The stock of Bata India has shot up 41 per cent from January '11 to date, completely bucking broader market trends. The company benefitted from its presence in the evergreen consumption sector, its erstwhile real estate division, and negligible debt.

However, at Rs 528 the stock is at 33 times trailing 12-month earnings (adjusting for one-time income of Rs 109 crore), close to its five-year average PE of 31.7 times.

Bata is making a move to shift from its low-cost value positioning to a mid-market and premium brand. The success of this move may take quite a while to come forth, and the company may face stiff competition from domestic and international brands. Revenues from real estate, which have propped earnings, are set to dry up with the company exiting its real estate joint venture.

These factors pose risks to Bata's ability to match earnings growth to high valuations. Investors may, therefore, book profits in their holdings in the stock and make the most of the scorching run it has had.

Bata India manufactures and retails footwear, with brands such as Marie Claire, Dr. Scholls and Bubblegummers, straddling multiple consumer segments. Relatively newer brands in Bata's fold are premium Hush Puppies and outdoor gear Weinbrenner.

Bata retails through a network of over 1m200 stores across the country. It has ambitious expansion plans in place, aiming to open about 100 large-format stores a year for the next three years. Bankrolling expansion is unlikely to pose a hurdle, given the company's low debt-equity of 0.1 times and its strong cash position (Rs 135 crore cash in hand at end-FY10) .

Changing perception

Bata commands a strong standing as a low-cost, functional brand at the entry level and as a school-wear brand. However, it is trying to shed this image in favour of a trendier, premium standing, targeted at the vast youth market that is more open to spending more for better quality.

Changing consumer perception, however, is a challenging task and could take a long time. It requires investments in promotion and advertising. The footwear market is crowded with domestic and international brands such as Metro, Woodlands, Puma, Clarks and Reebok; most of which already have a firm footing in the youth market. With international brands looking to Indian markets to augment their revenues, competition in the branded footwear market is likely to further heat up.

Much of the Indian footwear market is fragmented and dominated by the unorganised sector.

In the March '11 quarter, the company received Rs 109.35 crore in consideration for disposing its stake in its real estate joint venture. This one-time income resulted in a six-fold jump in net profits. The company still stands to receive constructed space at no cost, but revenue from real estate ventures is not likely to flow in.

Bata is a turnaround story, utilising its securities premium account to completely write off accumulated losses in 2007. In FY-07 (Jan – Dec '07) the company posted a revenue growth of 12 per cent, a significant jump from the flat revenues in the years before that.

Since then, however, revenue growth has hovered at that level, even as the company shut more unviable stores and revamped others. Revenues have clocked a three-year compounded annual sales growth of 13 per cent to Rs 1,258 crore in FY-10. Net profits have grown 26 per cent to Rs 95 crore in the same period. Operating and net margins during this period have hovered at around 12 and 7 per cent, respectively.

Margins are unlikely to show significant expansion as the streamlining of operations as part of the turnaround strategy — which had earlier boosted margins — is more or less complete. Costs such as promotion and advertising may also rise as the company pushes its brands. Premium product lines such as Hush Puppies do bring in higher margins, but these are nascent segments. Significant margin increases in the near term on account of these lines are not likely.

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