Bata Pakistan Limited

Bata Pakistan Limited (PSX: BATA) was established in Pakistan in 1951 as Bata Shoe Company (Pakistan) Limited. Later, in 1979 it went public and became Bata Pakistan Limited. The company manufactures and sells footwear, accessories and hosiery items; it has two business units, both located in Lahore, whereas it sells through its own retail outlets.

Shareholding pattern

As at December 31, 2019, Bata Pakistan Limited is largely held by its associated companies, undertakings and related parties with 75 percent shares held under this category; this solely includes Bafin (Netherlands) B.V. some 15 percent shares are under NIT & ICP; the directors, CEO, their spouses and minor children hold a very negligible number of shares, while the remaining 10 percent shares are with the rest of the shareholder categories.

Historical operational performance

Bata Pakistan has seen continuous rise in topline over the past one decade, at varying rates while profit margins have followed a stable trend.

Sales revenue growth stood at 7.4 percent during CY15. Most of this increase was contributed by the local sales of shoes and accessories. Cost of production was slightly lower at 59 percent that helped to increase gross margin. But the higher distribution expense owing to rent among other elements, kept net margin relatively flat at 9.8 percent. Moreover, inCY14, bottom-line was also supported by other income of Rs 163 million that reduced to Rs91 million in CY15. The higher other income in the previous year was due to a one time gain on disposal of property, plant and equipment.

During CY16, the company saw a marginal 2 percent growth in topline. This was the lowest seen in a decade. Sales breakdown reveals that local sales registered a 2 percent incline while export sales reduced. Cost of production as a percentage of revenue was slightly lower at nearly 59 percent, therefore gross margins also improved by roughly the same extent. With most other factors also staying similar in terms of their share in revenue, net margin remained flat at around 9 percent for the year.

At 2.75 percent, topline growth was lower than usual during CY17. Export sales continued to decrease while local sales of shoes and accessories made up a larger share in total revenue. Cost of production, too, as a percentage of revenue declined for the third time consecutively, having a positive effect on gross margin. Distribution expense increased as its share in revenue due to rent expense. However, it did not create a significant change in profitability with net margin continuing to increase, although marginally, to 9.8 percent.

Topline growth at 8.4 percent was relatively higher than that seen in the last two years. Most of this incline was contributed by local sales of shoes and accessories, while export sales followed a gradual downward trajectory. While the lower cost of production at 55 percent of revenue helped to improve gross margins, distribution expense, making up more than 23 percent of revenue, had an adverse effect on operating margin that was also reflected in the net margin that fell to 8.9 percent. Distribution expense increased mostly due to rent expense and trademark license fee; the latter “represents the royalty fee of Bata Brands S.A.R.L., Switzerland an associated company”.

Sales growth rate reduced to around 4 percent during CY19. Local sales, again, was the major contributor to this growth while export sales also increased after a period of continuous decline for the last four years, however, the increase was marginal. As per trends cost of production reduced, improving gross margins. But distribution expense and a sudden escalation of finance cost was responsible for the decline in net margin which fell to its lowest seen in the decade, at a little over 6 percent. Distribution expense increased due to higher than usual depreciation expense of over Rs 1 billion, while finance cost was mostly made up of interest/mark-up on lease liability that arose in CY19.

Quarterly results and future outlook

The first quarter of CY20 saw a decline in year on year sales, however it was not very pronounced as the outbreak of Covid-19 and the resultant lock down happened towards the end of the quarter. Though the company did incur a loss of Rs 250 million, during the period, however, a more severe impact of the pandemic can be seen in the second quarter where it fell considerably year on year as well as quarter on quarter. In the second quarter, not only was the launch of summer shoe line impacted, but also the most profitable event of the year, Eid. In 2QCY20, loss stood at the highest between the three quarters of CY20, at Rs 421 million.

During 3QCY20, revenue almost doubled quarter on quarter, but year on year there was a notable contraction. With a high distribution expense, the company did incur a loss, but it was lower than that seen during 2QCY20. With Covid-19 still in the equation, the company aims to focus on preserving cash reserves in order to maintain liquidity.