Co may step into sportswear, but Co may step into sportswear, but stock looks pricey

The Gurgaon-headquartered Bata India reported an 11% year-on-year (y-o-y) growth in topline in March 2010 quarter. Introduction of a wider range of products at competitive prices across all categories has helped Bata grow its market share over the past few years. The company targets the middle class segment, as it believes the segment offers immense potential and has the ability to drive consumption growth. However, on a quarter-on-quarter (q-o-q) basis, the company saw a 10% decline in revenues. For its March 2010 quarter, Bata clocked revenues of Rs 262 crore.

All key ratios have shown an improvement on a y-o-y basis, as consumer spending as well as economic condition have improved since the past year. At 21% EBIDTA margins, Bata registered a 100-basis point improvement over the corresponding quarter in the previous year. However, this was 500-basis point lower than the margins in December 2009 quarter. Overall increase in costs due to higher purchase costs, employee costs and marketing expenses eroded the margins.

The company has further brought down its finance cost, thus increasing its net profit margins by 100 basis points on a y-o-y basis to 6%. At Rs 15.8 crore, its profit after tax grew at 33% on a y-o-y basis. However, margins were much higher in the quarter before as December 2009 witnesses a festive season marked by higher business volumes.

The largest footwear retailer, Bata is also engaged in property development under a joint venture (JV) with Kolkata Metropolitan through its special purpose vehicle. Under this recently restructured JV, the company’s stake in JV will come down. This will fetch upfront Rs 100 crore and 6.4 lakh sq ft of constructed space. It is believed that these funds would be used for further expanding the company’s geographic reach and developing new products. The company could also look at diversifying into areas like sportswear or sports accessories. Currently, Bata has the widest retail network with 1,250 plus stores across the country.

On a trailing four quarter EPS of Rs 10.64, the stock is trading at a price to earning ratio of 24x and looks expensive. Investors can book profit in the stock.