Taming of the Shoe, BATA – by SPJIMR’s Fin Whiz Ronak

If you look back into the annals of time, trace a path all the way to the present and dare to peek into the future as well, you’d be surprised to find that no article of clothing has been, is or will be more ubiquitous than the humble shoe. Ever since prehistoric times, Man has always felt the need to protect his feet from everything that Mother Nature could throw at him and ancient cultures, ranging from the Native Americans to the Egyptians and all the way to Ancient China, developed their own forms of primitive footwear. While shoemaking as a trade only picked up speed during the Industrial Revolution, the global footwear market today is pegged at a size of around $190 – 200 billion, clocking a sub – 5% annual growth. While the luxury segment is still a minuscule portion of the entire pie, it is growing in double – digits, with some brands even growing at over 30% – 70% annually, albeit on a small base. Speaking of the luxury footwear industry, names like Jimmy Choo, Louis Vuitton, Christian Louboutin, Gucci, Prada, Steve Madden, Yves Saint Laurent, Manolo Blahnik and Brian Atwood are now the soles that legends are made of and every shoe cabinet desires.

While shoes have had a long standing history, they’ve galloped into modern culture as well. From the glass slipper that Cinderella lost at the Prince’s Ball to the shoe house that the old woman inhabited, fairy tales have revolved around that humble article of clothing. And shoes have become a part and parcel of modern times as well, from the memorial of the Boston Marathon bombing to that infamous pair that was thrown by an Iraqi journalist at and unfortunately missed George Bush.

Film, theatre and television haven’t been spared either. Nike featured in several movies, The Wizard of Oz showcased a pair of red shoes that is now virtually immortalized, Kinky Boots still rules Broadway and Carrie Bradshaw’s shoe closet of over a hundred designer pairs was one of the main talking points in Sex and the City. Incidentally, as far as that last one goes, I still opine that a newspaper columnist and freelance writer can’t afford that sort of a collection, live in an upscale New York City apartment and still maintain a flamboyant lifestyle, all at the same time. Nevertheless, shoes have been around for thousands of years and are probably destined to live on forever.

As far as India goes, for several decades on the trot, the simple mention of shoes would conjure up a single brand in one’s mind – Bata. Founded by Tomas Bata in Czechoslovakia and now headquartered in Switzerland, the shoe major has been around for over a century and back in the day, one of its cost – cutting measures of switching from leather to canvas resulted in the type of shoes that the company is famous for. Bata is also credited for creating the ‘Bata Pricing’ trend of prices ending in a 9, a strategy it originally pursued to encourage impulse purchases. While its original founding site of Zlin was christened Bataville, the company went on to develop several such communities in Europe and around the world. At the start of the twentieth century, Bata became one of Europe’s largest shoe manufacturers and it survived and thrived through the course of the two World Wars.

Bata entered India in the 1930s when it began sourcing rubber from the country and capitalized on the huge market that the country presented. Batanagar came up near Kolkata and it soon became a major shoe – producing centre. Meanwhile, Bata had entered several markets in South Asia but India continued to be one of its largest and by far, the most important. Following the nationalization of its factories in Czechoslovakia after the World Wars, Bata found a new home in Canada but in 2004, it moved its headquarters to Switzerland. The year 2004 was also when Bata announced that it would eventually move to a single global holding company, an announcement that did excite several markets around the world.

Today, with a topline of around Rs. 2800 crores and a bottomline a little shy of Rs. 230 crores, Bata India might be back on the growth path but as far as the company’s position over the course of the past two decades goes, the same cannot be said. In the years following 1991, Bata tackled issues relating to its labour unions and supply chains, even as it struggled to grow sales and infuse some life into a stagnant stock price. From 2005 onwards, Bata’s turnaround story began to kick in, with sales rising, more stores opening and everything seemingly going its way. And then, in 2010 – 11, a new wave hit the Indian market, one which left Bata high and dry.

When the e – commerce euphoria enveloped the Indian market, discounting was the order of the day and footwear was one of the hardest hit categories. While most companies jumped on the online bandwagon to boost sales, albeit at the cost of profits, Bata stubbornly stayed away, in a bid to protect its margins. MNC peers such as Puma, Nike and Adidas took to e – commerce readily, grew their sales and captured market share. However, Bata’s move of shunning e – commerce initially resulted in the spectre of slowing sales coming back to haunt it. While the company focused on safeguarding its margins, a lacklustre stock market only wanted companies that were growing their topline, at a time when the European sovereign debt crisis was threatening to bring about a double dip recession. And Bata’s reluctance to go the e – commerce way was kicking the company right where it hurt.

While Bata India’s scrip was struggling to find favour with the markets, help came from an unexpected quarter. In the aftermath of the global financial crisis, with growth hard to come by overseas, most MNCs resorted to increasing their stakes in their Indian subsidiaries, sending their scrips skywards. While open offers from the foreign parents flooded the Indian markets one by one, the trend was hardly surprising. With interest rates near zero overseas, most MNCs would have realized that instead of parking their cash piles in bank deposits, a better return could be obtained by simply borrowing overseas, bringing the cash to India, absorbing the foreign exchange loss and then raising the promoter stake in the Indian subsidiary. The double – digit return earned in a growing Indian market, minus the forex loss and the cost of borrowing would have easily overshadowed the return that an idle pile of cash in a bank deposit would have earned overseas. Incidentally, it was HSBC that managed almost every foreign parent’s open offer.

As far as Bata India was concerned, its stagnant stock price and attractive valuations of around 30 times earnings was just too good to resist. Bata BN NV, the parent and global holding company, sauntered in and picked up a 1% stake in Bata India, increasing its holding from 51% to 52%, which infused some life back into the scrip. A few months later, a new revelation kicked Bata’s stock price sky – high and it almost turned out to be a shoo – in.

With Bata India trading at a multiple of 30 times earnings, the market suddenly took cognizance of the fact that most of Bata’s showrooms were company – owned and its vast real estate holdings weren’t factored into the valuations or the stock price. Moreover, with most MNCs trading in the 40 – 70 times earnings range, Bata India had some steam left in it, to say the least. Bata India soon began climbing and if that wasn’t enough, Bata BN NV bought another 1% of its Indian subsidiary, taking its holding to 53%. Over the course of the next 12 months, Bata India’s scrip doubled and the markets cheered its announcement to enter the e – commerce channel, albeit in a limited manner. With Bata’s sales and profits sprinting once again, the company’s stock price soon rose to an exalted price multiple of 45 – 50 times earnings. Over the next two years, Bata India continued to climb and after overcoming a dull three year period by a buy – in from Bata BN NV and a re – rating on the bourses, it seemed as if the boot was firmly on the other foot.

Today, after a glorious three year run, Bata India seems to be running barefoot again. Over the past 12 months or so, a slowing sales growth has come back to haunt it. Moreover, its seemingly irresolvable supply chain issues have come back to trip up the company’s growth path and same – store sales growth, an important parameter for the retail sector, doesn’t look very encouraging, to say the least. The company’s B2B play, Way Finder Brands and its e – commerce division are slowly gathering steam but it might be a few quarters before they start bumping up its topline and spurring growth.

While Bata India’s scrip has corrected by over 30% in the past fiscal, on the back of two disappointing quarters, the company is doing all it can to kick up growth again. It continues to expand its store network, while shutting down unprofitable stores. Its deep push into the e – commerce channel, with a selective discounting strategy, continues. Moreover, it is diversifying its brand offerings by straddling virtually every segment of the footwear market and foraying into accessories as well. Bata’s bevy of brands includes Marie Claire, Hush Puppies, SunDrops, SPARX, North Star, Power, Weinbrenner, Bubblegummers and of course, its eponymous brand. Also, the company claims that its supply chain, hobbled by a delayed SAP implementation, is now back on track. Bata India has undertaken some price increases, despite an expected knock on its sales growth, in a bid to maintain its margins and rubber prices, which are at a multi – year low, should help the company, at least in the near future.

The company is following a premiumization strategy of increasing its focus on its high – end brands and leather offerings, in order to elevate its margins. An expected rise in consumer discretionary spending would bode well for the company in the years to come, as well as its push into tier – 2 and tier – 3 cities. For now, Bata India’s sales are growing in single – digits, with margins in place and its profits are reflecting a rising trend as well. But as far as the future goes, where does all that leave the scrip, you might ask?

Well, it might be déjà vu, all over again. Bata India’s scrip is back to its 30 – time multiple and its current position is eerily reminiscent of where the company was in 2010 – 11. So where does it go from here on? Well, remember that seemingly irrelevant comment that Bata made in 2004 about eventually moving to a single global holding company, a comment that excited markets at that time but was later shrugged off? Of course, you might argue that Bata’s announcement in 2004 holds little relevance today. After all, we are in 2015 now and the world was a different place, back in 2004. And quite frankly, it was. In 2004, the markets were on an upward move after recovering from the Dotcom Bubble, The X Factor had just debuted on television, Tony Blair was still referred to as George Bush’s poodle, Daniel Craig wasn’t yet a Double O Agent and Megan Fox was still… well, we won’t get into that.

Over the past five years or so, Bata BN NV has made some steps in the very direction that it promised it would take, way back in 2004. With only a few listed arms worldwide, Bata BN NV set out to consolidate its global holding structure. In 2010, it gradually increased its stake in its Thai arm and delisted it. In 2011 and 2012, it raised its stakes in its Pakistani, Indonesian and Bangladeshi subsidiaries from the 50% – odd levels to the capped limits in the 70 – 80% range in the respective countries. Intriguingly, these consolidation moves were all done at times when these companies weren’t reporting the best of numbers and the markets weren’t exactly ogling their scrips. While Bata may have already tackled its other South Asian arms, there’s one subsidiary that fits the bill and that could very well be next to receive a similar treatment of a stake hike and a delisting by the parent – a certain subsidiary that goes by the name of Bata India.

In 2010 – 14, while most MNCs came out with open offers and delistings for their Indian arms, Bata was one of the few companies that adopted the creeping acquisition route of a 1% hike in each of two years. Looking at the wealth created by companies that have delisted from the Indian market in the recent past, Bata India’s stock could see a significant run – up, if Bata BN NV does indeed decide to delist it. As far as the future goes, Bata India doesn’t need a listed presence and a disappearance from the Indian bourses is unlikely to hit its sales in any manner. Bata India is a zero – debt and cash – rich company that is both profitable and cash flow – positive for several years on the trot now. Any funding requirement is met by its foreign parent. In terms of a bright and shiny future, Bata India would be one of the biggest beneficiaries of the Indian growth story playing out, the returns from which Bata BN NV might want to keep all for itself. While it may have only nibbled 2% of its Indian arm then, it may soon be back for a bigger slice of the Indian pie. And of course, if the world does take to Marilyn Monroe’s famous saying of giving every girl a pair of shoes so that she can conquer the world, well then, Bata India’s sales and scrip might just flare up like Monroe’s dress in that iconic scene from ‘The Seven Year Itch’.

In recent news, Bata India went in for a 2 – for – 1 stock split, in order to increase its trading volumes. While that may not mean much on the face of things, there have been a couple of cases of MNCs going in for a stock split, in the run – up to a delisting, in order to create liquidity and increase trading volumes, which does ease a delisting.  That move might be a harbinger for things to come and as far as Bata BN NV increasing its stake in and eventually delisting its Indian subsidiary goes, well, that’s neither a prediction nor a prophecy. It’s more of a spoiler really.

With a promoter shareholding of around 53% and valuations looking ripe for the picking again at a sub – 30 time multiple, a stake hike and possible delisting look to be on the cards for Bata’s Indian arm in the near future. Indeed, it may not be long before the Swiss major reins in and tames its wild – running subsidiary, Bata India. And for all you know, that’s a tale that the shoemaker and his magic little elves might soon be crafting.    

Ronak Ravindran

Ronak Ravindran is a PGDM 2014-16 student at SPJIMR, Mumbai specialising in Finance. Connect with him on https://in.linkedin.com/in/ronakravindran. You can also follow his blog, http://corporateprophet.blogspot.in/


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