Looking at the performance of Bata India versus its listed regional subsidiaries in Bangladesh, Pakistan and Indonesia, also shows that Bata India stands up well in comparison
As a follow-up on Nomura Equity Research’s earlier report Taking the right steps, dated 5 July 2013, the brokerage looks at how Bata India has performed both against competitors in India and regional listed subsidiaries of Bata. Nomura finds that Bata India over the years has had the right strategy when it comes to taking on competition. According to Nomura, the company’s distribution strength (Bata India has around two times the number of stores as nearest competitor Adidas India) and the product portfolio (straddles across segments and price points).
Nomura finds that Khadims, with 630 stores and presence across segments, but only operating in the mass- to mid-price segment, as one of the most relevant competitors of the company. Geographically, Khadims is more focussed on West India, while Bata India has a much more diversified presence across the country, reveals Nomura.
In terms of financial performance, over the past five years Bata India has delivered revenue/EBITDA and PAT growth CAGR of 17%/30% and 29%. While Khadims has been able to match the revenue growth performance at around 16%, EBITDA and PAT growth has lagged that of Bata India. The outperformance has been led by Bata India’s ability to improve operating margins from 10% in CY08 to 15% in CY12. Khadims, on the other hand, has been operating at around 11% operating margins through this time period, the Nomura report said.
This is a result of Bata investing resources into developing the products line and branding and also pushing through cost efficiency measures. Khadims, being a mass- to mid-market player only and without the much better distribution that Bata has, has been unable to scale up the profitability, Nomura finds out.
The brokerage also analysed other local players in the footwear market in India such as Metro Shoes and Catwalk World, both of which are well known brands in the top 10 cities in India. While Metro Shoes does match up on operating margins (mid teens), Catwalk World is more similar to Khadims in terms of operating margin profile.
Looking at the performance of Bata India versus listed regional subsidiaries in Bangladesh, Pakistan and Indonesia, also shows that Bata India stands up well in comparison. Over the last six years, Bata India’s profit growth CAGR has been around 29%. Only the subsidiary in Pakistan has delivered a better performance with growth of 45%, according to Nomura.
While there has been improvement in operating margins across the board over the past six years, it has been more robust at Bata India against its regional competitors. As compared to CY06, Bata India has seen margins improve by 895 basis points (bps), while Pakistan and Bangladesh have seen margin improvement of 540 bps and 580 bps, respectively. Margins in
Bangladesh have largely remained flat.
Nomura also focussed at the RoEs across the region and finds that India ranks well, although the Bangladesh business has a far greater RoE than any of the regional peers. The brokerage believes there remains scope for the company to improve the return ratios over the medium term as product mix improves and the company gains from the scale of operations. The mid twenties RoE that Bata India has also compares well with other mid-cap consumer companies in India such as Marico and GCPL.
As a result of improvement in working capital and ability to fund capital expenditure using international cash generation, free cash flow FCF) at Bata India has grown significantly over the past five years, said Nomura. A look at the FCF generated in CY12 (in dollar terms) across all four listed subsidiaries shows that Bata India is by far the highest, with the Pakistan subsidiary at nearly half of Bata India’s level. Over the next three years, Nomura expects Bata India to deliver 17% FCF growth CAGR.
Bata trades at 24.1x CY14F EPS of Rs35.9 versus the sector average of 26x. With FCF set to increase at a CAGR of 17% between CY12-15F and Bata having a stable around 30% dividend payout, based on the brokerage’s estimates, it offers one of the best ways to play the growth of the discretionary spending segment in the long term. Macro factors such as low per capita consumption of footwear and increasing disposable income will drive longer-term growth for the footwear segment in India.
But speculators are having a great time
With the benefit of hindsight, a lot of...
The market regulator, which was mindlessly forwarding suggestions from EAS Sarma, a highly respected former bureaucrat, to the SEBI Complaint Redress System or SCORES, has finally replied after over six months
After keeping mum for over six months, market regulator Securities & Exchange Board of India (SEBI) has finally replied to the letters sent by EAS Sarma, former secretary to the Government of India (GoI) on the menace of money circulation schemes. Although, SEBI took over six months to reply, it admitted that these money raising schemes run by multi-level marketing (MLM) operators, take advantage of regulatory gaps and overlaps.
“The main difficulties with unauthorised or unregulated money raising schemes are that they are often successful in taking advantage of regulator gaps as well as overlaps,” SEBI said in its reply.
On 19 December 2012, Mr Sarma wrote to the prime minister about the scourge of MLM companies that have been taking “full advantage of the soft regulatory structure to swindle unwary and financially illiterate Indians on a mind boggling scale.”
The letter was copied to UK Sinha, chairman of SEBI, as well. The reaction from the SEBI chairman was, however, shocking. The letter was automatically diverted to SEBI Complaints Redress System or SCORES, SEBI’s web-based system. An automated reply directed Mr Sarma to lodge a complaint on SCORES, with a long explanation of the process. This was repeated, when the former secretary send a suggestion to ministry of corporate affairs (MCA) on the increasing menace of shell companies with a suggestion to tighten the procedure of registration of companies to pre-empt unethical persons indulging in money laundering. A copy of this letter was marked to the SEBI chairman. And SEBI again send its ‘standard’ automated reply to Mr Sarma.
Irritated at this “automatic reply route” from SEBI on his suggestions, Mr Sarma, the former secretary wrote to Arvind Mayaram, secretary, Department of Economic Affairs (DEA) in the finance ministry (who deals with these regulatory institutions). “Apparently, SEBI had no clear understanding about the difference between a ‘grievance’ from an individual and a ‘suggestion’ from the public! If at all there is any grievance, it is the grievance of the public about the indifferent manner in which SEBI has been dealing with suggestions from the public,” he said in his letter.
After finally receiving a reply from SEBI, Mr Sarma said, “I hope that, from the point of view of good governance, SEBI will institute a system in which letters from the public are treated with respect and replied promptly. After all, it is the tax payers’ money that is invested on your computers and internet connectivity and I do not see any reason why SEBI should conduct itself so insensitively, when even PMO sends acknowledgements promptly.”
The former secretary also asked the concerned official, who sent the reply, to place his letter before the chairman and members of SEBI for their information and to let them know how rest of the people in the country feel about the role of SEBI.
In 1999, both the SEBI Act and the Securities Contracts (Regulation) Act were amended to declare collective investment schemes (CIS) as ‘security’ risk and to provide jurisdiction to SEBI to regulate CIS. “However,” SEBI in its reply says, “four specific tests have to be applied to hold that a particular money raising scheme is a CIS or not. Besides, there are specific exemptions from CIS for activities like Non-bank financial companies (NBFCs), Nidhi, Chit fund, deposits raised by companies under the Companies Act and insurance. These activities are regulated by agencies like Reserve Bank of India (RBI), state governments, MCA and Insurance Regulatory and Development Authority (IRDA).”
While the RBI has maintained that the deposit-taking companies does not fall under its jurisdiction, market regulator SEBI tried to rein in such companies in the past under its CIS regulations. However, these companies managed to subvert the SEBI orders and continued to flourish with political patronage.
In its reply to Mr Sarma, the market regulator said, “MLM schemes in the nature of money circulation schemes are banned under the central legislation titled Prize Chits and Money Circulation Schemes (Banning) Act 1978 (PCMCS Act) and as such these do not fall within the purview of SEBI”.
The PCMCS Act defines money circulation scheme as under:
(c) “money circulation scheme” means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;
Even Section 3 of the PCMCS Act, prohibits any entity from promoting, conducting any prize chit or money circulation scheme, enrolling any member of any such chit or scheme, or participating in it otherwise, or from receiving or remitting any money in pursuance of such chit or scheme.
However, though PCMCS is a central Act, Section 13 empowers the concerned state government to make rules, in consultation with the RBI for carrying out the provision of this Act.
SEBI said, “It would be pertinent to mention here that MLM schemes have been declared as prohibited money circulation schemes under the PCMCS Act by various high courts and Supreme Court in following cases:
1. Amway v/s Union of India and others, 2007(4) ALT808 Andhra Pradesh
2. Apple FMCG v/s Union of India and others, 2005 Writ LT115 Madras
3. CIT v/s Amarjeet Kaur, (2006) 283 ITR71 (KAR) Karnataka
4. Kuriachan Chako and Others v/s State of Kerala, (2008)8SCC708 Supreme Court
SEBI said, at the time of notification of CIS Regulations in 1999, it had information about 664 entities operating CIS without obtaining registration from the market regulator. As of March 2013, SEBI said in 138 cases accused have been convicted.
However, the market regulator also admitted several deficiencies and procedural delays while prosecuting such CIS operators. SEBI said, since none of these companies are registered with the regulator as CIS, it has to first issue a show cause notice, hear them, establish that the test for CIS as prescribed under SEBI Act are fulfilled and then pass orders. All this takes time. In addition, any order passed by SEBI is appealable before the Securities Appellate Tribunal (SAT).
Even, other courts, which have no jurisdiction under the SEBI Act, grant injunction orders on the SEBI directions. In one case, district courts from West Bengal passed 11 injunction orders one after another and the market regulator had to name these courts and get these orders vacated by the high court.
SEBI said it has passed orders banning 11 companies and asking them to refund the money collected over the past three years. Some of the companies against which the orders were passed include Rose Valley Real Estate & Construction, Sun-Plant Agro, NGHI Developers India, MPS Greenery Developers, Nicer Green Forests, Maitreya Services Pvt, Sumangal Industries, Osian's Connoisseurs of Art Pvt Ltd, Saradha Realty, Ken Infratech and Alchemist Infra Realty.