BATAINDIA — earnings call

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Prepared remarks

Moderator · Conference Operator

MS. NIKITA JAIN – BATLIVALA & KARANI SECURITIES INDIA PRIVATE LIMITED Bata India Limited May 19, 2023

Thank you very much.

We have a first question from the line of Bhargav Buddhadev from Kotak Mutual Fund.

Please go ahead.

Bhargav Buddhadev

Good evening, team, and thank you for the opportunity.

Sir, Bata has been sort of working a lot on premiumizing its portfolio.

So just wanted to know your numbers in terms of what percentage of portfolio would now be below INR500 MRP, and what was it pre-COVID, and what is your sense on this category going forward in terms of outlook?

Gunjan Shah

Okay.

I don't have it handy.

I did mention some numbers last time.

Just let me see if the team is able to rustle up something quickly.

But broadly, I would say that below INR1,000, we were at about 50%-50% pre-COVID, and now we would be in the range of about 35%-40% below INR1,000.

That number, we handily, I do track it because we also did a tracking because of the entire GST and opening up price points back again wherever we could to get volume growth going back in.

Below INR500, my sense is out of that 35%-40%, we should be about half of it, so about 20%.

Both of them obviously would have declined with the premiumization, which is both mix as well as price that would have taken up the mix on the higher side.

Bhargav Buddhadev

Sure.

Thank you.

In terms of FOFO, our contribution to overall store count is now close to 20%.

Is it possible to highlight what could be the revenue contribution from this segment, and what would be the EBITDA margin in this category?

Gunjan Shah

You are talking of the franchise stores?

Bata India Limited May 19, 2023

Bhargav Buddhadev

Yes, sir.

Gunjan Shah

Yes.

So, while we don't get splits on the business lines, but ballpark, I would say that it is about 600 points to 700 points accretive from a profitability perspective at EBITDA or channel operating margin level, which takes care of all the nuances and only allocation costs which are neutral across business lines.

So, it is at almost significant accretiveness to our overall business profitability.

Bhargav Buddhadev

Because we are then seeing that contribution coming in as of date, so possibly as this sort of sector starts contributing meaningfully, will we see that also getting reflected in your EBITDA numbers?

Gunjan Shah

So, it should.

See, the whole objective of driving franchise expansion is on three fronts.

One is that it allows me to open up stores in places where the brand is obviously demanded for.

But however, the scale does not justify me opening up a company on store.

The second one is basically it is, as I said, it is accretive from a profitable perspective.

Your contribution that I get at an EBIT level per pair is higher than what I get from a COCO store.

And the third one is basically in terms of capital efficiency.

It allows me to flex expansion much faster without fixing up or deploying too much of cash.

So, on all these three fronts, we will see, I mean, the whole objective of doing this is to make sure and step-by-step it keeps on contributing meaningfully to our overall growth as well as profitability.

So, it gives me access to consumers as well as done it in a far more capital efficient and profitable way.

Bhargav Buddhadev

And so, my last question is, Bata has appointed Badri Beriwal as a Chief Strategy Officer who has come from Britannia.

Is it possible to share in which particular vertical will he be spending more time like COCO, distribution, FOFO, SIS?

Gunjan Shah

So, it is, the designation is Chief Strategy as well as Business Development Officer.

And therefore, driving the strategy from a consumer point of view across the organization as well as making sure that, new initiatives as well as alternative growth engines, etcetera, are given the right kind of leadership as well as direction, both from a strategy as well as the execution perspective.

Bhargav Buddhadev

So, this is a new position, right, in the history of the company or was this position already there?

Gunjan Shah

Yes.

Not there in the recent past.

Bhargav Buddhadev

Okay.

So, thank you for your thoughts and all the very best.

Gunjan Shah

Thank you.

Moderator · Conference Operator

Thank you.

We have a next question from the line of Nihal Mahesh Jham from Nuvama.

Please go ahead.

Nihal Jham

Yes, sir.

Thank you so much and good evening to the management.

Sir, three questions from my side.

The first was that could you discuss the category-wise and here by category I would say Bata India Limited May 19, 2023 bifurcated into formal, casual, school-wear and also maybe the [new sports 0:3:27] category where you have given some data, that how has the recovery versus pre-COVID and not versus last year?

Gunjan Shah

Okay.

Basically, I would say that, see, overall we would have recorded about, for the quarter gone by, about 15% growth over pre-COVID.

Now, in that, I would say sneakers, the casual as well as would have outstripped the rest of the category.

So, comfort slash casual, sneakers and the premium segments would have outstripped while I think most of the categories, even school, would have exceeded the pre-COVID levels.

But I think these are the categories that would have grown faster than the ad par growth.

Nihal Jham

Understood.

Because if I say volumes for this year are similar to what we did in FY ‘20, which are these categories?

Is it mainly formula which is seen of all versus pre-COVID or the school, which are the categories that have lost share internally in our analysis?

Gunjan Shah

I am, I didn't get your question clearly.

You asked which categories have grown, have done better versus the others versus pre-COVID?

Nihal Jham

Which you highlighted were basically the casual categories and sneakers.

So, I was just trying to ask the other side that which are the categories in which is incrementally seen a reduction in a share.

I'm assuming formula, but anything else that you want to highlight?

Gunjan Shah

So, I would say the ones that are at the lower price point.

So, I would say, as I said, all of them, even school would have exceeded pre-COVID, but they would not have grown at 15%.

More importantly, I think plastic as well as volume category, which is facing some amount of demand pressure are the ones which have been relatively a little over versus pre-COVID.

I mean, relatively versus 15%.

Nihal Jham

Understood.

And just a follow-up here that is this driven by our own aspiration that maybe the inventory that we are keeping now is more premium or this is more related to the way the market has grown?

Gunjan Shah

It's a combination of both.

So, premiumization is a conscious strategy, but that does not exclude ourselves from a significant amount of business that we do from the below INR1,000 price point, which I answered to someone else.

And we would like that to grow and through our multi-brand distribution business, etcetera, we will see that growth happening.

I think the building blocks are pretty much there.

And there's no reason why we should not see that demand recover as the inflation stabilizes.

Nihal Jham

So, is it possible in the future the share becomes 50-50 again from the 40-60 it currently is?

Gunjan Shah

Sorry, I didn't get that question at all.

Nihal Jham

I'm so sorry.

I was asking that currently the share of INR less than INR1,000 and, plus INR1,000 as you highlighted was around 40%-60%, 40% and 60%, which was 50%-50% pre-COVID.

So, do you see the case that in the future the share of less than INR1,000 and, plus INR1,000 becomes 50%-50% again?

Bata India Limited May 19, 2023

Gunjan Shah

It's a little difficult to predict this.

As I said, there are two levers at play.

There will be premiumization across segments.

Now, which segment relatively is doing better at various points in time will determine this mix.

But right now, we see the premium segments relatively doing much better.

So, that's driving the momentum of growth.

But you will also have times wherein obviously the bottom of the pyramid, etcetera, will start firing in.

And we will see that also grow.

But I think over a longish period of time, I think by last year we would have seen a significant impact of inflation, therefore an acute impact on less than INR1,000.

That should normalize a little.

But the longer term trajectory would be that I don't see that going back to 50%-50%.

Nihal Jham

Point taken.

The second question was, is it possible to share the channel mix for the full year between wholesale, online, and COCO franchise?

Gunjan Shah

So, basically COCO is about 70%.

You have franchise which is at about 8%.

You will have multi-brand distribution at about 14% and e-commerce at about 10% or so.

Nihal Jham

Last question from a side.

You did highlight investments in technology and marketing as a part of the press release.

Any sense or quantification that you expect how much of the spend could be on a ballpark basis if you budgeted this out?

Gunjan Shah

Yes.

So, the IT technology-based capex that we will have outlay for this year will be in the range of about INR30 crores.

And the marketing expenditure, we will look at it continuously going up to basically from 2.6%, 2.7% levels to about 3% over a period of time.

Nihal Jham

Thank you so much, Gunjan.

And wish you all the best.

Gunjan Shah

Thank you.

Moderator · Conference Operator

Thank you.

We have our next question from the line of Tejash Shah from Spark Capital.

Please go ahead.

Tejash Shah

Hi.

Thanks for the opportunity.

So, we have made a lot of interventions on distribution, premiumization, and even brand positioning in the last 24 months to 36 months.

Now, when I see distribution expansion, CAGR, which is 7% of last four years versus our revenue growth of 4%, the output actually looks a bit underwhelming despite putting so much effort on the premiumization and distribution expansion side.

So, is it that the underlying demand is so underwhelming or have we lost market share versus pre-COVID period?

Gunjan Shah

So, there are a couple of factors.

I think one is basically that as we go about expanding, some of these, so let's say the franchise stores in general are at about 0.5x of our COCO stores on an average, 0.4x to 0.5x.

So, the turnover per store would be lower because you are entering and penetrating into cohorts that are relatively smaller, and which is why we want the franchise model to get us access there.

So, it's not an apple-to-apple.

The second piece that would be there is basically in terms of multi-brand outlets.

I think there is some kind of a demand pressure that has been seen over the last year on those price points which are at the mass end.

Bata India Limited May 19, 2023 And that has obviously created some of the pressure.

As I mentioned, we are looking forward to the inflation stabilizing and consumers adjusting to it.

I'm sure the kind of mix that we have in the building blocks, that should provide payback.

So, I think both of these combined together is what is providing that phenomenon.

Each of these element-wise, they have pretty good, I would say, same-store growth that we are carrying.

Tejash Shah

Sure.

And so, if you can comment on market share and any specific segment where we would have gained market share or we are still under-indexed?

Moderator · Conference Operator

I request you to come back in the queue, Mr. Shah, as we have other participants.

Thank you.

We have our next question from the line of Gaurav Jogani from Axis Capital.

Please go ahead.

Gaurav Jogani

Thank you for the opportunity, sir.

So, my first question is with regards to the investment that you are doing on the technology and also on the other ventures like marketing, etcetera.

So, do you think that these are right now suppressing the margin?

So, my question is with regards to, you know, you have been making a lot of investments in the technology part as well as on the marketing front.

Bata India Limited May 19, 2023 But at the same time, you know, your franchisee is giving you a better margin perspective.

So, do you think it is because of these investments that your cost savings initiatives as well as the incremental margins from franchises are getting masked right now?

And once these initiatives are over, you could see a rebound in the margin profile?

Moderator · Conference Operator

We have our next question from the line of Nitin Shakdher from Green Capital's Single Family Office.

Please go ahead.

We have our next question from the line of Girish Pai from Nirmal Bang Equities.

Please go ahead.

Girish Pai

Yes, thanks for the opportunity.

Gunjan, if you look at the EBITDA margin in FY ‘23 and compare with FY ‘20, there is almost like a 430 basis point dip.

A lot of that is coming from other expenses being higher by about 500 basis points.

Can you give some guidance of how that number is going to look like?

Other expenses?

Were there any one-offs in FY ‘23 which are not going to be repeated going forward?

Moderator · Conference Operator

Thank you.

We have our next question from the line of Aliasgar Shakir from Motilal Oswal.

Please go ahead.

Aliasgar Shakir

Thank you so much for the opportunity.

I just wanted some color on the revenue profile and revenue growth.

So, when I see your store addition over the pre-COVID numbers around 20%, and you would have taken some price increase plus premiumization combined would have helped us somewhere about 10%.

So, against this 30% revenue growth expectation probably that we were building, I mean, your growth, if I compare pre-COVID is somewhere about 13%.

Now, I take your point, you mentioned that franchisee is about 0.5.

And we've seen about close to 250 or franchisee is about 10% to 12%.

So, maybe 6% impact would have come because of this.

And, but I'm just trying to get a sense that this along with, you also mentioned that lower price products are seeing some impact.

Still, the gap seems, reasonably high.

Bata India Limited May 19, 2023 So, against the 30, let's say if I take 6 impact because of franchisee, maybe, you know, give or take 5 impact because of the low price product not doing well.

Still, the gap seems reasonably high.

So, what is it, you know, that has seen a relatively far lower revenue growth than what, probably you were anticipating?

Moderator · Conference Operator

Thank you.

We have our next question from the line of Tejas Shah from Spark Capital.

Please go ahead.

Tejas Shah

Hi, sir.

First of all, I wanted to apologize on that inventory calculation.

It was wrong at my end.

So, you were right.

It was 2% versus 4%.

So, first of all, I wanted to register that.

So, my question is on the franchisee part.

So, we have done a very good job on expanding the network.

And usually, if the franchise economics works out, then the same franchisee partner starts expanding the network.

So, just wanted to know, are we seeing consolidation of franchisee owners who are expanding more franchisees?

Moderator · Conference Operator

Ladies and gentlemen, we request you to restrict your question to one at a time.

We have our next question from the line of Ankit Kedia from Philip Capital.

Please go ahead.

Ankit Kedia

Hi, Ankit.

Hi, sir.

A couple of calls back, you had mentioned your aspirations to do contract manufacturing for global data.

In your next leg of growth, you haven't spoken of that.

Has that project been shelved or that is a separate thing which you will call out number-line?

Moderator · Conference Operator

I request you to come back in the queue, sir.

Thank you.

Ladies and gentlemen, you are requested to restrict your question to only one at a time.

We have a next question from the line of Akhil Parekh from Centrum Broking.

Please ask your one question.

Akhil Parekh

Thanks for the opportunity.

The question is on the employee expenses front.

If I look at it as a percentage of sales, it is broadly in line with FY’20 numbers.

And this is despite some of the activities…

Moderator · Conference Operator

Hello.

Your voice is breaking.

There is a lot of disturbance.

Thank you.

We have our next question from the line of Gaurav Jogani from Axis Capital.

Please go ahead.

Gaurav Jogani

Thank you for the opportunity again, sir.

So, my question is with regards to the margins if you see in Q4. So, you know, we had done a gross margin of around 58.5%.

And given the fact that, you know, our franchisee contribution has been increasing over a period, shouldn't the gross margin should go down whereas the impact could be felt at the EBITDA level?

But shouldn't the gross margin theoretically be down?

And how do you see this sustaining ahead?

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, that was the last question for today.

I would now like to hand the conference over to Mr. Nitin Bagaria for closing comments.

Over to you, sir.

Nitin Bagaria

Thank you, everyone, for taking your time and joining us.

Looking forward to interacting with you again.

In case there are any further queries, you can direct them to us.

We would be happy to answer them.

Thanks a lot.

Thanks, everyone.

Moderator · Conference Operator

Thank you.

On behalf of Batlivala & Karani Securities, that concludes this conference.

Thank you for joining us and you may now disconnect your lines.

Disclaimer

While we have made our best attempt to prepare a verbatim transcript of the proceedings of the Earnings’ Call, however, this may not be a word-to-word reproduction.