Bata Pakistan Limited

Bata Pakistan Limited (PSX: BATA) was incorporated in Pakistan in 1951 and became public in 1979. The company is engaged in the manufacturing and sale of all kinds of footwear along with the sale of accessories and hosiery items. Bafin B.V. (Nederland) is the parent company of BATA whereas the ultimate parent company is Compass Limited, Bermuda. As of December 31, 2023, BATA has 444 retail outlets across Pakistan. The company has an annual production capacity of 18.394 million pairs.

Pattern of Shareholding

As of December 31, 2023, BATA has a total of 7.56 million shares outstanding which are held by 1302 shareholders. Bafin B.V. (Nederland) holds the majority shareholding of 75.21 percent followed by NIT & ICP holding 15.22 percent shares of BATA. The local general public has a 4.13 percent stake in the company while insurance companies account for 3.26 percent shares. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Except for a decline in 2020, BATA’s topline has been posting reasonable growth in all the years under consideration. Its bottom line declined in 2019 and 2020 with a net loss in the latter year. BATA’s bottom line took an upward flight thereafter. The company’s gross margin slightly inched up in 2019, while its operating and net margins plunged. This was followed by a drastic drop in all the margins in 2020. BATA’s margin recovered for the next two years to attain its highest level in 2022 only to slide back in 2023. The detailed performance review of the period under consideration is given below.

In 2019, BATA’s topline grew by 3.75 percent year-on-year. During the year, the company slightly reduced its production capacity from 20.29 million pairs to 19.375 million pairs and operated at 80.73 percent capacity versus 78 percent capacity utilization attained by BATA in 2018. The change in production and sales mix enabled the company to record 4.75 percent gross profit in 2019 with GP margin climbing up from 44.81 percent in 2018 to 45.16 percent in 2019. Distribution expense increased by 8.94 percent in 2019 mainly on account of higher depreciation on right-of-use assets, higher trademark license fee, elevated advertising expense as well as increased payroll expenses. This was despite the fact that during the year, the company streamlined its number of outlets from 476 to 462 which meant a lesser sales force. Administrative expenses grew by a mere 2.04 percent in 2019 due to higher payroll expenses as well as management service fees payable to Global Footwear Services Pte Limited and Bata Brands S.A.R.L., Switzerland for management and information technology services respectively. Other expenses plummeted by 15.68 percent in 2019 due to lower profit-related provisioning made during the year. Other income also shrank by 32.59 percent in 2019 due to lesser income from financial assets. Operating profit slid by 0.58 percent in 2019 with an OP margin of 13.17 versus an OP margin of 13.74 percent attained in 2018. Finance cost escalated by 1779.73 percent in 2019 on account of an elevated level of discount rate as well as lease liability recorded during the year as the company obtained retail outlets and wholesale depots on lease from different parties. This translated into a 27.48 percent lower net profit of Rs.1088.862 recorded by BATA in 2019. EPS slipped from Rs.198.6 in 2018 to Rs.144.03 in 2019. NP margin clocked in at 6.25 percent in 2019 versus 8.94 percent in 2018.

BATA’s net sales drastically tumbled by 32.79 percent in 2020. This was on account of the sluggish performance of both retail and non-retail outlets due to COVID-19. The company reduced its retail outlets from 462 in 2019 to 444 in 2020 due to weak demand. Production capacity was also reduced to 18.704 million pairs with a capacity utilization of 59.81 percent. Cost of sales tapered off by 23.18 percent in 2020 due to lower absorption of fixed overheads. This resulted in a 44.46 percent lower gross profit recorded by BATA in 2020 with a GP margin of 37.32 percent. Distribution expenses leveled down by 12.9 percent in 2020. The higher depreciation charge was diluted by lower payroll expenses due to a lesser number of operational outlets, lesser rent, and lower utility expenses as well as curtailed trademark license fees incurred during the year. Administrative expenses inched down by 1 percent in 2020 due to lower payroll expenses as the number of employees was reduced from 2683 in 2019 to 2287 in 2020. 50 percent lower other expenses incurred during the year was the result of no profit-related provisioning made during the year. Rent concessions received during the year resulted in 1429.48 percent higher other income recorded by BATA in 2020. The company recorded an operating loss of Rs.106.92 million in 2020. Finance costs grew by 1.38 percent in 2020 due to higher interest on lease liability. BATA recorded a net loss of Rs.627.345 million in 2020 with EPS of Rs.89.98.

In 2021, BATA recorded 19.41 percent higher net sales due to changes in sales mix, increased volume as well as upward revision of prices. In pursuance of a better production and sales mix, the company reduced its production capacity to 18.339 million pairs per annum and operated at 63.1 percent capacity. Cost of sales ticked up by just 2.92 percent in 2021, resulting in a 48.15 percent improved gross profit recorded in 2021 with a GP margin of 46.31 percent. Distribution expenses grew by 6.8 percent in 2021 due to higher payroll expenses, elevated freight charges as well as increased trademark license fees incurred during the year. Administrative expenses grew by 1.58 percent in 2021 mainly because of higher management service fees and increased payroll expenses incurred during the year, although, BATA right-sized its workforce to 2274 employees in 2021 from 2287 employees in 2020. Other expenses grew by 46.6 percent in 2021 due to higher profit-related provisioning and exchange loss incurred during the year. Other income contracted by 33.28 percent in 2021 due to greater rent concessions received in 2020. The company was able to record an operating profit of Rs.1525.93 million in 2021 with an OP margin of 10.91 percent. Finance cost slid by 10.29 percent in 2021 due to monetary easing and fewer lease liabilities outstanding. Net profit clocked in at Rs.546.089 million in 2021 with EPS of Rs.72.23 and NP margin of 3.91 percent.

BATA registered 26.82 percent greater net sales in 2022. During the year, BATA slightly increased its annual production capacity to 18.378 million pairs and operated at 63.05 percent capacity. Improved volume, right sales mix, upward price revision, and cost-cutting measures resulted in 32.64 percent higher gross profit in 2022 with a GP margin of 48.43 percent – the highest among all the years under consideration. Distribution expenses mounted by 29 percent in 2022 due to a considerable hike in payroll expenses, trademark license fees, rent as well and advertising and promotion budgets incurred during the year. 24.17 percent higher administrative expenses incurred during 2022 were the result of higher payroll expenses, management service fee as well as traveling charges. BATA made increased profit-related provisioning during the year and also incurred higher exchange loss which translated into 28.29 percent higher other expense in 2022. Other income dropped by 17.73 percent in 2022 due to significantly lesser rent concessions received during the year as well as lower profit earned on bank deposits and investments. BATA’s operating profit registered a 41.6 percent year-on-year rise in 2022 with OP margin amounting to 12.18 percent, Finance cost grew by 4.32 percent in 2022 due to higher discount rate and higher mark-up incurred on WPPF and employees/agents securities and personal accounts. The higher effective tax rate due to the imposition of super tax slightly diluted the bottom line which posted a 60.10 percent rise to clock in at Rs.874.288 million in 2022 with EPS of Rs.115.65 and NP margin of 4.93 percent.

BATA’s sales improved by 8.62 percent in 2023. The company’s production capacity slightly increased to clock in at 18.394 million pairs per annum, however, the company operated at 59.93 percent capacity. The capacity enhancement was particularly done in cemented footwear. High inflation, Pak Rupee depreciation, hike in commodity prices as well as high energy cost resulted in a 10.62 percent higher cost of sales in 2023. Gross profit grew by 6.5 percent in 2023, however, GP margin dwindled to clock in at 47.5 percent. Distribution expense grew by 7.58 percent in 2023, particularly on account of higher payroll expense and elevated level of depreciation charge incurred during the year. While the company reduced its workforce from 2142 employees in 2022 to 1983 employees in 2023, its payroll expense multiplied, resulting in 28.8 percent higher administrative expense in 2023. Other expenses grew by 14.6 percent in 2023 due to higher exchange loss and greater provisioning for WWF. Other expense was conveniently offset by 103.2 percent higher other income which was the result of gain on lease modification as well as higher income on investments and bank deposits. Operating profit thinned down by 2.99 percent in 2023 with an OP margin of 10.88 percent. Despite a high discount rate, BATA was able to keep a check on its finance cost which grew by a mere 0.46 percent in 2023. This was due to fewer outstanding lease liabilities in 2023. Net profit grew by 4.8 percent to clock in at Rs.916.288 million with EPS of Rs.121.2 and NP margin of 4.76 percent.

Recent Performance (1QCY24)

BATA’s net sales grew by 9.37 percent in 1QCY24. Inflation took its toll on the cost of sales which spiked by 14.97 percent in 1QCY24. Gross profit turned out to be 4.25 percent higher in 1QCY24, however, GP margin clocked in at 49.79 percent in 1QCY24 versus 52.23 percent in 1QCY23. Distribution inched up by 0.64 percent in 1QCY24. The main components of distribution expense were payroll expense, depreciation, and trademark license fee. Administrative expense magnified by 18.57 percent in 1QCY24. In accordance with the past trend, we can assume that higher administrative expenses were because of elevated payroll expenses and management fees incurred during the quarter. 78.12 percent decline in other expenses in 1QCY24 appears to be the effect of lower profit-related provisioning. Other income built up by 92.79 percent in 1QCY24 supposedly on the back of higher investment income recorded during the quarter. Operating profit grew by 42.15 percent in 1QCY24 with an OP margin of 11.48 percent versus an OP margin of 8.83 percent recorded in 1QCY23. Finance costs slid by 23.7 percent in 1QCY24 despite a high discount rate. This was on account of lower outstanding lease liability. BATA’s net profit grew by 71.71 percent year-on-year in 1QCY24 to clock in at Rs.214.456 million with EPS of Rs.28.37 versus EPS of Rs.16.52 recorded in 1QCY23. NP margin also improved from 3.03 percent in 1QCY23 to 4.76 percent in 1QCY24.

Future Outlook

Effective sales mix and rising export sales are the mantra of BATA’s improved net sales over the years. However, the company needs to focus on cost optimization to attain better margins.