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Bata India: The shoe bites - Outside View
 
 
Bata India: The shoe bites

Bata India represents a classic study of what can go wrong with a 'Power Brand' if it is saddled with inept management.The sad and unfortunate part is that it has got everything going for it. A brand of 77 years standing in India, if not more (the company has been around for 77 years), manufacturing facilities, access to suppliers, prime outlets and a workforce which presumably understands the market only too well. The Bata brand in urban India is synonymous with shoes and accessories.

It is not that the market for its products is static .On the contrary, the directors state just the opposite and I quote 'Footwear is the engine of growth in the entire leather industry in India which is the second largest producer of footwear in the world after China, accounting for 14% of the global footwear production of 14.5 bn pairs. India produces 2.1 bn pairs of different categories of footwear including leather shoes, leather uppers and non leather footwear.------With the entire leather industry now de-licensed and de-reserved, it is paving the way for expansion on modern lines of manufacture. The company however now intends to source more footwear from the SSI sector.

The note of caution that the directors add is that with 100% foreign direct investment now allowed in the footwear segment, it will face more competition from international brands. Besides, it adds, non specialist retailers are now diversifying into promoting their own footwear brands.

In a sense, it still gives the impression of not being ready to face the challenges ahead. Well, to start with, the company does not even seem to have an honorable retirement policy for its senior management staff. The CEO is 67 years young and two other foreign employees have also crossed the 60 mark. The parent Bata's way of dishing out retirement benefits to its expatriate staff in the absence of other benefits accruing it would appear. It is simultaneously implementing a VRS scheme for its Indian staff. No quarrel on this latter aspect please. But, what in heaven's name are its 2 wholly owned moribund subsidiaries up to please?

Take another look, if you please, on how it is run.Under the heading of Loans and Advances, there are provisions under 5 sub-heads. There is a provision for Doubtful Advances, for Doubtful Claims, for Doubtful Deposits, for Other Loans and Advances and, amazingly enough, for Doubtful Advances for Deposits made with Statutory Government Bodies!!!!All adding up to a cool Rs 100 m for 2009. Then there is a contingent liability amounting to Rs 400 m. There are other contingencies also. Phewwww!!!There is something not quite right here. Or is it that all shoe companies share a similar fate? More tellingly, bonus shares constitute only a niggardly 15% of its paid up equity of Rs 64.26crs-a poor showing for an MNC.

To recap, in the last ten years, between 2000 and 2009, it skipped dividend on 5 occasions, simply because the bottomline was registering a negative cash flow, inspite of the best attempts of its accounts department. Whether this insipid state of affairs also affected the payment of royalty and technical collaboration fees to the parent in these trying years is not possible to ascertain as the annual reports for these years is unavailable. In 2009, it paid out Rs 125 m on this count, up from Rs 80 m previously.

Between 2000 and 2005, sales including other income, yo-yo-ed in the region of Rs 7 bn to Rs 7.8 bn. In 2006, sales suddenly accelerated and have been picking up some speed since then.Thankfully so has the bottomline. At least now it is generating enough cash from operations to plonk down small sums on fixed asset expansion. Sensibly enough, it has also quickly moved in to reduce it borrowings. In its wisdom, the management has also entered into a 50:50 JV for the development of its considerable real estate- but this venture has yet to contribute any dosh to the bottomline yet.

Its biggest asset and which is still not shown at full marketable value is its real estate. In the fixed asset schedule the land value is shown as Rs 240 m and in the investment schedule there is a further figure of Rs 122 m shown under immovable properties.Why the land bank is shown under 2 separate headings is not known.

Its plant and machinery however is still considerably depreciated, with accumulated depreciation amounting to 76% of the P&M gross block. This was after the almost Rs 800 m additions to overall fixed assets over the last 2 years and the simultaneous disposal of Rs 290 m fixed assets too. The bulk of this addition in 2009 has gone not into manufacturing, but in setting up 65 new large scale retail outlets and the modernization of 40 existing stores. In other words, it would appear to be going slow on the upgradation of its own production facilities. It still has considerable clout in the market place as witnessed by the increasing deposits that it is able to garner from franchisees. It should also thank its stars that it is still able to sell cash down literally.

The future focus will be on outsourcing, inspite of the company having substantial production capabilities. It can on paper produce 43 m pairs of rubber and canvas footwear and 20 m pairs of leather and other footwear, but capacity utilization of the former was a low 30% in 2009 while that of the latter was appreciably higher at 67%.The latter also brought in more than 60% of gross rupee sales or Rs 7.5 bn in 2009. It completely outsources the sale of its plastic footwear range which added Rs 1 bn to turnover in 2009 as also accessories and garments which tossed in further Rs 320 m.

The increased emphasis on outsourcing was only marginally evident in 2009. It also sold less nos in 2009 than in 2008-that is 45.5 m pairs against 47.5 m pairs. Of this, outsourcing in volume terms, accounted for 43% as compared to 41% previously. The outsourcing included purchase of shoes from its foreign affiliates and sale of shoes to its foreign affiliates.The shoe pinches both ways it appears. There is no separate classification of the profits earned on manufactured and outsourced sales and hence it is left to our individual conclusion on the profitability factor.

In sum, one can only hope that the reignited spark that is rekindling the company's fortunes will take to full flight in the near future itself. Much time has already been wasted.

Disclosure: Please note that I am not a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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Equitymaster requests your view! Post a comment on "Bata India: The shoe bites". Click here!

2 Responses to "Bata India: The shoe bites"

sanjeev lihala

Dec 11, 2010

which sector to outperform in the current senario

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Avijit roy

Jul 7, 2010

Bata India has always been an enigma. A bridesmaid amongst MNCs, at least on the stock market. Sometime in 2008 I had bought a few shares at Rs 153 or so intending to sell at a reasonable profit. The price rose to Rs 210 or so and before I could give the order to the broker to sell, the quotation on both NSE and BSE nosedived to around 175/180. I thought that I should sell when it dashes over the Rs 200 levels. The price would meander to my target level only to shy back to the Rs 180 levels. Finally, as my patience was wearing thin, I sold all that I had around Rs 190-195 levels. Today, this share is quoting at Rs 275-280 levels and we are not sure if it is worth a look at, from an investment angle.

I read somewhere that Bata was considering buys shoes from the SSI sector which is now confirmed by Luke Verghese. It is a MNC who loves behaving like a cottage industry. It owns most of the showrooms in most cities, where the employees consider themselves to be the employees of the West Bengal Govt. It also owns valuable real estate, which,I believe, is being developed. A time-tested brand of about 75-80 years that would now be selling leather produsts, read shoes, which are manufactured at some shed in some shady location.

From the point of investment, I wonder if it would be worthwhile to get into that stock at these levels. Would someone risk an opinion?

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Equitymaster requests your view! Post a comment on "Bata India: The shoe bites". Click here!
 

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