Bata India: Business rejig, cost cuts continue to deliver

India's biggest footwear retailer, Bata India, posted its highest ever operating margin in the quarter to December 2011 with indications that it will continue to reap the benefit of the business restructuring exercise it has undergone over the last few years.

The company's efforts have been on increasing the RoE. For this, it has tried increasing its sales, reducing costs by bringing down employee cost and other expenses, outsourcing manufacturing of low margin products and increasing commission sales.

In the December quarter, year-on-year sales increased by 21%, operating profit increased by 25% and profit after tax increased by 31%. Though its gross margin rose due to higher input cost, the company has cut down on employee cost and other expenses, helping it to post an all-time high operating margin of 17.7%. Increasing share of commission stores in sales also helped.

Commission store is a store in store, where Bata sells its products in malls such as Lifestyle. The company shares the profit but this helps in reducing fixed costs such as rental and employee cost.

Besides this, outsourcing of manufacturing of lower-end products such as rubber footwear products allows the company to block lesser capital in raw material inventory. All this has helped in gaining a higher RoI. At the current market price of Rs 698, the company is trading at a P/E of 30.

Considering the strong business model and high earning growth potential, the company continues to remain the best consumer play in India.