BATAINDIA — earnings call

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Prepared remarks

Moderator · Conference Operator

MR. GAURAV JOGANI – AXIS CAPITAL Bata India Limited August 11, 2023

Ladies and gentlemen, good day and welcome to the Bata India Q1 FY’24 Results Conference Call hosted by Axis Capital Limited.

As a reminder, all participant lines will be in the listen- only mode and there will be an opportunity for you to ask questions after the presentation concludes.

Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone.

Please note that this conference is being recorded.

I now hand the conference over to Mr. Gaurav Jogani from Axis Capital.

Thank you and over to you, sir.

Gaurav Jogani

Thank you, Zico.

Hi, everyone.

On behalf of Axis Capital, it is my utmost pleasure to welcome

Moderator · Conference Operator

Thank you.

We move to the next participant.

Our next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund.

Please go ahead.

Bhargav Buddhadev

Yes, good afternoon team and thank you for the opportunity.

My first question is on what is the share of exports now and when we say that Bata India is aiming to become an India sourcing hub, can you share some thoughts in terms of timelines and market opportunity that this can translate into?

Gunjan Shah

Yes, so basically, see the macro opportunity as I have said in the past, when I have said that we are evaluating this entire piece, is coming from a fact that we've got one third of the global production that Bata does happens in India, largely for India itself, right?

So, we do about 50 million pairs, globally we sell about 150.

So, there is another 100 that is being sourced from various parts of the world.

Now, we have right now not contributed meaningfully to that entire pie that is happening.

We do source a large part globally from China and globally we are also looking at consciously diversification out of China from a sourcing strategy and because of the large base as well as knowledge and expertise that we have in India across various footwear types and almost across all our brands.

Natural outcome of the diversification out of China is to enhance the India sourcing hub.

Now in that light basically what work has been happening is to make sure that there are multiple things that have to fall into place.

We see signs of that now progressing right, the teams have now started getting aligned.

There are now supply chain linkages that are being created so that people get comfortable in sourcing out of India.

And last but not the least, there has to be a lot of tech transfer that has to happen out of the current supplier base, wherever that is lying, in China or otherwise.

So, there is progress happening.

I think once we start seeing meaningful numbers, we will make sure that we also share it with you.

But we do see light at the tunnel sooner rather than later.

Bhargav Buddhadev

And will we sort of manufacture this through a vendor ecosystem or we'll be investing in manufacturing?

Gunjan Shah

So that will depend on the product.

As long as I mentioned in the past, this business is straddled on two fronts.

On one stratum is fully automated products, largely molded as well as single molded stuff, etcetera, something like floatz.

On the other side is customized, huge manual interventions, tiles, small MOQs, etcetera.

So depending on where in the stratum the product sits, that is where you will see, wherever there is a high level of capex and automation, we will put it up in our plant.

But wherever it is to do with, let's say for example, as I said, styles, labor intensity as well as smaller MOQs, we will want to leverage the source ecosystem that we also have very large in India.

Moderator · Conference Operator

Thank you.

Mr. Bhargav, may we request you to rejoin the question queue for follow-up questions as there are several participants waiting for their turn.

Thank you.

Our next question is from the line of Nihal Mahesh Jham from Nuwama.

Please go ahead, sir.

Bata India Limited August 11, 2023

Nihal Jham

Yes.

Thank you so much and good evening to the management.

So my first question was, as a part of the opening question you did allude to the mass segment being under pressure.

So just to quantify that, possible to give a sense of how the growth divergence was within the less than 1000 and above that segment, we've done that in the early quarters before?

Moderator · Conference Operator

Thank you.

Our next question is from the line of Varun Singh from ICICI Securities.

Please go ahead.

Varun Singh

Yes, sir, my first question is like given the distribution expansion, since past several quarter, it is extremely low, hardly 1% or 2% compared to the last quarter base.

I understand the 80%- 20% principle, which we are using to drive capital light distribution expansion but still, given that context 1% to 2% overall total store expansion, that number looks relatively on the lower side.

At the same time, if you can also help us understand that, like currently our total Coco store is 60%- 62% ballpark compared to our overall distribution.

So at what level you think that, the current capital light aggressive store expansion that we are doing that is likely to stabilize.

So what should be that ideal ratio, which is there in your mind?

So just two questions on this distribution front, sir.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Tejash Shah from Spark Capital.

Please go ahead.

Tejash Shah

Hi, good afternoon.

Thanks for a very detailed presentation and improving disclosure standards.

So a couple of questions.

So first, we have seen a lot of permutation combination of late in franchise model in the industry of late.

So just wanted to understand in our franchise model, apart from capex, what does the franchise has to fund?

And how do we account for margins that we give to franchise in P&L?

Moderator · Conference Operator

Thank you.

Our next question is from the line of Gaurav Jogani from Axis Capital.

Please go ahead, sir.

Gaurav Jogani

Thank you.

So my first question is with regards to the cost savings.

We have seen your both employee cost as well as the other operating expenditure being much lower.

In fact, it has declined on a Y-o-Y basis.

So is this a conscious estimate on the part of the company, given that the focus on the cost of the initiative, which is start now to reflect?

And can we expect similar cost savings in the future as well?

Moderator · Conference Operator

Thank you.

Our next question is from the line of Alok Shah from Ambit Capital.

Please go ahead.

Alok Shah

Yes, thanks for the opportunity.

The first one is, Gunjan, just wanted to check when the new product launch is made, how does the product travel across your different formats of stores, say Bata India Limited August 11, 2023 flagship, family, normal, distribution, franchisee, etcetera.

So how does it go?

Does it go all across the formats at the same time or how does the rollout happen?

That's my first question.

Gunjan Shah

Okay, so I'll try and give you a couple of examples.

In case it's a new format and a new product altogether.

So for example, let's say when we had launched floats, which was something that we didn't have, either because of the price point, because we did have Ewa products, but with the compound that we launched at the price point that we launched, which was almost 50% premium to the rest of the products that we had, we were making sure that we initially launched it in about 20% of our network, and then because we are having relatively agile lead times, we could then expand it over a period of the next six months to nine months to now as I said almost about 90% of our network.

But now taking this parallel further, now we are launching and obviously we are investing in molds and therefore much larger designs and range and floats that we are doing it much more ambitiously and faster because these we feel much more confident.

It is upgradations, new designs, value-addition, but the same DNA of the product of floats.

And which we will, so floats 2.0 that we have launched, we have launched it at almost 450 stores in one shot.

So then we become a little more ambitious in terms of how we go about launching it.

So that is broadly the process.

I hope that answers your question.

Alok Shah

Correct.

So just an extension to that.

So say floats is a new one.

Say a range in North Star, right?

Say, five new designs in North Star gets launched.

So how does that rollout happen?

Say, first to your store and then say after how many weeks, etcetera, to smaller stores of Bata COCO and then after how many weeks to franchising.

I mean just wanted to understand that.

Gunjan Shah

Largely they would follow the floats 2.0 sample, right, which we will have -- see it also depends, Alok, on the price point that we launch it at.

So therefore, there might be and now more-and- more store with the franchise network becoming large we are also wanting and developing since the last season, customized selection for those type of stores.

So it can also be the bottom 500 stores this product goes, but doesn't go to the top 800 stores.

So there are various ways in which we skin it, also depending on the price point, but largely it will follow the model which is for products which are let say in the North Star updates, etcetera, new styles, colors, etcetera, we will then go much closer to 2.0 because then we are largely in the same DNA of the product.

And therefore, you will go to a much wider set of our target stores in the first season itself.

Alok Shah

Got it.

Fairly clear.

The second point was on, consistently over the last few quarters, you've been mentioning about the growth in North Star, HushPuppies, Comfit, etcetera.

That if you do some checks, it's coming to around maybe 45%, 50%-odd of your revenue.

Maybe, maybe we could be wrong.

So firstly, just wanted a clarification that what that number could be?

And parallelly, then, if that is growing then what segment is growing at a larger rate and what is largely, the management strategy to address that decline?

Gunjan Shah

So if I look at it from the last about 12 months period because longer horizons are not handy in terms of the data available but let's say, these categories would be in the range of about 30%, Bata India Limited August 11, 2023 35% of a turnover, they have grown faster, right, for sure.

What's happened is that there are the mass volume products that are there.

And especially, as I've been mentioning it now for some quarters, we do see sequential improvement on those because of I think external environment as well as I think some of our internal actions, but they have been the ones that have taken the toll.

So price points below INR1,000, which would be Sandak, etcetera, are the ones that have taken some kind of a toll.

Open footwear, volume products, etcetera.

Alok Shah

Got it.

I have a couple of more, maybe I'll take it offline.

Thank you.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Chanchal Khandelwal from Birla Mutual Fund.

Please go ahead.

Chanchal Khandelwal

Hi Gunjan, thanks for the opportunity.

So the point which Tejas raised previously in terms of markets here, now if I look at from the organization you are coming from, Gunjan, ex-Britannia, you always we always saw that the market share was the utmost focus.

Now somewhere in last 24 months after you have taken off 24 months, 36 months now, somewhere you have taken a lot of initiatives but it's not reflected in the sales, it's not reflected in the same store sales growth.

There may be a leaking bucket, but there's something which is going wrong.

And plus, if Bata as a brand is not working on, you have multiple brands in the category and you are a net cash positive company.

Why the focus is not on aggressive expansion now?

I mean, if I look at the market across vertical, there are companies who have been expanding retail in a very aggressive way.

Somewhere we are losing that sales or market share.

Any comments here?

Before I ask another question?

Gunjan Shah

No, I commented on that with Tejas's question.

It's on the same line.

As I said, there have been different consumer segments as well as price points have been behaving in a differently post- COVID in a slightly acute manner.

I think our initiatives are in the right direction, both from the areas that I've outlined on slide number six of nine, which we have been consistently working on.

And I think once these even out over a period of time, we should see the games that we are all looking for.

Chanchal Khandelwal

Gunjan, what we are trying I mean, I'm asking it again, what we are trying is within the same store giving multiple spaces to various categories and trying it out.

What I'm trying to understand is that why not try a few new formats and aggressively roll it out given the franchisee route or given the net cash you have and see the success.

I mean correct me if I'm wrong, won't that play a better role because of the leaking bucket which we have?

Gunjan Shah

You are saying new banners?

Is that what you are talking about?

Chanchal Khandelwal

Yes, new banners for them aggressively expand HushPuppies or aggressively expand some other banners you have multiple banners which you have tried in the past.

Gunjan Shah

Yes, sure, sure.

So we are looking at them, but it's not easy to set up a banner, right?

To make it accretive in terms of profitable growth and substantial enough, it is years of seeding that needs Bata India Limited August 11, 2023 to be done and with some clarity of where it needs to lead up to.

So we are looking at them, as I mentioned to you, we have seen the floats that we have put up, we have also tried out something on the wedding occasion piece which is under Red Label, etcetera.

So these are all areas that are there, but to have substantial enough effect to show impact on the overall business, it does take, building over a period of time.

Moderator · Conference Operator

Thank you.

We move to the next question.

Our next question is from the line of Falguni Dutta from Jet Age Securities Private Limited.

Please go ahead.

Falguni Dutta

Yes, good evening, sir.

So I have two questions.

One is on the number of the pair of footwear that was sold volumes in FY ‘23 and Q1.

Gunjan Shah

I don't have handy, Falguni, the volume exactly, but it was flat over last year.

So it's been largely volume driven.

Basically, as I've mentioned, we have hardly taken any price increase in the last about eight months to nine months.

So it's been a marginal price, ASP related impact.

Blended all across, it's been about 1% to 2%.

Falguni Dutta

No, so this is you are mentioning for Q1, right?

Gunjan Shah

Yes, Yes.

Is that the question you asked?

Falguni Dutta

Yes, so you are saying that in Q1, the volumes were more or less flat Y-o-Y.

Have I understood you correctly?

Gunjan Shah

Yes.

Falguni Dutta

Yes, and another question is like broadly if you can just tell for FY ‘23 full-year, what was the number of pair of footwear sold?

Gunjan Shah

About close to 50 million pairs, about 48.4 million.

About close to 50 million pairs.

Falguni Dutta

Okay.

And sir, another question would be, is it possible to give a broad breakup of, like, Comfit would be what percentage of this or sneakers that way?

A broad idea?

Gunjan Shah

Sneakers is about 20% of our turnover right, Comfit sits at about 7%, in fact 8% now because of the growth that we have seen.

Falguni Dutta

And any other any two more categories you can give on the which contribute higher.

I mean, I just wanted to know broad breakup of the volume of the turnover also will do like you said 20% is sneakers.

Gunjan Shah

Yes, Yes.

So I don't have it handy but I can give you HushPuppies that fits at about 20%.

Falguni Dutta

Okay.

Thank you.

And if by chance you have the number for -- can we take this number to be more or less flattish or no, no, it will be a bit higher in this volume for the -- if you were to break up into quarterly, four quarters, would you have the number for Q1 of last year or can you give us some sense?

Bata India Limited August 11, 2023

Gunjan Shah

Can I request you, Falguni, to reach out offline to our investor relations and we will try and see how best we can understand your question and respond to it.

Falguni Dutta

Sir, would you have their number on the website or else I can just take the number on the call phone.

Gunjan Shah

I will reach out and if not available then we will try and respond to you.

I don't have it handy right now.

Falguni Dutta

Fine sir, if you can just tell me whom to call to and whom to speak to?

Nitin

Falguni, Nitin here, I'll reach out to you.

Falguni Dutta

Fine, fine.

Thank you, thank you so much.

Moderator · Conference Operator

Thank you.

Due to time constraint, that was the last question of our question-and-answer session.

I would now like to hand the conference over to the management for closing comments.

Gunjan Shah

Yes, so thank you everyone for your time and joining us.

Looking forward to interacting with you again.

If you have any further queries, you can direct them to us.

We would be happy to answer them.

Thanks a lot, everyone.

Moderator · Conference Operator

Thank you.

On behalf of Axis Capital Limited, 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.

Questions and answers

Moderator · Conference Operator

Thank you very much.

We will now begin the question-and-answer session.

Our first question is from the line of Ali Aliasgar Shakir from Motilal Oswal.

Please go ahead.

Aliasgar Shakir

Yes, thanks so much for the opportunity and for that detailed presentation.

First question is on the revenue growth, sir.

So you did explain the network expansion that we have done from somewhere about 1,900-odd point of sales to 2,100, and also the particular categories which have seen growth.

So, if you could just explain what would have led to 2% growth, I mean any particular categories that would have seen decline product wise or in terms of network if we have seen 10% growth, but revenue growth is 2%, then which particular channel would you have seen decline?

Is it the retail channel, Cocoa channel or are the new channels that we have expanded in which is the shopping shops and MBO have probably seen a weaker performance?

Gunjan Shah

Hi Ali, that's a lot of questions bundled into that, but I'll try and give a jab at it.

So, our growth engines largely continued in terms of outpacing growth, which is franchise as well as e- Bata India Limited August 11, 2023 commerce.

The distribution business, while the platforms are strong, we are strengthening them, as I said, in terms of now getting into retail productivity and control, and therefore extraction of throughput per distributor.

But it has had impact because of this entire mass category, GST, pricing, etcetera.

It's now stabilized.

We have across channels now not taken price increases for almost about eight months to nine months.

And we don't foresee touching that any significantly going forward.

So, we are very hopeful that that should along with the retail control give us.

On the Cocoa side, it has been basically, I would say that we've been also cautious in terms of our investments and it's a capital intensive kind of a channel.

So while we will keep expanding in the last two quarters, we have started seeing net Cocoa additions, but as I have mentioned, our conscious strategy is to make sure that we are driving expansion almost 80% through the franchise network.

So that's where I would place myself right now.

Aliasgar Shakir

So I wasn't clear why would we have seen just 2% growth when the network has grown 10% year-on-year.

Are we seeing like-to-like decline, SSSG decline in our network?

Gunjan Shah

No, there is been decline, obviously.

That goes without saying.

But I would say relatively it's been not so sharp.

It is basically, I would say, I think it's a combination of two facts.

And we will have to see how it pans out.

I am very hopeful.

As I said, one is that consumers have seen a significant amount of inflation and that takes time for consumers to absorb.

I think the second piece that is also there is basically it's a, I think, consumption and occasion days, especially wedding occasions, etcetera, have had a calendar shift.

And we are looking forward to the festive season very optimistically and that should hopefully cover up for this.

Aliasgar Shakir

Got it, this is quite helpful.

Two more questions, one is on your margin, we have seen you despite RM softening and also you know you've taken some mix lead price improvements, margins have come down.

Can you just explain what has led to this?

Gunjan Shah

It's actually very simple.

It's been largely driven through basically inventory optimization.

So, we have had, how do you say, we did see industry moving into EOSS much earlier.

And therefore, basically, our EOSS period got preponed into a large part of June and that did have obviously an impact on margins.

As I said that -- that has also resulted in us now bringing in our fresh merchandise back in much faster.

So, I don't think that's a longer term structural phenomenon, but yes in the month of June we did have a preponment of EOSS for about two weeks or so.