:
Institutional sales focus on the special requirements of defense
and paramilitary forces, hospitality, airlines, retail, construction, hospitals, mining
and other industries. Based on the expertise and technical knowhow from BSO, Bata
has installed new machines at its Batanagar plant to manufacture safety footwear
required by defence, mining and other industries. It recently got a large order from
Indian Air Force. The defence sector requires 12m footwear a year, which is supplied
by unorganized players, thus providing greater scope for an organized player like
Bata.
Store level performance measurement
Bata keeps a strict vigil on performance of each store. It sets a target of 10% PBT in the
first year from a new large format store. The finance team meets the retail operations
team on a monthly basis to determine the list of stores that consistently underperform.
A remedial plan is devised for such stores, which includes renegotiating with the
concerned landlord for store rentals or reorganization of merchandise within the
store. The store is kept under observation for a few months and is closed if there is no
satisfactory improvement.
3 June 2013
12

Bata India
Outsourcing, K Stores expansion to check employee cost
Expect capacity utilization to fall but margins to increase
With employee expenses up to 25.6% of sales in CY05, Bata took the twin steps to
rationalize costs by closing certain businesses which were more labor-intensive and
increase outsourcing.
Employee headcount was pruned from 9,631 in CY05 to 5,162 in CY12 by providing VRS,
translating to significant savings in employee cost from 25.6% in CY05 to 10.6% in CY12.
Launch of K Stores 3.5 years ago for ex-Bata employees helped to reduce employee cost
as a K Store agent is paid 6-8% of turnover as commission, compared to 11-12% of sales as
employee cost if taken by the company on its books, thus leading to a saving of 300bp.
Contribution from outsourcing increased from 23.2% of sales and 46.7% of cost of goods
sold (COGS) in CY05 to 32.7% and 69.4% in CY12. This mix is likely to improve as incremental
demand going forward will be met through outsourcing, thus improving margins.
Employee cost to remain under check
A key cost component for footwear manufacturers is employee cost, given the labor-
intensive nature of the business. With employee expenses mounting to 25.6% of
sales in CY05, management took the twin steps to rationalize costs. Company closed
certain lines of business which were more labor-intensive and had limited scope for
automation and began to outsource them. It outsourced labor-intensive lines of
operation such as cutting, threading and stitching, and only critical manufacturing
processes were retained in-house, including leather selection, sole manufacture,
design, cutting and finishing. The jobs retained by Bata were machine work and less
labor-intensive. To facilitate these changes, management offered a VRS to affected
blue collar and white collar employees. Hence, the headcount was pruned from 9,631
in CY05 to 5,162 in CY12, translating to significant savings in employee cost, which
reduced to 10.6% in CY12.
Focus to open more K Stores to reduce employee cost
To reduce employee cost further, Bata is setting up more outlets in the form of K
Stores since the past 3.5 years. Given that a K Store agent is paid 6-8% of turnover as
commission, compared to 11-12% of sales as employee cost if taken by Bata on its
books, the savings on this count can improve margin by ~2% per K Store.
Hence, we expect employee cost to further reduce from 10.6% of sales in CY12 to
9.4% in CY15E as outsourcing as a percentage of sales increases and management's
guidance to open 70-75% of 100 large format stores over the next two years in K
format stores.
3 June 2013
13

Bata India
Reduction in employee count
Expect further improvement in employee cost % of sales
Source: Company, MOSL
Increase presence through online sales
To improve customer service, company introduced home delivery of shoes. Customers
can now place orders for any footwear which they are unable to find in a store and get
it home delivered at no extra cost. Bata derives less than 1% of its sales online.
Company recently tied up with online portals like Jabong, Snapdeal, India Times,
Rediff, Junglee, etc., to attract potential customers online. etc. Any significant increase
in the contribution of online sales will lead to meaningful improvement in margins
due to negligible cost, as compared to sales through retail stores.
Outsourcing - a key fitness mantra
Outsourcing of certain manufacturing operations has been a key component of Bata's
business reorganization strategy. As mentioned earlier, outsourcing increased
significantly from 23.2% of sales and 46.7% of COGS in CY05 to 32.7% and 69.4% in
CY12. We expect outsourcing to increase significantly, thereby lowering the cost of
production and improving margins. From CY05, it outsourced labor-intensive jobs
and retained machine operation, thus utilizing installed capacity to the fullest. This
implies the incremental increase in volume was met through outsourcing.
Outsourced percentage of total volumes sold on an increasing trend
Source: Company, MOSL
3 June 2013
14

Bata India
Outsourcing as a percentage of sales for leather increased from 23% in CY05 to 45% in
CY11, while outsourced proportion for rubber and canvas increased from 9% in CY05
to 59% in CY11 in volume terms. Bata outsources 100% of its plastic footwear and
accessories requirements. The strategy going forward is to raise outsourcing of cheaper
items such as rubber, canvas and plastic footwear and manufacture high value-added
leather footwear in-house. Hence, we expect capacity utilization to further reduce
across segments as most employees will shift to K Stores format, albeit leading to
higher margins.
Company guided that with the likely opening of 100 stores every year, the incremental
demand for footwear will be met through increased outsourcing across segments.
We believe this move will not only help Bata to increase margins but also focus on its
brand strategy and improve the mix of women and child segment.
Falling capacity utilization suggests increase in outsourcing
CY01
Installed capacity (m pairs)
Leather and other footwear
Rubber and canvas footwear
Finished Leather from hides
Total installed capacity
Production (m pairs)
Leather and other footwear
Rubber and canvas footwear
Finished Leather from hides
Total production
Capacity utilization (%)
Leather and other footwear
Rubber and canvas footwear
Finished Leather from hides
Total
20.3
42.5
1.6
64.4
10.7
20.2
0.8
31.7
52.9
47.6
48.7
49.3
CY02
20.3
42.5
1.6
64.4
11.8
24.9
0.8
37.5
58.2
58.6
47.7
58.2
CY03
20.3
42.5
1.6
64.4
10.8
21.7
0.6
33.2
53.3
51.1
39.8
51.5
CY04
20.3
42.5
1.6
64.4
9.6
20.9
0.5
31.0
47.2
49.3
33.1
48.2
CY05
20.3
42.5
1.6
64.4
10.6
20.5
0.5
31.6
52.1
48.3
30.0
49.1
CY06
20.3
42.5
1.6
64.4
9.5
16.8
0.3
26.6
46.8
39.6
20.3
41.4
CY07
20.3
42.5
1.6
64.4
9.3
16.4
0.3
25.9
45.9
38.5
16.8
40.3
CY08
20.3
42.5
1.6
64.4
9.5
15.7
0.2
25.4
46.7
36.9
14.4
39.4
CY09
20.3
42.5
1.6
64.4
13.5
12.6
0.2
26.3
66.9
29.6
11.5
40.9
CY10
20.3
42.5
1.6
64.4
14.4
8.0
0.1
22.6
71.0
18.9
8.1
35.0
CY11
20.3
42.5
1.6
64.4
13.6
6.6
0.1
20.3
67.0
15.6
6.9
31.6
Quantative details (m pairs)
Rubber/Canvas Footwear
Opening
Purchase
Production
Sales
Closing Stock
Leather & Leather Look alike Footwear
Opening
Purchase
Production
Sales
Closing Stock
Plastic Footwear
Opening
Purchase
Sales
Closing Stock
7.9
8.9
20.2
30.9
6.2
6.9
4.9
10.7
16.6
5.9
2.1
12.2
12.2
2.1
6.2
2.5
24.9
26.7
7.0
5.9
4.6
11.8
13.7
8.7
2.1
12.2
11.9
2.4
7.0
0.2
21.7
22.8
6.2
8.7
9.0
10.8
18.4
10.1
2.4
10.5
10.9
2.0
6.2
1.8
20.9
20.3
8.6
10.1
6.2
9.6
20.8
5.1
2.0
10.4
10.0
2.4
5.6
2.5
20.5
22.6
6.0
8.1
4.4
10.6
13.7
9.4
2.4
10.6
10.6
2.5
6.0
0.1
16.8
16.9
6.1
9.4
5.9
9.5
15.7
9.1
2.5
10.3
10.7
2.0
6.1
3.2
16.4
20.0
5.6
9.1
6.4
9.3
14.7
10.1
2.0
9.7
9.0
2.8
5.6
2.6
15.7
19.0
4.9
10.1
6.8
9.5
18.2
8.2
2.8
9.8
10.3
2.3
4.9
4.2
12.6
16.6
5.1
8.2
5.9
13.5
19.6
8.0
2.3
9.4
9.3
2.4
Source:
5.1
7.7
8.0
15.8
5.0
8.0
8.8
14.4
23.7
7.5
5.0
9.6
6.6
16.2
5.1
7.5
12.2
13.6
24.6
8.7
2.4
2.2
8.6
7.3
8.8
8.1
2.2
1.4
Company, MOSL
3 June 2013
15

Bata India
Segment-wise outsourcing contribution (m pairs)
CY01
Leather
Opening stock
6.9
Add :- Purchases
4.9
Less :- Closing stock
5.9
Total purchase of traded goods (Leather) 5.9
Leather sales
16.6
Outsourced (%)
35
Rubber and canvas
Opening stock
7.9
Add :- Purchases
8.9
Less :- Closing stock
6.2
Total purchase of traded goods
10.6
(rubber and canvas)
Rubber and canvas sales
30.9
Outsourced (%)
34
Plastic
Opening stock
2.1
Add :- Purchases
12.2
Less :- Closing stock
2.1
Total purchase of traded goods
12.2
Plastic sales
12.2
Outsourced (%)
100
CY02
5.9
4.6
8.7
1.9
13.7
14
6.2
2.5
7.0
1.8
26.7
7
2.1
12.2
2.4
11.9
11.9
100
CY03
8.7
9.0
10.1
7.6
18.4
41
7.0
0.2
6.2
1.0
22.8
5
2.4
10.5
2.0
10.9
10.9
100
CY04
10.1
6.2
5.1
11.2
20.8
54
6.2
1.8
8.6
-0.7
20.3
-3
2.0
10.4
2.4
10.0
10.0
100
CY05
8.1
4.4
9.4
3.1
13.7
23
5.6
2.5
6.0
2.0
22.6
9
2.4
10.6
2.5
10.6
10.6
100
CY06
9.4
5.9
9.1
6.2
15.7
40
6.0
0.1
6.1
0.1
16.9
0
2.5
10.3
2.0
10.7
10.7
100
CY07
9.1
6.4
10.1
5.4
14.7
37
6.1
3.2
5.6
3.6
20.0
18
2.0
9.7
2.8
9.0
9.0
100
CY08
10.1
6.8
8.2
8.7
18.2
48
5.6
2.6
4.9
3.3
19.0
18
2.8
9.8
2.3
10.3
10.3
100
CY09
8.2
5.9
8.0
6.0
19.6
31
4.9
4.2
5.1
4.0
16.6
24
2.3
9.4
2.4
9.3
9.3
100
Source:
CY10
8.0
8.8
7.5
9.3
23.7
39
5.1
7.7
5.0
7.7
15.8
49
CY11
7.5
12.2
8.7
11.0
24.6
45
5.0
9.6
5.1
9.5
16.2
59
2.4
2.2
8.6
7.3
2.2
1.4
8.8
8.1
8.8
8.1
100
100
Company, MOSL
Outsourcing in leather to continue going forward (m pairs)
Outsourcing in rubber, canvas to rise going forward (m pairs)
Source: Company, MOSL
3 June 2013
16

Bata India
Gross margin expansion on the cards
Betting big on women and child segment
To increase the contribution from women and children footwear segment, Bata enhanced
the display area at all stores and launched trendy designs under various brands. Thus,
women's segment contribution rose from 25% in CY08 to ~35% in CY12.
It increased focus on high-value products in the leather segment with a thrust on Hush
Puppies (growing at 40%), thereby improving its mix from 62.8% of sales in CY05 to 72%
in CY12. The mix is likely to improve to 76% of sales, thus improving margins.
Bata plans to increase the contribution from accessories (belts, ladies bag, wallets, caps)
segment from 5% in CY12 to 10% over the next few years. Accessories segment has the
highest gross margin of 60%, with 100% outsourcing model.
Company launched a programme from FY13 to modernize three factories (Patna, Batanagar
and Bangalore) over FY13-15, with a total capex of INR500m. This is likely to improve
gross margin by 500bp, according to the management.
Betting big on women and child segment
The women's category is largely unorganized in India. As per industry data, close to
86% is unorganized, compared to the organized global nature of the segment. Thus,
seizing the opportunity and with BSO's technical expertise, Bata over the last four
years improved its designs and collections. To increase the contribution from women
and child footwear segment, it enhanced the display area for the segment across all
stores and launched trendy designs under brands like Marie Claire, Hush Puppies,
North Star etc. Management stated that the designs/collections for women at its
Indian stores match those at its stores in Singapore, Thailand or the US.
Revenue break-up - CY12
Source: Company, MOSL
These measures improved the contribution of high margin women's segment from
25% in CY08 to ~35% in CY12. To increase the contribution from children's segment
from 8-10% of sales to 12-13% over the next few years, Bata recently in-licensed the
Angry Birds trade mark from Rovio, which is selling 10,000 pairs a week. The collection
is an assortment of rubber thongs, slippers range along with school shoes and socks.
Management expects the women and child segment to grow at a faster pace (25%-
30% growth) than men's footwear, thereby increasing gross margin.
3 June 2013
17

Bata India
Lower margin products discontinued...
In CY05, ~65.4% of volumes was driven by low margin rubber/canvas and plastic
footwear segment, mainly low value slippers, where lower price point was the main
driver for demand compared to brand pull. Thus, realization within rubber/canvas
and plastic stood at INR86 and INR96 respectively in CY05, compared to INR309 for
leather footwear. Company phased out the INR69/pair rubber Hawaiians', where it
incurred a small loss and shifted to the Sunshine range (INR199-399) with colorful
designs. Now, these account for better margins and are sold throughout the year,
compared to earlier monsoon sales.
Segment-wise realizations (INR/per pair)
Source: Company, MOSL
...Focus on premiumization
Post CY05, however, Bata focused to increase the share of higher value products. The
leather segment had higher margins, compared to rubber/canvas and plastic segment.
Within leather segment, thrust was on Hush Puppies (growing at 40%), thereby
improving its mix from 34.5% of total volumes and 62.8% in value in CY05 to 55.1% and
72% respectively in CY12. We expect the mix to improve to 74% of revenue in CY15E,
thus increasing gross margin.
Increase in mix of high value leather segment
Plastic segment gross margin
Source: Company, MOSL
3 June 2013
18

Bata India
Greater focus on high margin accessories segment
Over the last three years, Bata focused to increase the proportion of revenue from
accessories segment. This segment has the highest gross margin of 60%, with 100%
outsourcing model. Revenue pie for accessories (belts, ladies bag, wallets, caps)
increased from 2.7% in CY05 to 5% in CY12. We expect revenue from accessories to
increase to 7.5% by CY15E, thus driving gross margin. Management plans to increase
the share of non-footwear segment from 5% in CY12 to 10% over the next few years.
Benefit from plant modernization - icing on the cake
The technology in Bata's factories is relatively obsolete and hence it makes higher
gross margin through outsourced manufacturing, compared to in-house. Company
launched a programme from FY13 to modernize three factories over FY13-15, with a
total capex of INR500m. In the first year, it will focus on the Patna facility, Batanagar in
West Bengal (sports wear and sandals) in the second year, and lastly Bangalore (school
shoes, Hush Puppies). Under the modernization programme the company has plans
to install state of art plant and machinery and plans to improve throughput and
productivity and hence, management expects overall gross margin to improve by
500bp over the next three years.
Global support gives an edge over peers
Bata has seamless access to the benefits of technical research and innovative
programmes of BSO from the Global Footwear Services for which it paid a fee of
INR179m during CY12. Company continues to receive guidance and managerial support
for functions, including store layout, marketing, shoe line, upgradation of factories,
training of managers and guidance from senior-most managers of the group. The
technical collaboration, which expired on December 31, 2010, has been renewed for
10 years.
GST, a game changer
As per the Financial Budget 2012, the rate of excise duty has been increased to 12%.
The concessional rate of excise at 5% for footwear with retail price exceeding INR250
and up to INR750 per pair has been withdrawn and the abatement has been reduced
from 40% to 35%. The effective rate is one of the highest and puts the footwear
industry almost at par with luxury goods and products where the government expects
to curb consumption, such as tobacco. Footwear industry is paying maximum taxes
amounting to 24% (excise 8%, VAT 13% (average) and service tax and others 3%). We
believe with the introduction of Goods and Services Tax (GST) (both central and state),
overall cost will decline to 16-18% and result in significant savings.
3 June 2013
19

Bata India
Strong brand, to scale up with focused branding
Presence across price points to hedge against recessionary environment
Backed by eight decades of operation, Bata enjoys strong brand equity in India and is the
market leader with ~16% share in the organized footwear segment.
Company's ad spends as percentage of sales fell from 1.7% in CY08 to 0.8% in CY12.
However, to increase brand recall and educate consumers on the new offerings, it has
hired DDB Mudra for advertisement and marketing initiatives.
Bata is present across price points starting INR199 to INR7,000. With a presence across
price points and brands, we believe Bata is hedged against the risk of down-trading in a
recessionary environment.
Strong brand franchise and market leader
Backed by eight decades of operation, Bata enjoys strong brand equity in India and is
the market leader with ~16% share in the organized footwear segment. Due to a
business restructuring, it lost market share over the last few years. However, with the
company on a strong footing and focus on aggressive growth, we believe it is poised
to gain a significant market share, going forward.
Focus on advertisement to enhance brand pull
Bata traditionally advertised through local stores, and as it was well-known, did not
advertise nationally. Ad spends as a percentage of sales declined from 1.8% in CY08 to
0.9% in CY12. To increase brand recall and educate consumers on the new offerings,
company has hired DDB Mudra for advertisement and marketing initiatives. Bata plans
to do a prime time television, radio and print campaign in 2HCY13 and expects to
spend ~1.5-2% of sales on advertisements, going forward.
Ad spends as percentage of sales to increase (INR m)
Source: Company, MOSL
Presence across price points to hedge against recessionary environment
With the growth of premium segment, Indian footwear market, that traditionally has
been price driven, is slowly evolving into a quality and fashion conscious industry.
Bata straddles at both ends of this spectrum and in between (comfort and value-to-
premium). Among them, it covers all metros, mini metros and every town with a
population of half a million or more. Company sells footwear from price points of
INR199-7,000. We believe the presence across price points and brands hedges it against
the risk of down-trading in a recessionary environment.
3 June 2013
20

Bata India
Portfolio pyramid
Source: Company, MOSL
Improvement in inventory days to improve working capital going forward
Bata over the years has been focusing to improve its working capital days, especially
on the inventory front. It had increased stores timings on weekdays and also on
Sundays, thereby leading to an increase in footfalls. Currently, company has a well
organized logistics team at Gurgaon which controls the distribution process and ensures
that footwear of the right size is available at the right time and place across the
country. Due to these, inventory days improved from 266 in CY08 to 179 in CY12.
To support and deliver growth projections, company is strengthening its supply chain
through restructuring and consolidation of the regional distribution centre space,
introduction of modern infrastructure and new technologies, reduction in product
transit lead-times and faster and more frequent deliveries to stores. We expect an
improvement in the distribution process through greater use of technology inputs to
track the changes in consumer tastes, preferences and shopping trends. Bata has
already restructured five regional distribution centers (RDCs) and expects benefits of
the same going forward, thus leading to an improvement in inventory days by
additional 15 days.
Cashing out of real estate to focus on core business
Bata had a cumulative 309 acres of land in Batanagar, Kolkata. It transferred the excess
262 acres to a special purpose vehicle (SPV) called Riverbank Developers Pvt Ltd (RDPL)
to build an integrated township. SPV was owned equally by Bata and Calcutta
Metropolitan Group (CMGL). In 1QCY10, company restructured the agreements with
revised terms for development of the modern integrated township at Batanagar to
ensure faster development of the project and maintain its focus only on core business.
The revision was completed in 1QCY11 and as part of the restructuring, Bata sold its
investment and rights in the joint development agreement and made a gain of
INR1.09b. Also, it would receive 0.324m sq ft (~160 flats) from the JV amounting to
~INR1.3-1.5b. We have not factored any gain from real estate in our target price.
3 June 2013
21

Bata India
Indian footwear industry
Per capita consumption of footwear in India on the rise
According to Assocham, the Indian footwear industry is pegged at INR240b and is expected
to reach ~INR387b by 2015, marking a CAGR of 17.3% over CY12-15.
While Indian footwear industry is dominated by men's segment comprising of 55%, women
at 30% and child at 15% respectively, globally women's segment comprises of 60% of the
overall market.
Women's footwear market in Indian remains mostly untapped, with nearly 80-90% sales
in the unorganized market, thus providing huge opportunity for organized players like
Bata.
The men's segment is growing at 10-12%, while women and child segments are increasing
at 20% per annum.
According to Assocham, the Indian footwear industry is pegged at INR240b and is
expected to reach ~INR387b by 2015, marking a CAGR of 17.3% over CY12-15. Online
shoe shopping is a significant segment that is fast emerging and accounts for ~8% of
the overall industry and is expected to reach ~20% by 2015. Globally, women's segment
comprises of 60% of the overall footwear market, and the Indian footwear industry is
dominated by men's segment comprising of 55%, women at 30% and child at 15%
respectively. Women's footwear market in Indian remains mostly untapped with 80-
90% sales being in the unorganized market, with a focus on colors and designs than on
comfort and durability.
Women's footwear segment growing at a faster rate than men
The men's segment is growing at 10-12%, while women and child segments are growing
at 20% per annum. Thus, share of men's footwear is likely to decline to 48% and
women and child footwear segments' contribution is likely to increase to 35% and
17% respectively. Casuals comprise of 60% of the footwear market, with the balance
contributed by sports, formal and semi formal footwear.
Average annual spend on men's footwear higher than women
As per Images-AC Neilson study, the average annual spending on men's footwear is
~INR2,300 (with 29% of the household spend on an average or below INR1,000 and
another 36% of the purchases are in the range of INR1,001-2,000). Average annual
spending on women footwear is ~INR1,300 (with more than 50% of purchases at or
below INR1,000 and another 40% of purchases in the range of INR1,001-2,000).
Indian footwear market is categorized in Economy - prices below INR750 (USD17),
Value - prices between INR750 and INR1,500 (USD17-34), Premium - prices between
INR1,500 and INR3,000 (USD34-70), Super Premium - prices more than INR3,000 (USD70
and above). The share of Economy and Value segments up to INR1,500 (USD34) is
~INR230b (USD5.1b).
3 June 2013
22

Bata India
Per capita consumption of footwear in India on the rise
India is the world's second largest footwear producing country, second to China and
the third largest market. Even though the per capita shoe consumption in India has
risen from 1.4 pairs a year in 2004 to 2.5 pairs per year in 2012, it is still much below the
average per capita pair consumption of 5.5 in developed countries. With increasing
consumption, growing popularity of online shopping, higher affordability and rising
income level, per capita footwear consumption is expected to rise to 3.5 from the
present 2.5 by FY15E.
Driven by larger penetration to Tier II and III cities and a growing rural market, various
premium footwear brands are foraying into India's non-metro markets that hold
growth potential and account for ~55% of the overall footwear industry. With changing
lifestyles and increasing affluence, domestic demand for footwear in Tier II and III is
expected to grow at a faster pace than urban India.
In the non-leather footwear segment, there is huge demand for slippers as it is cheap,
convenient and suits the needs of rural consumer as it can be used as multi purpose
footwear. Rural India accounts for ~60% of slippers manufactured in the Indian footwear
market.
Organized v/s unorganized footwear
Total retail market size
Note: Assumed currency rate at INR50/USD for 2010 and
INR55/USD for 2012 and 2015.
Source: Assocham, MOSL
Share of verticals in overall and organized retail
Verticals
Food and grocery
Apparel
Consumer durables, mobile and IT
home décor and furnishing
beauty , personal and healthcare
Pharmacy
Jewellery, watches and eye care
Footwear
Books and music
Total
Total retail FY12
Market size
share
(INR b)
(%)
16,342
66.2
2,727
11.1
1,358
5.5
1,014
4.1
1,238
5.0
298
1.2
940
3.8
605
2.5
149
0.6
24,671
Organized retail FY12
Market size
share
(INR b)
(%)
390
2.4
563
20.6
320
23.6
60
5.9
160
12.9
30
10.1
130
13.8
98
16.2
16
10.7
1,767
Source: CSO, NSSO, Assocham
23
3 June 2013

Bata India
Organized footwear retailing, comprises 16% of the industry, is growing at double the
industry growth rate on account of : 1) growing presence of organized players in Tier
I and II cities where consumption power remains high, 2) expanding and continuously
growing women and child sections (women at 40% and child 10% of industry
respectively). With rising urbanization and better education levels among women,
there has been a marked increase in women workforce, thus creating demand for
branded footwear, 3) rising online shopping (8% of industry at INR20b) among 20-35
age group. Market leaders Bata and Relaxo are even looking at opening dedicated
stores for women/children in the future. Bata's e-commerce business is less than 1%
of its total revenue, which it intends to grow faster. Company recently tied up with
online portals like Jabong, Snapdeal, India Times, Rediff, Junglee etc to attract potential
customers online.
Segment-wise breakup of footwear industry
Geographical-wise contribution to footwear industry
Source: Company, MOSL
Transforming from manual to automated manufacturing systems
The footwear sector has matured from the level of manual manufacturing methods
to automated systems. Many units are equipped with in-house design studios
incorporating state-of-the-art CAD systems having 3D shoe design packages that are
intuitive and easy to use. Many Indian factories have also acquired the ISO 9000, ISO
14000 and SA 8000 certifications.
3 June 2013
24

Bata India
Global footwear industry
Asia continues to be the powerhouse of footwear industry
The global footwear market was worth ~USD182.2b in 2011 and is expected to reach
USD223.6b in 2015, clocking a CAGR of 5% from 2011 to 2015.
Worldwide production of footwear reached 21b pairs in 2011, with India's share pegged
~13%.
Asia pacific region holds ~42% of overall market share in value terms.
The worldwide production of footwear reached 21b pairs in 2011, with India's share
pegged ~13%. Asia continues to be the powerhouse of footwear industry, with an
overall share close to 90%. Seven Asian countries figure among the world's top 10
producers, a list in which China's leadership is undisputable. Brazil is the only non-
Asian country among the top five producers. China is the world's largest market for
footwear in terms of quantity, closely followed by the US and India. Low cost of
production, abundant availability of raw material, ever evolving retail ecosystem,
buying patterns and a huge consumption market are certain basic features that set
apart the Indian footwear market. According to Assocham, the global footwear market
was worth ~USD182.2b in 2011 and is expected to reach USD223.6b in 2015 (USD211.5b
in 2018), clocking a CAGR of 5% from 2011 to 2015. Asia pacific region holds ~42% of the
overall market share in value terms.
Global footwear market share breakup production-wise
Global footwear market share breakup consumption-wise
Source: World footwear year book 2012
3 June 2013
25

Bata India
World share percentage of top 10 countries in production
of footwear
World share percentage of top 10 countries in consumption of
footwear
Source: World footwear yearbook 2102, MOSL
3 June 2013
26

Bata India
Financial outlook
Top line to post 17% CAGR over CY12-15E
We estimate Bata's sales will increase from ~INR18.4b in CY12 to INR29.6b by CY15E, a
CAGR of 17%, primarily driven by strong growth in women, children and accessories
segment. Also, retail (contributes 85% to revenue) has been posting a CAGR of 20%
over CY06-12 and is likely to grow at 20% over CY13-15E primarily driven by 100 new
large format stores addition.
Revenue growth trend (INR m)
Source: Company, MOSL
Margins to improve going forward
We assume Bata's EBITDA will increase from ~INR2.7b in CY12 to INR4.74b by CY15E, a
CAGR of 20%. We expect margins to improve from 14.9% in CY12 to 16% in CY15E
primarily driven by an increase in value-added products in favor of high-end leather
products, increased share of higher margin women, child and accessories segment,
increase in outsourcing as a percentage of revenue and modernization of plants.
EBITDA margins set to improve going forward (INR m)
Source: Company, MOSL
PAT CAGR of 22.5% over CY12-15E
Given top line of 17% CAGR over CY12-15E driven by 100bp margin expansion, we
expect PAT to post 22.5% CAGR over CY12-15E. We also expect depreciation and interest
to remain subdued as the company focuses on outsourcing model and generates free
cash flow of INR5.7b over CY13-15E.
3 June 2013
27

Bata India
PAT growth to be higher driven by better margins (INR m)
Source: Company, MOSL
Bata India: 1-year going forward P/E
Bata India: 1-year going forward P/BV
Source: Company, MOSL
3 June 2013
28

Bata India
Valuation and view
We estimate Bata's revenue would increase by 17% and net profit by 22.5% over CY13-
15E. Given the strong brand with 16% market share in the organized footwear market,
strong distribution network, focus on aggressive growth, improvement in margin
profile, transformation into fashion footwear retailer, we believe Bata has strong
earnings and growth visibility. It has a strong balance sheet, with cash of INR1.9b and
healthy return ratios of 27.1% RoE and 39.3% ROCE in CY12. With limited capex of
INR2b over CY13-15E, we believe the company will generate free cash flow in excess
of INR5.9b over CY13-15E. All these factors make a strong case for re- rating. At CMP of
INR810, Bata trades at a PE of 26.4x/20.8x/16.5x CY13E/14E/15E EPS. We value the stock
at 25x CY14E EPS and arrive at a target price of INR975, with a
Buy
rating.
Key assumptions
Sales (Volumes)
Leather and other footwear
Rubber and canvas footwear
Plastic footwear
Total
Volume Growth (%)
Leather and other footwear
Rubber and canvas footwear
Plastic footwear
Total
Realization (INR/Pair)
Leather and other footwear
Rubber and canvas footwear
Plastic footwear
Average
Realization Growth (%)
Leather and other footwear
Rubber and canvas footwear
Plastic footwear
Average
Gross sales (INR m)
Leather and other footwear
Rubber and canvas footwear
Plastic footwear
Accessories, Garments & Others
Sale -Sundry Store/R.M./Scrap
Income from Repair Shop/Chiro.
Total gross sales
Growth (%)
Leather and other footwear
Rubber and canvas footwear
Plastic footwear
Accessories,Garments & Others
Total top line growth
CY06
15.7
16.9
10.7
43.3
-2.7
-16.0
1.5
-7.5
318
103
91
178
2.8
19.0
-1.4
8.1
4,992
1,736
974
214
16
16
7,948
0.0
0.0
0.0
0.0
0.0
CY07
14.7
20.0
9.0
43.7
-6.4
18.6
-16.4
0.9
363
119
100
197
14.4
15.5
10.3
11.0
5,345
2,378
897
253
20
14
8,908
7.1
37.0
-7.8
18.5
12.1
CY08
18.2
19.0
10.3
47.5
23.6
-5.0
14.7
8.7
355
124
100
207
-2.3
4.5
0.0
5.1
6,454
2,360
1,029
233
34
13
10,123
20.8
-0.8
14.7
-7.8
13.6
CY09
19.6
16.6
9.3
45.5
7.7
-12.6
-9.4
-4.1
382
138
108
237
7.7
11.5
7.7
14.3
7,486
2,300
1,004
313
15
9
11,126
16.0
-2.6
-2.5
34.1
9.9
CY10
23.7
15.8
8.8
48.3
20.9
-5.1
-5.6
6.0
377
153
116
256
-1.3
10.3
7.9
8.1
8,933
2,406
1,023
393
13
2
12,771
19.3
4.6
1.9
25.7
14.8
CY11
24.6
16.2
8.1
48.8
3.6
2.5
-8.2
1.1
444
186
138
308
17.7
22.0
19.0
20.2
10,891
3,008
1,117
619
11
0
15,646
21.9
25.0
9.2
57.4
22.5
CY12
27.0
15.0
7.0
49.0
10.0
-7.2
-13.3
0.4
500
218
148
363
12.7
17.1
7.0
18.1
13,500
3,270
1,036
938
14
1
18,759
24.0
8.7
-7.3
51.5
19.9
CY13E
28.9
14.3
6.3
49.4
7.0
-5.0
-10.0
0.9
550
229
157
407
10.0
5.0
6.0
12.1
15,890
3,262
988
1,313
18
1
21,471
17.7
-0.2
-4.6
40.0
14.5
CY14E
31.6
13.9
6.0
51.5
9.5
-2.5
-5.0
4.2
605
252
166
459
10.0
10.0
6.0
12.6
19,139
3,498
995
1,773
22
1
25,428
20.5
7.3
0.7
35.0
18.4
CY15E
34.5
13.5
5.8
53.9
9.0
-2.5
-2.5
4.6
666
277
176
515
10.0
10.0
6.0
12.2
22,948
3,752
1,029
2,304
28
1
30,061
19.9
7.3
3.3
30.0
18.2
3 June 2013
29

Bata India
Key risks
Volatility in raw material prices
Hide skin, leather and chemicals are key inputs for footwear and play an important
role in its pricing. Any sharp increase in raw material prices might affect margins in
the short term as it is passed on with a lag period of two to three months.
Availability of skilled labor
Footwear industry is labor-intensive and involves manual work to carry out stitching,
fitting, finishing, stamping etc. The organized footwear industry is growing at a robust
20% and may fall short of skilled labor with more than 30% of the workforce comprising
of women.
Slowdown in economy
Any significant slowdown in the economy is likely to affect Bata's growth prospects.
But in case of any down-trading in the industry, it should not materially affect due to
its presence across price points.
Increased competitive intensity
The Indian organized footwear industry faces stiff competition from unorganized
players, especially in the mass segment. There will also be competition from countries
like China, Indonesia, Thailand, Vietnam and Brazil as products are more competitive
compared with India.
Increase in lease rentals
Lease rentals form 9% of the company's revenue and have posted a CAGR of 30% over
CY05-10. Within the retail vertical, the main distribution channel, steep escalation in
lease rentals can erode margins and also deter new store roll-outs, thus affecting
revenue growth and operating leverage.
Sparx litigation
BSO owns the Sparx footwear brand, which is available in 27 countries. Bata registered
the brand in India in 1978 but never used it. Relaxo Footwear started using the Sparx
brand since 2004-05 and since then has been making continued investments in it. Of
late, Bata started to sell footwear under the Sparx brand at its outlets. Relaxo moved
court in 2009 on Bata's rights on Sparx and the outcome is still pending. Sparx brand's
contribution to revenue is very low for Bata and hence the impact would be
insignificant if the court's verdict goes in favor of Relaxo.
3 June 2013
30

Bata India
Management details
Mr Uday Khanna - Chairman & Independent Director
Mr Uday Khanna is currently the President of the Bombay Chamber of Commerce &
Industry and non-executive Chairman of Lafarge India and Bata India. He also serves
on the boards of Castrol India Ltd, Pfizer Ltd and Coromandel International Ltd. Mr
Khanna was the Managing Director & CEO of Lafarge India from July 1, 2005 to July
2011.
Mr Rajeev Gopalakrishnan - Managing Director
He joined Bata Shoe Organization (BSO) in 1990 and has since been associated till
date. Mr Gopalakrishnan has an experience of 22 years in retail/wholesale and running
company operations and has been the Director - Wholesale Channels, Sales &
Marketing with Bata International - Canada and Vice-President of Bata India in Retail
Operations and Wholesale Division. Prior to that he was working as the Managing
Director of Bata Bangladesh for a year and before that as Managing Director for Bata
Thailand for three years when he turned around the company to a healthy position.
Mr Ranjit Mathur - Director Finance
Mr Ranjit Mathur is a finance professional with over 19 years of experience. Most of
his experience has been with Unilever, where the last position he held was of Category
Finance Director for Foods in Asia and Africa based out of South Africa. Before joining
Bata India, Mr Mathur was the Head of Finance at Dow Corning in India.
Mr Jack G. N. Clemons - Non-Executive Director
Mr Jack Clemons is the Group Chief Executive Officer (CEO) of Bata Shoe Organization
(BSO). Mr Clemons joined Bata in 2006 and served for a number of years as Group
Chief Financial Officer (CFO) and President of Bata brands. Mr Clemons has lived and
worked in Europe, Asia, North America and Australia and currently teaches strategic
finance and corporate governance at various European Business Schools, including
EPFL and HEC Geneva.
Mr Jorge Carbajal - Non-Executive Director
Mr Jorge Carbajal is the President of Bata Emerging Markets (BEM), responsible for
the overall business operations in Asia, Africa and Latin America regions. He has held
various senior positions in different Bata companies in Latin America starting with
Chief Finance Officer and Group Finance Officer (Mexico, Bolivia & Ecuador) and in
Asia Pacific regions (Sri Lanka and Malaysia as Managing Director).
3 June 2013
31

Bata India
Financials and Valuation
Consolidated - Income Statement
Y/E December
CY11
Net Sales
15,422
Change (%)
22.5
Total Expenditure
13,040
EBITDA
2,382
Margin (%)
15.4
Depreciation
412
EBIT
1,969
Int. and Finance Charges
103
Other Income - Rec.
1,654
PBT bef. EO Exp.
3,520
PBT after EO Exp.
3,520
Current Tax
967
Deferred Tax
-31
Tax Rate (%)
26.6
Reported PAT
2,584
PAT Adj for EO items
2,584
Change (%)
189.2
Net Profit
2,584
No of fully diluted sh. (Mn - FV: INR10) 64.3
Adj EPS
40.2
Equity Dividend
386
Corporate Dividend Tax
62
Corp Div Tax (%)
16.0
Dividend per Share
6
Total Div Payout (INR m)
447.1
Payout (%)
17.3
CY12
18,425
19.5
15,675
2,750
14.9
514
2,236
10
301
2,526
2,526
907
-101
31.9
1,721
1,721
-33.4
1,721
64.3
26.8
386
62
16.0
6
447.1
26.0
CY13E
21,149
14.8
18,040
3,109
14.7
571
2,538
8
376
2,905
2,905
930
0
32.0
1,976
1,976
14.8
1,976
64.3
30.7
450
72
16.0
7
521.8
26.4
CY14E
25,047
18.4
21,207
3,840
15.3
619
3,221
7
470
3,684
3,684
1,179
0
32.0
2,505
2,505
26.8
2,505
64.3
39.0
514
82
16.0
8
596.4
23.8
(INR Million)
CY15E
29,611
18.2
24,873
4,738
16.0
672
4,066
5
587
4,648
4,648
1,487
0
32.0
3,160
3,160
26.2
3,160
64.3
49.2
578
93
16.0
9
670.9
21.2
Consolidated - Income Statement
Y/E December
Equity Share Capital
Total Reserves
Net Worth
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
CY11
643
5,083
5,725
194
5,919
5,028
2,817
2,211
81
CY12
643
6,348
6,990
0
6,990
5,636
3,202
2,434
181
8,236
4,621
449
1,877
1,289
4,305
3,507
798
3,931
6,990
CY13E
643
7,802
8,444
0
8,444
6,136
3,773
2,363
127
9,857
5,022
579
2,712
1,543
4,346
3,780
566
5,510
8,444
CY14E
643
9,710
10,353
0
10,353
6,886
4,392
2,495
150
12,199
5,714
618
4,021
1,847
4,935
4,285
650
7,264
10,353
(INR Million)
CY15E
643
12,200
12,843
0
12,843
7,636
5,063
2,573
178
15,421
6,531
730
5,775
2,385
5,773
5,038
735
9,648
12,843
32
Curr. Assets, Loans&Adv.
7,203
Inventory
3,913
Account Receivables
314
Cash and Bank Balance
1,240
Loans and Advances
1,736
Curr. Liability & Prov.
3,917
Account Payables
2,588
Provisions
1,329
Net Current Assets
3,285
Appl. of Funds
5,919
E: MOSL Estimates; * Adjusted for treasury stocks
3 June 2013

Bata India
Financials and Valuation
Ratios
Y/E December
Basic (INR) *
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x) *
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Leverage Ratio (x)
Current Ratio
Debt/Equity
* Adjusted for treasury stocks
CY11
40.2
46.6
89.1
6.0
17.3
CY12
26.8
34.8
108.8
6.0
26.0
CY13E
30.7
39.6
131.4
7.0
26.4
CY14E
39.0
48.6
161.1
8.0
23.8
CY15E
49.2
59.6
199.8
9.0
21.2
30.3
23.3
7.5
2.7
18.3
0.7
26.4
20.5
6.2
2.3
15.9
0.9
20.8
16.7
5.0
1.9
12.5
1.0
16.5
13.6
4.1
1.6
9.8
1.1
53.5
68.3
27.1
39.3
25.6
37.8
26.7
39.3
27.3
40.1
2.6
92.6
7
2.6
91.5
9
2.5
86.7
10
2.4
83.3
9
2.3
80.5
9
1.8
0.0
1.9
0.0
2.3
0.0
2.5
0.0
2.7
0.0
Consolidated - Cash Flow Statement
Y/E December
Net Profit / (Loss) Before Tax
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
EO Expense
CF from Operating incl EO
(inc)/dec in FA
(Pur)/Sale of Investments
Others
CF from Investments
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
3 June 2013
CY11
3,525
412
16
-908
-1,421
1,624
-1,427
197
-764
200
615
51
-14
-256
-163
-398
-149
1,389
1,239
CY12
2,526
514
10
-788
-441
1,822
23
1,845
-833
-540
91
-1,282
-10
-446
531
75
637
1,240
1,877
CY13E
2,905
571
8
-930
-744
1,811
0
1,811
-446
0
0
-446
-8
-522
0
-530
836
1,877
2,712
(INR Million)
CY14E
3,684
619
7
-1,179
-445
2,685
0
2,685
-773
0
0
-773
-7
-596
0
-603
1,309
2,712
4,021
CY15E
4,648
672
5
-1,487
-630
3,208
0
3,208
-777
0
0
-777
-5
-671
0
-676
1,754
4,021
5,775
33

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