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Shanthi Venkataraman

SHAREHOLDERS can consider investing in the rights offer of Bata India. The offer price of Rs 54 is at a substantial discount to the market price of about Rs 90. With Bata poised for a turnaround in performance, there is scope for appreciation.

The proceeds of the rights offer would be used for financing working capital requirements.

A small portion of the funds would be used to upgrade its information systems and renovate and modernise a few of its stores. The lower debt burden would reduce the interest outgo.

But this is unlikely to have a significant impact on its performance — Bata reported a loss of about Rs 60 crore for the third straight year in 2004 - and its interest cost is at low levels.

Bata, however, appears to be finding its feet again. On the back of restructuring initiatives such as introducing new designs, revamping its retail and slashing staff costs, the company reported a modest profit of Rs 0.5 crore in the January-March quarter.

The company's revenue growth has been tepid at less than five per cent. This, however, needs to be viewed in the context of the heavy discounting it has resorted to to liquidate its old merchandise.

Bata has products that straddle across price-points. About 80 per cent of its volumes continue to be dependent on footwear that caters to the economy segment, where it faces stiff competition from the unorganised sector.

At the premium end, too, it has the likes of Woodland and Gaitonde competing for market share.

Bata, however, finds itself on a better footing vis-à-vis other competing brands, on a few counts.

As part of the Bata Shoe Organisation, it enjoys access to new designs, technology and brands.

It has brands such as Hush Puppies, Body Shoe and Dr Scholl as a result of its tie-ups with Wolverine World Wide and Dr Scholl's. Bata continues to have a strong hold on the school footwear market.

It also has a superior distribution network, with more than 1,000 of its own outlets spread across the county.

This makes it a preferred marketing partner for several well-established brand names such as Reebok, Adidas and Lotto, to name a few. Distribution of these brands earns margins ranging between 35 per cent and 45 per cent.

These inherent strengths are likely to stand the company in good stead; only aggressive cost cutting would help Bata reverse its losses. There is scope for improvement in margins with Bata outsourcing a part of its manufacturing to facilities in tax-free zones.

It is also likely to rein in inventories better with the installation of superior information systems.

The biggest drag on profits continues to be staff cost, which now accounts for about 25 per cent of sales. Bata has managed to cut down its large workforce over the past year through a voluntary retirement scheme.

It plans to introduce another one in 2005. This could help reduce staff cost significantly. Bata also appears to have made peace with its labour unions. Frequent lockouts have disrupted Bata's performance in the past.

Aside from restructuring its operations, Bata's plans for its surplus real-estate is also likely to give it a leg up.

Bata has entered into a joint venture with Calcutta Metropolitan Group, to develop an integrated township on a part of the surplus land at its Batanagar property, near Calcutta. The project, once completed, would provide another revenue stream for the company.

Offer details: One share will be offered for every four held at a price of Rs 54. The offer closes on June 20 and the lead manager is ICICI Securities.

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