Bata India Limited analyst Q&A

We will now begin the question-and-answer session. The first question is from the line of Sameer Gupta from India Info Line. Please go ahead.

Firstly, if you could quantify the impact of GST-related disruption that you have called out, both in terms of your channel partners as well as consumers, whatever the best judgment that you have. The idea is to understand the normalized growth or decline this quarter had these issues not been there.

In our whatever analysis what we have done internally and looking at the number post the GST transition what we look at especially from a consumer footfall perspective into store post the GST reduction, we assume if the transitions would not have been there, we would have at least reported a flat revenue versus a 4% decline what is seen there grom a top-line perspective.

This is very clear. So, 400 basis points is broadly the impact that you can research. Secondly, on margins. I have asked this before also. Now, if I look at the EBITDA margin on a pre-IndAS basis, this is after accounting for rent and also if you adjust for the royalty accounting change that has happened in 4th Quarter of last year, I believe the margin is somewhere at 7.5% for this first half. Now, I understand that largely a function of weak same-store sales, but historically also we have had periods where the volume growth or the same-store sales growth hasn't been really impressive, but margin still used to be in a particular range. At the peak of it, they were at 16% and largely around 12% margin range is what we used to deliver. So, what is then pulling this down? Is there a factor apart from same-store sales or subdued sales which is pulling this down? I understand marketing spends have gone up, but even if I adjust for that, it is much below what it used to be. Is franchisee network a margin dilutive channel? And more importantly, apart from same store, what are the other levers that you can use to pull up the margins to at least (+) 10% levels from here? I know it's a lengthy question, but I am sorry, need clarity.

Thanks for raising this. If you look at purely from a dilution perspective, as I mentioned, specifically for the current quarter there are two large impacts, one being the gross margin erosion. Now, gross margin, again, is a function of two things which I mentioned. One is that to ensure that there is a continued footfall as well as the conversion because of the GST-led price reduction. The reforms were announced sometime mid-August while the rates were applicable from September 22. It was a very, very long transitionary period where at least what we witnessed from a data perspective, there was a deferral in terms of buying. So what we tried to do is entice consumers with communication and that's where Gunjan also covered as part of the slide that we were the first mover advantage in terms of ensuring and communicating with the consumers that while the revised rates are applicable from September 22, we went ahead and started passing on those additional GST-related benefits effective first week of September itself. Similarly, certain incentives were run for channel partners specifically in case of franchise and distribution business to ensure there is no deferral of buying and whatever support is needed by them to liquidate and minimize the inventory holding which is at a higher GST rate which otherwise would have led to working capital blockage at their end. So that piece, that impacted the gross margin for the quarter. Second, the drive to continuously improve the freshness. So, earlier what used to happen that the old stocks were heavily cleared during the USS period what we are moving away from doing that we are constantly driving the freshness so that entire discount which gets supplied during the USS period that comes down effectively. So broadly in the next quarter when the USS is there, ideally the markdown spend which otherwise we would have incurred you may call there as an advancement and recognition of the same earlier. So, it should be a lower markdown in the subsequent quarter which would help us recover some of the gross margin which we have lost during the quarter.

Just a follow up here. Is there an EBITDA margin range that you are targeting and what will lead us to that?

So, while we don't give you a forecast Sameer, but some of these were typical incidences/actions for the quarter gone by so we should not see them repeating. The other piece that I can definitely tell you is that as Amit was also describing this entire piece of freshness as well as inventory clearance or health, a large part of the journey from a health perspective I think we have crossed and therefore the commentary that he gave on the USS load and therefore the markdown impact, we should see those benefits coming through and that's the whole reason that we want. I mean you keep a healthy inventory, so you don't have to do deep discounts later on rather than clear it at a lower discount earlier. But unfortunately right, we have to take the hit earlier the benefits come a little later. So, one offs GST related, etc., obviously should not get repeated. We should not have those incidences again. The other one is the benefits of inventory should flow through as long as we maintain the discipline. The total inventory we still have I think some way to go. I still feel that there is much better terms that we can hit. So that's where the commentary will lie on that. The other levers VRS, etc., obviously are not going to repeat all the time.

We have next question from the line of Saurabh Kundan from Goldman Sachs.

I have two questions. The first one is if you could please share the same store sales growth of your company owned stores for festive vs festive last year. So, I am talking about Navratri vs Navratri comparison. If I could get the same store sales growth number for your COCO stores for the last 9-10 days of the quarter vs the last Navratri.

We don't reveal and share that but what I can tell you is what I mentioned in the commentary is that there was obviously a disproportionate impact and which is what I think in the previous conversation Amit commented, because of this transition and some amount of impact of the warehouse related disruption last quarter did impact our overall growth. But we do see an uptick obviously post the 22nd. Some of it I guess must be also to do with backlog getting pent up demand coming through. But we will and are hopeful of structural benefits coming through. One is all the action that I have talked about. The second one is from a structural ecosystem that the GST would have started giving. We do see some signs of that coming through even in the lower price point products which were under stress for the last 2 years or so.

But if you could give us just an idea of how the festive demand was quantified, I am talking about only those last 9 days. I know in the commentary you said that there was a pickup, and I understand it also involves some sort of backlog but some sort of an idea that will be quite helpful to see what is happening to the underlying demand.

So, I would say it has been much better than what we have seen for the last few quarters, and I will leave it at that.

The second question is your channels including franchise and distribution must be under some kind of stress and you indicated that you tried to support them. How long before the channel hygiene there is okay and the channel health there is okay, and you start getting your primary sales? Could it take another couple of quarters?

Just to clarify, it was during the transition period, so let's say the rate rationalization announcement was made by somewhere towards the mid of August while the rates were announced in the first week of September. The moment the rates were announced, and the benefit was visible to all the channel partners, there was a deferral in terms of buying because what would have happened you would have purchased at let's say 12% and sold at 5%, the 7% becomes an ITC blockage from a channel partner perspective. So, what they were all looking at is how to defer the buying so that they are able to buy after 22nd September at 5% to avoid any blockage of working capital in the nature of ITC. So, the moment 22nd September happened, the buying resumed and everything is live now. It's just that the backlog we could not service in just 7 to 9 days of the remaining 8 days of the month therefore some of those spillover orders float to October. But right now, it is normal.

So, there is no long running disruption that we see and therefore any kind of gross margin impact from a support perspective. As I mentioned to some other person, it was a one-off thing that happened in the quarter.

I was just trying to understand there must be inventory in the channel, right? Let's say in your distribution channel which if I recall correctly is maybe 12%, 13%, 14% of your business. How about that? That also would have been bought at a higher GST.

From a consumer perspective given the company decided to pass on the MRP reduction and the channel partner anyway has that advantage, it is not an actual loss to them. The entire conversation was around the blockage of ITC. Because if I purchase at 12 and sell at 5 the working capital gets stuck because I will be able to utilize this ITC not in the immediate month but let's say over a period of 5 to 6 months and there was a reluctance from channel partner to invest to that extent. But purely from a margin perspective there is no impact to channel partner also with the GST rate reduction exercise.

Disruption we called out but I thought that there were tailwinds also in terms of early Navratri and our exposure to East India where this festival is very prominent. We saw many East heavy retailers, both listed and unlisted kind of calling out to be a decent quarter. Just wanted to know, was it that we could not kind of capture the demand because of the disruption?

We are reasonably present and penetrated in East, but it is about 20% of our business from a turnover perspective. So, it is not so prevalent that it can move the whole thing both ways. But yes, the Durga Puja related preponement, etc., and Navratri related, that did come through but as we mentioned somewhere else in the conversation was that there was a disruption related impact till 22nd that was obviously not recovered as fast. The backlog obviously got cleared over a period of time.

Even if we adjust for that that we called out that it is 4%, flat growth does not kind of show that kind of exuberance or recovery that we have seen in some of the other like-to-like retailers. So, what is your read on consumer sentiment then because of this flat number?

Within this then there are two segments that obviously this whole piece that is that I talked about in my presentation works towards that obviously. The second piece that there is that there is this whole piece which is we will see what the structural impact will come through but the pressure that was there in terms of the 40% of our portfolio which is below 1000 and that ideally with the pass-on that has happened, etc., we should see hopefully that coming and bouncing back. So, those are the two levers that are there. One is obviously the work that we are doing in terms of consumer experience end-to-end and the other piece is obviously the price point related pressure that is there on the lower and mass end. Plant expansion, if I may add, as I said the journey was to make sure that we fix what we have and get that going. Now that confidence seems to be there and therefore as I said we will do now aggressive expansion especially in the channel that I mentioned.

Last one if I may, when I look at our interactions over the past few quarters it seems we have been ticking all the right boxes in terms of interventions and growth drivers that we are trying to repair, yet for one reason or another numbers haven't quite come through. So, where would you narrow down the core of the problem which is still not responding?

Obviously we all want numbers to be better. So, there is no question about that. I think our hypothesis is exactly on the lever that we are working on. Therefore, having got the confidence on setting the right part of the portfolio or the journey right, is where now the investments are going into marketing which you have started seeing now. Investments into now expansion in the right channels and last but not the least the one that is now kicking off is the entire thing of product funnel getting reimagined. So, those are the areas that I think we can do much better on and hopefully that should result into all of this finally cumulatively creating impact.

Example is the ZBM store where if you look at the deltas what you see from a control perspective even from a turnover perspective there is a good delta and ZBM is what represents our going philosophy in terms of the rights availability of products, the right assortment, the right consumer experience. So, there is what we see that once you do those concepts right the growth will come.

So, just to add on. Three parts, one is ZBM as Amit just mentioned which we have been now tracking for some time and at large scale it still continues to give us significant delta, and we want to make sure that we paint things faster and which is what the agenda is. The second piece is on the marketing piece. I didn't elaborate on this, but we did do an over indexation within this quarter which was in the places where we have managed to paint green and we did see a significant preference being made to the overall city from a like-for-like as well as footfall perspective. And the last one that is there is on the product imagine that Victoria Ballerina is a classic case. One scientifically designed format giving multitude of options literally on a bouquet, a strong association and story with the Bata promise, and a simplified price positioning I think will give us fantastic results. So, we will bet on these much larger and on a wider scale as we see these successes coming through.

We have next question from Prerna Jhunjhunwala from Elara Securities.

I wanted to understand your strategy in terms of value versus premium and how it could impact volume versus ASP largely as you focus on increasing volume from lower price product as well and focusing on Hush Puppies and all these brands for premiumization. So, where do we see as a vision for Bata India where it is positioned and how do we see volume growth and ASP is moving once this GST disruption actually flattens?

It's not positioning of Bata India by the way. Bata India is a corporate name. It's positioning of the brands and right now there are two large banners in operation which is Bata and Hush Puppies. As I mentioned in the presentation Hush Puppies is our premium driver and that is seen obviously with the traction that we have seen on premium side of things, etc., in the portfolio, it has seen continuous expansion. Now EBOs both COCO as well as franchise combined, we have crossed 150 now on last count let's say September versus let's say about less than 100 till about 2 years back. So that sees continuous expansion that will anchor the entire premium side on specifically comfort and as I said comfort casual kind of space, formal casual space. There also there are growth levers from a portfolio perspective in terms of there are two large growth levers, one is on NFT. I think the badge value is very strong. We can leverage it across many other categories that consumers wallet consumes. So non footwear related stuff and we are seeing exciting traction on some of the products that we have brought in there. The second piece in Hush Puppies is the ladies section. Ladies offerings, the ladies call to action, the mind share for ladies is not as high as it is for men and I think we have got a right to it. More often than not couples do walk in, and we can monetize both of them. So, there are two clear cut levers besides expansion, etc., on the Hush Puppies side. On the Bata side, it is going to be also, I would say that the growth will be driven by a mix of both volume as well as value. We will not want it to be only value driven. We have realized that that is very critical. However, the price points that are on the lower side have been under pressure for some extended period and therefore some of the benefits have not come through. We are expecting and we do see some early signs of it because of obviously the value proposition that we have done. We have re-indexed products. We have brought in new products at competitive price points but wherever we can add in technology and features, we will charge for premium and classic example being Power Easy Slide, the whole float story that we have created over 3 years as well as let's say Bata Comfit, etc. These are technology/feature driven products, and they do sell at ASPs which are significantly higher than overall ASPs. So, it's a two-pronged thing. I hope I have been able to answer Prerna.

As a follow-up on this answer, I wanted to understand as a company, how do you see the volumes and ASPs moving because these are two different strategies merging and I know it is consumerization where you cannot really pinpoint on what will work first and what will work second. But as a senior management, you would be having some vision wherein how this should pan out and how can you deliver growth on a volume and ASP basis because at the end of the day, we need growth on volume and ASP.

Bata will continue to drive volumes. We will want within that the full price sales to go up significantly and that's what the whole inventory declutter was all about and we do see now that coming through as Amit mentioned in a commentary on markdown and therefore gross margins. Premiumization as I said will be driven by certain categories of products as well as portfolio and Hush Puppies. It will be a combination of both as I said and I think it is going to be a medium- term trajectory that I can comment on. Quarter-to-quarter, there will be variations based on contextual circumstances.

Just wanted to understand this quarter, how was the volume growth and what was the ASP decline because of this inventory declutter. If you could also give us some sense on how is the consumer behaving on a (+) Rs.2500-2800 price point and below price point and how are you going to take it forward?

The latter question we will wait for as I also mentioned that there is some amount of backlog, etc., so we don't know what's the structural piece while we do see uptick definitely post 22nd. But the fact is that what is the structural behavioral change, etc., we will wait and watch on that front. So, I will hold my answers on that right now while do we see some traction coming through on the lower price point product so that's where I limit myself. But between let's say 1000 to 2500 which I heard you ask versus (+) 2500 we will wait for a little more time while we make any commentary on that. On the first piece which is on ASP versus this, I think last quarter we would have been flattish on ASP. As I said premium has done much better, so the mix obviously lifted the ASP the inventory declutter and the clearance on that front lowered the ASP, so both of them nullified each other overall flat on ASP.

In fact, the decline is largely volume driven.

Do you see any margin impact going forward in terms of this strategy moving ahead because this quarter definitely there was some disruption, but do we return back to similar margins that we were doing earlier in the next quarter.

I think Amit commented on this pretty much in detail in a prior question, but I will let him summarize it once again.

Again, I am saying see the company is slightly shifting from a deep markdown during the USS period to consistently clearing up inventory and not waiting for the USS period therefore what you see the slightly higher markdown leading to margin erosion. So, next quarter, which is a big USS period, we should see significantly lower markdown impact on gross margin because many of those actions are continuously being done in the current quarter as well as in the previous quarter. So, next quarter the overall margin should come out to be better compared to the previous year.

We have a follow up question from Sameer Gupta from India Infoline.

A clarification on the zero-base merchandise I have seen in the presentation that you have completed Gurgaon and Mumbai. I wanted to understand what does it mean? Does it mean that all stores in Mumbai now are on zero-base merchandising, or it means whatever stores you had assigned to be on zero-base merchandising in Mumbai are now completed.

Largely the objective is all stores but however within that there is some filter that they apply but broadly about 90% I would say, so most of the stores.

90% of Mumbai Bata stores in Mumbai are now on zero-base merchandising.

Yes.

Another bookkeeping question, can you quantify the percentage of portfolio now which is below 1000 between 1000 and 2500, and the rest would be above 2500.

About 40% below 1000. 40% between 1000 and 2500 and 20% above 2500. 40-40-20.

A clarification on this also so I heard in earlier interview like 3 days back you mentioned that premium is 30% of sales so what exactly do you call premium, is it a price point.

It is price point driven but it is a combination of price point as well as brand so I think it would have been depending on the context that was said but I would have commented based on let's say basically (+) 2000 or something like that. So, there are various categories of products which also have price points above and therefore (+) 2000 would have been in that range. I think it would have been in context of a question.

Basically, understanding again is like an open footwear even if it is let's say less than 2000 can be classified as premium in your understanding, or no, that's (+) 2000.

Yes. I can't give you a concrete example immediately but there are Hush Puppies products which are let's say for example below 2500. So, there are similar examples in Power the other way around, etc. So, it's more of a subjective definition

Yes.

We will take that as our last question for the day. I would now like to hand the conference over to management for closing comments.

Thank you everyone for participating. If you have any follow up questions you can get in touch with me. Thanks everyone.

On behalf of Batlivala & Karani Securities India Limited, that concludes this conference call. Thank you for joining us. You may now disconnect your lines.

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