Bata India Limited analyst Q&A

The first question is from the line of Sameer Gupta from India Infoline.

Sir, firstly, on the gross margin contraction this quarter, now I understand that increased franchising operations will also lead to some gross margin dilution. So, if you can maybe quantify the impact of that and the rest, if there is any gross margin contraction, the reasons for that?

Okay. So, a couple of factors that contributed to it. One is obviously the mix. It's obviously franchise and e-commerce, as I mentioned in the past, does have a different implication on the way it flows through from a gross margin to EBIT level. But also, the fact that we have been consciously providing value proposition, while we are parallelly working towards resetting the cost structure for some of our lead products like the kind of example that I mentioned, Sameer, in my presentation. And that should pan out over the next -- so both of these are the things that have contributed to the gross margin that you see.

Got it, sir. Second is, sir, more bookkeeping question. If you can help me with the channel mix in terms of revenues for this year, COCO, franchisee, multi-brand distribution and e- commerce.

Should be basically about for the year, can I have it handy? Retail would be about 70% COCO. You will have franchise at about 7.5%, e-commerce at about 10%. And you will have IND at about 12% to 13%.

The next question is from the line of Videesha Sheth from AMBIT Capital.

The first question was that you ended the year with 100-odd stores being added. So how should we think of store addition momentum going forward?

Yes. It should be a little higher going forward, Videesha, right now as we look at it, right? Obviously, as I mentioned, we would want to continue. And we've largely retained, which is about an 80-20 ratio between franchise and COCO. But it should be a little higher next year compared to the previous year that we've seen.

Got it. And if you could just help with the revenue contribution of revenue mix from the key brands that you operate being Power, Hush Puppies, Comfit, etcetera?

Okay. We don't share that, but basically, I would say that the second and the third largest brand after Bata, which is the largest by far, is Hush Puppies and Power. They would be in the strong double digits in the range of about 20%.

Noted, noted. And just 2 small clarifications on my end. In Slide number 6, so when you're talking about the output of the Zero-Based -- or sorry, of the value proposition there, I just wanted to check that is it fair to interpret that the opening price points are currently available only in 600 stores out of the entire network?

Okay, No, no. The value propositions, you're talking on Slide number 7.

Sorry. Slide number 7 on the left-hand side.

Yes, yes, yes. No. So this is basically trying to talk about that overall universe, which is the price point that you see. So, let's say, for example, the core price point of INR799, Videesha, right, would be a core in, let's say, for example, about 800 stores, what is the opening price point for the balance 600 stores. So, from a full portfolio on the table, we have an opening price point, and that's basically suitable as the opening price point in the store for, let's say, about 600 stores, which have been taken to 800 as part of driving the value.

Understood. And on the slide earlier to that, which is on the Zero-Base Merchandising, the import and -- or the output is being showcased in this slide. That would be for all the 146 stores. Or again, it will be a sample out of stores -- 146 stores?

No, no. This is for all 146 stores.

The next question is from the line of Gaurav Jogani from JM Financial Institutional Securities.

So, my question is with regards to this -- the lower other expenses this quarter. So, you did, I think, mention that there is some adjustment with regards to the license rights. So, if you can explain that a bit in detail and what exactly it is.

Yes. I'll ask Amit to do this.

Gaurav, in terms of -- see there is a change in the construct of one of our licensed brands. And in line with the earlier, the ex-royalty, what we were paying towards the usage of the brand was being charged as other expenses. However, in line with the India's requirement due to change in the structuring of the agreement, the same has been led to creation of an intangible asset, which you would see in the balance sheet side also. Therefore, once I create an intangible asset, the amortization and the financial liability of the same gets charged in the form of depreciation and finance costs on a like-for-like basis, yes.

No. So, my question, sir, would this be a recurring in nature? I mean, every quarter now...

Yes, yes. It will be recurring. So, we will have 3 more quarters where there will be numbers may not be comparable with reference to the previous year. Once we reach quarter 4 of '26 financial year, then number starts becoming like-to-like.

Sure, and that explains the reason why the other expenses have declined so much on a Y-o-Y basis.

Yes. Apart from that also, there is an improvement or underlying initiatives, which we have run, which has led to improvement in overall other expenses. If you look at purely from a P&L perspective, if I exclude the gross margin impact, the overall cost structure, which is including your employee expenses, finance cost, depreciation and other expenses, overall, the trend is marginally lower versus last year. In terms of percentage of revenue, it has marginally gone up by 30 basis points, which also includes one exception -- one-off exceptions of about, let's say, 100 basis points in terms of my employee cost.

It should not be recurring.

It should not be recurring in nature.

Sure. So, you're saying the employee cost is higher by 100 bps approximately this quarter, right? Because the run rate was around INR100-odd crores a quarter basis.

Yes. Roughly, yes.

Okay, okay. And sir, my next question is with regards to the overall demand conditions. So, you did highlight that in the 146 stores where you have implemented the zero-base budgeting, there, you were able to see a better revenue conversion, volume, etcetera. But what about the remaining? Is it largely because of the muted demand environment exactly or there is some other issue as well? Because of this, the overall revenue performance is thought being flattish rather is what I would say.

Yes, yes. No. So obviously, we know that the demand conditions are -- have been tight, Gaurav. However, within that, what we see is that our ability to do 2, 3 things, right? One is provide the right kind of portfolio to consumers, which we are looking for, and many of them are what we see very clearly are looking for some kind of a relief from the overall inflation that they've seen and, therefore, value for money. The second piece is our ability to showcase that to the consumers in a tangible way, which is, are you able to showcase them in a non-cluttered way, are you able to showcase them in a full set manner, which is all sizes, etcetera, our ability to make sure that they are served well. And those are the ones which are resulting in the delta performance that we see and which we are measuring for. So -- which is why we are looking at it very aggressively across the various levers that I've talked about. And hopefully, that should result in the overall network getting impacted over a period of time.

Okay. Sure. And sir, just lastly, I mean, on the Floatz side, your Floatz have been really doing well for you. Has this now been expanded across all the stores? Or still it remains in terms of the presence limited to most of the metro towns or certain kiosk that you were trying to open earlier?

It is across stores. It is across stores, Gaurav. It is now in some stores. It is now resulting in basically some of the places where we have opened kiosks, etcetera, and -- which is to cater to basically where we might not have the right kind of store footprint or we want to have a point of sale, which shows up consumers the Floatz proposition.

Sure. Sir, I think last time, you did mention that this has already crossed, I think, $1 billion plus in revenues for us. Any number that you would want to put out for this brand?

At the run rate, in fact, it costs out by a handsome margin. I'm assuming $1 billion is INR100 crores, right? So, it plotted by a handsome margin last year. And this year, my sense is if this continues momentum, right, we should be in the range of about INR200 crores.

The next question is from the line of Ankit Kedia from PhillipCapital.

So, my first question is on the inventory. You're now introducing more of the Power products in the stores, which could be at a higher ASP. Two, we are reducing inventory in those stores of other products, which 2 years back was not there. Apparel was not there 2 years back in the store. So, what kind of the inventory are we reducing in the stores? So, I understand that clutter getting reduced. But what are these new products replacing in the store?

Okay. So, there are 2, 3 pilots that are there on this, Ankit. Then, I mean, obviously, we can speak a long time because there's a lot of effort that's gone in. The results are now being seen, but it's been in the works for almost about a year, right? So, the first thing that there is, the one that I'm sure you can tangibly see is, reducing the aged inventory, which is basically to do with on 2 fronts, right? One is reacting fast on a slow- moving product. And the second one is to make sure that we are also ordering in the right manner. Right now, the technology of the Blue Yonder that we've implemented, some of the processes and governance that has been put in place, etcetera, etcetera, leading up to that. So, reduction of aged inventory, which is redundant inventory, does not provide proposition. We don't market it to consumers is one big lever. The second one is basically making sure that we are able to have sharpish collection for the new products. Now making a new -- let's say, for example, a new sandal or a new loafer just by itself does not -- at least we believe, does not basically lead to great success or great probability of success. We need to present a collection to consumers, and -- which is what, let's say, this entire Power Move+ is. It's a collection of articles, which are basically sitting in a certain proposition of, let's say, in this case, value-added certain technology at a certain democratize price and, therefore, leads to pitching a story to the consumers. And hopefully, a good chance of success that we've seen, or Floatz, for the matter or, let's say, the office sneakers from Hush Puppies. So that's the second thing. I don't -- so that also forced the teams to be far more choiceful in the new products that we bring in. The last thing that's there and which is, I think, the one that is going to result in a lot more work going forward is cannibalization. Is there a distinct reason for a product to be on the shelf? I mean if it's another sandal with the same black color, if it's the same slip-on with the same brown color, are you offering enough reason for the consumer to be able to see it differently versus another one against it right on the shelf? So, are the price points enough different, etcetera? And this has also resulted in -- that is what I've talked about in ladies value proposition that one is the value proposition of opening price points, etcetera, but the other one is the collab's price points. And then that results in questioning that do you need the same sandal, which was at, let's say, for example, INR799 and you have another one at INR899. Now they might not necessarily need to coexist together. Either one of them will serve the proposition to the consumer. So, these are 3 broad levers, obviously, results in a lot more work. But effectively, that's what is resulting in this.

And sir, in a lean demand environment, what we have seen in last 3 or 4 quarters, if the demand doesn't play out, do we see higher discounting? How does the supply chain at the back-end work given that you're more sharper in the inventory?

Yes. So, it does result in that. It comes with the lag and which is what I answered to someone else who was talking about it, that we are now also making sure that the products that we are looking for value proposition, we want to reset the cost price. The volumes go up on a per article basis. My ability to amortize costs and, therefore, get per pair cost down goes up, etcetera. So, they do result in that. What it also helps is that because you've got conscious -- limited conscious choices of new products, your ability to react is far better. If a product is selling well in one part of the geography versus another, we move that stock out. Obviously, it slows you down if you've got more and more clutter in the pipeline. So yes, it does result in a much better efficiency. Therefore, lower intensity of markdown after a lag.

Sir, my last question is on the focused product scheme announced in the budget. We haven't seen the handprint of that from the ministry side. Do you think if implemented we'll see a lot more of the global brands coming in the country or exports as opportunity will open up for you to the parent? How should we read that from a budget perspective?

Okay. While we await the fine print in the retail, as you've rightly said, there is not so much of clarity. However, the piece is that -- and I think there is already a lot of ecosystem that is developing because of BIS itself Ankit, right? So that we can see evidence of that. From a Bata perspective, we are obviously consciously working, and I have mentioned this, on creating a complete structure within Bata India, which can basically cater to Bata globally. And that's going to be opportunity, which will keep ramping up over a period of time. And as we see tangible progress, I will keep updating you on it. And if there is clarity on PLI or any other scheme, etcetera, it will only provide impetus on this going forward.

The next question is from the line of Rahul Agarwal from IKIGAI Asset.

Gunjan, a couple of questions. Firstly, on this resetting of the business, that's the way I'm looking at it…

Can you speak a little louder, Rahul?

Yes. Yes, sure. Is this better?

Yes.

Okay. I was basically looking at Bata in terms of the entire resetting of this business. I understand the demand is weak, but you're obviously doing more premium, some automation focus, more efficient inventory management. From an investor perspective, what would you expect Bata to look like 3, 5 years out? When you are tangibly measuring success of these changes, how should we look at it? Specifically talk about financial metrics. How -- will the Bata look very different from what we are looking at today in terms of growth, margins, in terms of balance sheet turns? Anything would you want to highlight? That's the first question.

Okay. Why don't you complete your question, Rahul?

Sure. And second was more a bit shorter term, let's say, next 2 years. You talked about volume growth, consecutive quarters, now better. But obviously, pricing is paying its own part. The way to look at growth for Bata should be more format-wise, which you discussed about retail, FOFO, COCO, e-commerce, industrial. And what it entails when the salience changes, what it entails for the gross margin operating margin? Because assuming that whatever right now, fourth quarter, you've reported based on that salience and incremental growth outlook. How does this business look like in, let's say, 2 years? How should we look at growth in ASP and different format growth, whatever you want to talk about? The relative question also was on inventory and working capital. Should we expect more rationalization on inventory, which you alluded that we'll continue to work on that? This 80 days of inventory of sales, which you look at, does it further decline? And where this business stabilizes over a 2-year time frame? Those are my questions.

Okay. All right, Rahul. So, they are pretty much linked together, Rahul, so I'll try and see without -- we don't normally give you -- give forward-looking commentary. But however, at least from a trust area and an impetus perspective, I will try and give you few markers and more than happy to see whether the team can connect with you offline also. One is that we want to make sure Bata is, how do you say, the heart of our consumer base, which is basically the middle-class Indian is what it remains to be, right, and how do we make sure that we are relevant to that. From all the initiatives that are either I'm talking about it or the ones that we want to go going forward. So, making sure that the product portfolio, our communication strategy, our stores, the way they look, etcetera, the way the experience for consumers is, is all connected towards this one larger objective from a consumer perspective. The second theme that's there is that we want, over the next not only 2 years, but also 5 years, to make sure that we -- it's a volume-driven growth trajectory overall, right? There might be some quarters up and down, but we want to make sure it's a volume-driven revenue growth trajectory. The third piece is this should come with the kind of initiatives that I think we've already set in place, plus the larger projects that I also alluded to in my presentation. It should come with an extremely aggressive objective on inventory agility, overall, in general, right? Now that resulting to many facets. And with some of them, I have talked about, some of them will expand as we roll out this project further. In terms of complexity, the agility of bringing in new range, etcetera, the amount of choices that we make or bringing the new range, but presented in a coherent manner to the stores, to the consumers in the stores, etcetera. Last but not the least, we would and are endeavour at all times and I think the amount of work that we have done on the cost efficiencies, etcetera. Once we see the revenue growth trajectory, it should result into, obviously, operating leverage and, therefore, profitable growth for us.

So, does this also mean we should get back to value equal to volume growth this year or you still think there is time?

I'll refrain from giving a forward-looking statement, but the direction is in the endeavour of what I said.

Okay. And based on the salient changes, more franchisees, more e-commerce growth, does that entail any meaningful changes on EBITDA margins? So obviously, you mentioned that...

Yes, yes. That was the -- yes, yes. That other piece, I didn't comment on. Ideally, we would like -- we are -- something that we have mentioned that we want to make sure that this multichannel model remains from a revenue pipeline perspective. And I think each one of them caters to consumer cohorts, which are -- yes, there might be overlaps, but there are large enough distinct consumer cohorts within that. So, for example, franchise allows us to add EBOs in towns and markets, which otherwise the COCO model did not have till, let's say, about 4 years back in a very profitable way. And that also we have fine-tuned now. So, we will expect all of these channels to grow. COCO will have its own new source of growth driven by same-store growth. You will have a lot of franchise, both same-store growth as well as basically expansion, especially in the urbanizing India. A large part of our addition in the last 2, 3 years have come through that and will continue going forward. And e-commerce and multi-brand outlets, obviously, have their distinct strategies. So, it should basically largely be pronged on all these 4 with the focus being on retail, for sure.

One follow-up. Because you mentioned a number of stores opening should be higher than last year, but are you guys working with some kind of numbers here? Or it's more about taking it very opportunistically, FOFO continues to expand faster than COCO and then you'll end up doing, let's say, 120 stores, something like that. Or is there a hard number to work around it?

No. There is obviously targets and numbers that people and the teams carry on this, Rahul. There are also -- more importantly, there are target areas that we want to be in, right? So, there is a complete census mapping. Now there's enough and more modules of multiple data integrators that give us the right kind of, what we call, a PTAs, the potential trade areas, which is what we start as a universe. That universe, by the way, if I last remember, is at about 600 locations, right? So, we have managed to successfully, economically viable, how do you say, commercialize, let's say, about 100 last year. So, there will be enough and more opportunities going forward.

The next question is from the line of Rajiv Bharati from Nuvama.

Sir, I'm on Slide number 14, the inventory reduction part. So -- and there, you mentioned that aged part, right? So, is it safe to assume that this 16.5% or the delta between the 2 is basically largely each inventory reduction?

I can't mathematically do it, but the large part would be, which is what I mentioned to another gentleman on this call some time back, which is that there are multiple levers towards this inventory. I think the one that is the fastest and the most profitable is reduction of aged inventory, which is being proactive in slow-moving SKUs before it becomes aged as well as trying to be choiceful of what you bring into the stores, right? But there are other levers that I mentioned about. But my sense is, yes, some mathematics will show that a large part of this would have been aged.

No, no. It will be lower. It will -- yes, it will be lower. I don't know the exact numbers. I can offline get back to you, but it will be lower.

I mean, what I'm implying is looks like close to INR250 crores is the aged inventory out of the INR765 crores. And I was just wondering that the inventory turn on rest of the portfolio is upwards of 3, 3.5, is it?

I don't think that conclusion is right because I don't know how you got that INR200. But aged inventory is in low single digits.

So how I got is INR915 minus INR765 is 0.37, right?

No, no, no. They are very different. That's total inventory, Rajiv, whereas the aged inventory is showing a reduction of 37% from a starting point of X. Both of them are in low single digits as a percentage of the total inventory, which you see on the left top chart.

Sure. And on Slide number 6, which is your -- sorry, not 6.

Mind if I say, the best-in-class benchmark, by the way, on the aged inventory is low mid-single digits. So, it should be in the range of about 2%, 3%, so less than 4%. So, we still have some way to go, while we have reversed a large part of the reduction. But it's in that range. So, it's nowhere close to the 20%, 30% that you calculated.

Yes. And on the overall volume growth in the -- at the company level, can you specify that number? How much is that?

We don't share that. But as I've mentioned in my press release also as well as my commentary in the start, the second quarter that we've seen reasonably broad-based volume growth in the mid-single digits would be the best.

Why I'm thinking? Because on Slide 6, right, the ZBM portfolio is having a volume growth of 8%.

It's net of control. The way we see it, net of control, as you can see in the comment, right? So, it's not necessarily in absolute. It is how they are doing relative to the rest of the stores in the same consumer cohort or city.

Sir, I got that. The next question is in terms of, let's say, this ZBM scale-up. We are probably a quarter behind what we have initially shot for right, 250, by the end Q4. Are you sharing what is the number you're targeting for, let's say, '26, '27?

That's a very -- ideally, we would like to see -- and I've mentioned this, yes, we took a little while to scale up, but now the scale up is happening at a pretty good pace. So, my sense is that we should be covering about, ideally, my best guess is about 300-odd stores by [December] end. And that should cover us -- my sense is about 50% or 45% of our turnover on retail.

Am I audible?

Yes, Vikram.

So, apologies on repeating the question…

Now your voice is inaudible. Vikram, can you speak a little louder? You said you are repeating the question. No problem. Tell us.

Am I audible?

Yes.

So, I just wanted to get a sense of the opportunity that's arising from the implementation of the...

Sorry. Surety on the implementation of?

BIS norm.

Your voice is coming and growing. Okay. Go on, go on.

Yes. So, the -- what percentage of sales versus have been a few years ago? And going forward, what sort of opportunity that arises for local manufacturers? If you can just give me -- throw some light on that, please?

Sorry to interrupt. Mr. Vikram, your voice is not that clear. Could you speak a bit louder?

No, we heard the question, Vikram. We heard the first question, yes. Yes. Okay. Vikram, so basically, we are 100% localized. There was a level of small amount, but I've given this commentary almost about 4, 5 quarters back when BIS was under transition. We had a seamless changeover, and we had almost no hiccups, except for maybe a few niche licensed brands, which also have now been sorted now. So, in fact, we are looking at this as an opportunity from an export’s perspective, which is what I commented on earlier to one other question. Does that answer your question?

Yes. Partly, what I actually wanted to gauge is the overall sort of supply. How much was the BIS supply to India, 5%, 10% of the overall market?

Miniscule. It wasn't -- it was less than 5%, and that's now been eliminated.

The next question is from the line of Udit Gajiwala from YES Securities.

Just one clarification and advice. You have mentioned that the focus is on volume growth. If I look it in quarters back in the con-call, you were mentioning more of a premiumization as the strategy. Is there a shift in strategy or the volume growth will come and premiumization will also be with it? If you can just explain a bit on it.

Yes, yes. No. So Udit, I think it's the latter of what you yourself mentioned right now, right? So -- and that's what my document or my presentation also was while you would have heard me at the start, right, that there is a consumer cohort, a large part of our target consumers who are looking for value proposition. And therefore, how do we make sure that we do it not only in the short term, but also in the medium-term structure is what we are working on. Some of the initiatives, I have shared with you all. But simultaneously, that doesn't stop us from bringing in technology innovation, brand as well as basically premiumization being driven through it. And that was the example that I told you from a portfolio level, so whether it is Power, whether it is Floatz, whether it -- Floatz is a classic example. Consumers buying that kind of a footwear were buying it at a price point, which was less than half of what the ASP of Floatz is. The ASP of Floatz is almost 2x of the parallel products that we had on offer for consumers. So that parallelly does do premiumization. Similarly, HP, there are a bunch of levers as well as the product -- the technology driven offerings from Power. So, they will continue in parallel, in short.

As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Thank you, everyone, for joining once again. It was lovely interacting with you, as always. We look forward to connect again. Thanks.

Thank you. On behalf of JM Financial Institutional Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

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