Overview of Indian Economy
Footwear Industry Overview
Concentration of Footwear Industry in India
Introduction of BATA India Ltd.
DCF Model
Financial Performance Highlights
1. Net Sales & PAT
2. Historical Share Price Performance
3. Expenditure Breakdown
4. Revenue Breakdown
5. Peer Comparison
6. Adjusted Price Valuation of BATA India Ltd.
7. Depreciation and Capital Expenditure Schedule
8. Beat Calculation
9. CAPM
10. Workings
11. Calculations for Free Cash Flow
12. WACC Calculation
Recommendations.
1. PROJECT REPORT FOR C-4 COMPONENT
FOR STRATEGIC FINANCIAL
MANAGEMENT FOR EVALUATION
PURPOSE.
BATA
CALCULATI
ON
C-4 EVALUATION USING
DCF MODEL (Discounting
Cash Flow Model)
BY:
SAURABH GARG
16BSP2271
2. Overview of Indian Economy
With the strong political mandate, India is believed to be a bright spot in the global economic
slowdown. The long-term growth prospective of the Indian economy is positive due to its
young population, corresponding low dependency ratio, healthy savings and investment rates,
and increasing integration into the global economy. The Indian economy has the potential to
become the world's 3rd-largest economy by the next decade, and one of the two largest
economies by mid-century. The International Monetary Fund (IMF) described the Indian
economy as the "bright spot" in the global landscape. India topped the World Bank's growth
outlook for the first time in fiscal year 2015–16, during which the economy grew 7.6%.
Growth is expected to have declined slightly to 7.1% for the 2016–17 fiscal year. According
to the IMF, India's growth is expected to rebound to 7.2% in the 2017–18 fiscal and 7.7% in
2018–19.
Demonetisation is expected to have a positive impact on the Indian economy, which will help
foster a clean and digitised economy in the long run.
India is expected to be the third largest consumer economy as its consumption may triple to
US$ 4 trillion by 2025, owing to shift in consumer behaviour and expenditure pattern,
according to a Boston Consulting Group (BCG) report; and is estimated to surpass USA to
become the second largest economy in terms of purchasing power parity (PPP) by the year
2040, according to a report by PricewaterhouseCoopers. Also, the Prime Minister, Mr
Narendra Modi has stated that India has become the world's fastest growing large economy,
and is expected to grow five-fold by 2040, owing to a series of policy measures.
Recent news of cabinet approval to the Seventh Pay Commission also kindled hope in
corporate world as it promises to hike salary of central government employees (Nearly 1
crore employee) by average 23.55%, which can boost demand in urban India. However, one
more side of the coin in that it is gone increase government burden by 1.07 lac crores which
will increase fiscal deficit.
Meanwhile Warren Buffet’s MCAP/GDP valuation triggered fear on Dalal Street as India’s
MCAP/GDP ratio is 153, which is more than threshold. That means market capitalization of
Indian companies is far more overvalued as compare to its GDP if we compare this ratio to
other economies. Indian economy is consumption led economy witnessed by 1.25 billion
populations. This gives strong mandate to foreign investor to invest in India. India is proved
to be a fastest growing state in world.
3. Footwear Industry Overview
India is the second largest footwear producer globally. Indian footwear industry plays a vital
role in the Indian economy for its vast potential for employment generation, especially for the
weaker sections and supporting economy through its foreign exchange earnings. India also
accounts for 9% of the global annual production of 22 billion pair as compared to China's
share of more than 60%. India annually produces 2.1 billion pair of which, nearly 90% are
consumed internally while remaining are exported primarily to European nations. Due to this,
India's share in the global export market is a meagre 1.9% in value terms making it much
lower than the leading producer China which shares 40% of the global market.
Footwear consumption in India has witnessed a healthy growth over the last decade, though it
remains much below the global average
India's annual footwear consumption of nearly 2.1 billion pairs is the third largest globally
and has recorded a healthy growth over the past decade driven by rise in income levels,
higher disposable income, growing fashion consciousness, and increasing discretionary
spending.
Both organized and unorganized markets are estimated to have an equal market size in value
terms
The Indian footwear industry is highly fragmented with almost 15000 small and medium
enterprises operating largely in the unorganized segment; and limited presence of organized
segment. The competitive intensity is high between the two segments and currently, both are
estimated to have an equal share of the overall domestic market in value terms. Unorganized
segment dominates the market in sales volumes due to its presence majorly in the low-cost
rubber/ plastic footwear.
Unorganized sector gains its prominence in the Indian context due to its price-competitive
products which are more suitable and attractive to the price conscious Indian consumer. Their
products are cheaper due to involvement of cheap household labour, lax implementation of
tax & labour laws and limited investment in assets.
4.
5. Bata India Limited
Bata India Ltd is the largest footwear retailer and the leader in the footwear industry in India.
The company is engaged in the business of manufacturing and trading of footwear and
accessories through their retail and wholesale network. They are having their production
facilities at Batanagar in West Bengal, Patna and Hathidah in Bihar, Faridabad in Haryana,
Bangalore in Karnataka and Hosur in Tamil Nadu. Their wholly owned subsidiaries include
Bata Properties Ltd and Coastal Commercial & Exim Ltd.
The company operates in two segments, namely footwear & accessories, and investments in
joint venture for surplus property development. Their Footwear & Accessories segment is
engaged in the business of manufacturing and trading of footwear and accessories items
through their retail and wholesale network. Their Investment in joint venture for surplus
property development segment is involved in development of real estate at Batanagar. Their
products include leather footwear, rubber/canvas footwear and plastic footwear.
Bata India Ltd was incorporated in the year 1931 as Bata Shoe Company Pvt Ltd in Konngar,
West Bengal, which was then shifted to Batanagar. Batanagar was the first manufacturing
facility in the Indian shoe industry to receive the ISO 9001 certification. The company went
public in 1973. They changed their name to Bata India Ltd. Over the years, the company has
established a leadership position in the footwear industry and is easily the most trusted name
in branded footwear.
Its retail network of over 1200 stores gives it a reach /coverage that no other footwear
company can match. The stores are present in good locations and can be found in all the
metros, mini-metros and towns.
Bata’s smart looking new stores supported by a range of better quality products are aimed at
offering a superior shopping experience to its customers.
The Company also operates a large non-retail distribution network through its urban
wholesale division and caters to millions of customers through over 30,000 dealers.
Bata has a strong pan-India network covering more than 1250 stores, which are located
across 500 cities. It is probably the only footwear brand house which caters to people from all
ages across segments. To augment its reach, it plans to focus on new store opening in Tier-II
& Tier-III cities. Over a period of time, to improve its customer patronage, it has been
constantly reinventing itself by extending its product offerings with the launch of new brands
like Naturalizer, Marie Claire, Hush Puppies, Caterpillar, Sun Drops, Scholl, Power, North
Star etc. Goingforward it plans to move toward premium contemporary style footwear
addressing the new age customer.
Bata has been constantly focusing on leveraging its brands by extending its product line and
introducing new products like sunglasses, scarves, hand bags, purses and other accessories. In
the event of enhancing customer experience, it focuses on its customer loyalty programme
‘Bata Club’, which aims at constant customer engagement. Bata Club has been introduced
across the country and has more than 27 lakh members.
Bata intends to capture the growing aspirational huge middle-class consumer segment by
becoming a one-stop solution for all occasions. It also aims to create a separate product
portfolio exclusively for online sales, which will make its products more competitive against
6. deep discounts offered by e-commerce players. Bata has also re-launched its website
www.bata.in. Apart from this, to attract online customers, it has entered into new partnerships
with leading e-tailers like Amazon, Myntra, Flipkart and Jabong.
Category revenue break-up:
70% leather and leather alike footwear
19% rubber/canvas footwear
7% plastic footwear and
4% accessories, garments, etc
7. Discounted Cash Flow Model (DCFM):
Discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset
using the concepts of the time value of money. All future cash flows are estimated and
discounted by using cost of capital to give their present values (PVs). The sum of all future
cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the
value of the cash flows in question.[1]
Using DCF analysis to compute the NPV takes as input cash flows and a discount rate and
gives as output a present value; the opposite process—takes cash flows and a price (present
value) as inputs, and provides as output the discount rate—this is used in bond markets to
obtain the yield.
Discounted cash flow analysis is widely used in investment finance, real estate development,
corporate financial management and patent valuation. It was used in industry as early as the
1700s or 1800s, widely discussed in financial economics in the 1960s, and became widely
used in U.S. Courts in the 1980s and 1990s.
The discounted cash flow formula is derived from the future value formula for calculating the
time value of money and compounding returns.
Where,
DPV is the discounted present value of the future cash flow (FV), or FV adjusted for the
delay in receipt;
FV is the nominal value of a cash flow amount in a future period;
r is the interest rate or discount rate, which reflects the cost of tying up capital and may also
allow for the risk that the payment may not be received in full;[5]
n is the time in years before the future cash flow occurs.
Where multiple cash flows in multiple time periods are discounted, it is necessary to sum
them as follows:
for each future cash flow (FV) at any time period (t) in years from the present time, summed
over all time periods. The sum can then be used as a net present value figure. If the amount to
be paid at time 0 (now) for all the future cash flows is known, then that amount can be
substituted for DPV and the equation can be solved for r, that is the internal rate of return.
8. All the above assumes that the interest rate remains constant throughout the whole period.
If the cash flow stream is assumed to continue indefinitely, the finite forecast is usually
combined with the assumption of constant cash flow growth beyond the discrete projection
period. The total value of such cash flow stream is the sum of the finite discounted cash flow
forecast and the Terminal value (finance).
Continuous cash flows[edit]
For continuous cash flows, the summation in the above formula is replaced by an integration:
Financial Performance Highlights
Net Sales & PAT
11. Adjusted Price Valuation of Bata India Limited
In the adjusted present value (APV) approach, we begin with the value of the firm without
debt. As we add debt to the firm, we consider the net effect on value by considering both the
benefits and the costs of borrowing. The value of the levered firm can then be estimated at
different levels of the debt and the debt level that maximizes firm value is the optimal debt
ratio. Steps in the Adjusted Present Value Approach The unlevered firm value is not a
function of expected leverage and can be estimated as described in the earlier section – by
discounting the free cash flows to the firm at the unlevered cost of equity. In fact, if you do
not want to estimate this value and take the market value of the firm as correct, you could
back out the unlevered firm value by subtracting out the tax benefits and adding back the
expected bankruptcy cost from the existing debt.
Current Firm Value = Value of Unlevered firm + PV of tax benefits
The only components that change as a firm changes its leverage are the expected tax benefits
and the expected bankruptcy costs. To obtain these values as you change leverage, you would
go through the following steps.
1. Estimate the dollar debt outstanding at each debt ratio. This process mirrors what was
done in the cost of capital approach. Keeping firm value fixed, we consider how much
debt the firm will have at 20% debt, 30% debt and so on.
2. Estimate the tax benefits of debt by multiplying the dollar debt by the tax rate. This
essentially assumes that the debt is permanent and that the tax benefits will continue
in perpetuity.
3. Estimate the rating, interest rate and interest expense at each debt ratio. This process
again replicates what was done in the cost of capital approach.
4. Use the rating to estimate a probability of default. Note that Table 15.8 provides these
probabilities for each rating.
5. Estimate the expected bankruptcy cost by multiplying the probability of bankruptcy
by the cost of bankruptcy, stated as a percent of unlevered firm value. We compute
the value of the levered firm at different levels of debt. The debt level that maximizes
the value of the levered firm is the optimal debt ratio.
Assumptions for APV of Bata India Limited
Revenue: 10.50% for 2018 11.50% till 2022 and 12.25% for Terminal Value growth
rate.
Debt Schedule: Company is not receiving/paying current/new debt in the future. All
the Capital Expenditure is fulfilled through retained earnings.
Capex Schedule: Bata currently has 4 manufacturing plants and there are no plans for
opening any further plants. However they aim at retail store expansion with a target of
opening 80 stores on average till 2022. The base taken is expenditure of 150 stores
opened in 2016-17.
Calculation of Beta is done using Market Weights
WACC = 15.50% which is equal to the rate of Equity as the company has no Debt.
Effective Corporate Tax Rate= 30.25%
12. Depreciation and Capital Expenditure Schedule
Year End 2013 2015 2016 2017
2018E 2019E 2020E 2021E 2022E
FixedAssets
(Less:Intangibles)
2454.
40
3057.
00
3015.
20
2645.
80
3145.
80
3507.
50
3910.
90
4360.
70
4862.
10
NetFixedAsset
602.6
0 -41.80
-
369.4
0
500.0
0
361.8
0
403.4
0
449.8
0
501.5
0
Add:Depreciation
792.3
0
788.0
0
650.1
0
599.8
0
782.4
0
711.2
0
725.3
0
801.4
0
Capex
1394.
90
746.2
0
280.6
0
1099.
80
1144.
20
1114.
50
1175.
00
1302.
90
Capex (as% of
Sales) 6.75% 2.77% 1.15% 4.40% 4.15% 3.62% 3.43% 3.41%
Beta Calculation
To measure the risk of a particular equity, many investors turn to beta. Beta is a measure of
the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a
whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected
return of an asset based on its beta and expected market returns. Beta is also known as the
beta coefficient.
CAPM
The capital asset pricing model, with assumptions about no transactions cost or private
information, concludes that the marginal investor holds a portfolio that includes every
traded asset in the market, and that the risk of any investment is the risk added on to
this "market portfolio". The expected return from the model is
Expected Return = Risk free Rate + βjM (Risk Premium on Market Portfolio).
Bata Relaxo Mirza Sree Leathers Liberty
Average Return 0.11% 0.84% 0.84% -0.37% 0.29%
Beta (5 years weekly data) 1.018 0.661 1.513 -0.219 1.621
Mcap 81160 58030 19130 mil 3820 mil 29834 mil
Debt 0 698 148 0 77.6
D/E 0 0.24 0.07 0 0.05
Asset Beta 1.018 0.566 1.443 -0.219 1.566
Avg Asset Beta 0.671 0.762 0.733 0.918 0.702
Relevered Beta 0.671 0.889 0.769 0.918 0.726
13. What Do We Like to Measure in Beta
The beta or betas that measure risk in models of risk in finance have two basic characteristics
that we need to keep in mind during estimation. The first is that they measure the risk added
on to a diversified portfolio, rather than total risk. Thus, it is entirely possible for an
investment to be high risk, in terms of individual risk, but to be low risk, in terms of market
risk. The second characteristic that all betas share is that they measure the relative risk of an
asset, and thus are standardized around one. The market capitalization weighted average beta
across all investments, in the capital asset pricing model, should be equal to one. In any
multi-factor model, each beta should have the same property. Keeping in mind these
characteristics, we would like the beta we estimate for an asset to measure the risk added on
by that asset to a diversified portfolio.
Choice of Market Index
In practice, there are no indices that measure or even come close to the market portfolio.
Instead, we have equity market indices and fixed income market indices, that measure the
returns on subsets of securities in each market. In addition, even these indices are not
comprehensive and include only a subset of the securities in each market. Thus, we have used
“NIFTY500” index for our calculation purpose.
Choice of Time Period
Risk and return models are silent on how long a time period one needs to use to estimate
betas. Services use periods ranging from two years to five years for beta estimates, with
varying results. We have used five years’ data to estimate beta for Bata India Limited.
Workings
Assumptions in the calculation of the projected Cash Flows:
Sales Growth Rate: For the calculation of the sales growth rate, we have taken
regressed growth rate because of the fluctuations in sales in the industry. The industry
has been growing at the rate of 12.5 %. Bata has shown a growth of 12% in the year
2016-17, but due to GST impact which we believe will be for 1-2 quarters, we have
assumed growth rate as 11.5%.
Terminal value: The industry has been growing at an average of 12.5%, so following
the law of averages , we assume that industry will grow at the industry growth rate of
12.5%
14. Calculation of Expenses: For this, we have taken the growth rate of the expenses on
year on year basis and then averaged it out. This average rate is used to project each
expense for the future years.
Provision of Taxation: we have taken the average of the past tax rates and thus taken
30.5% as tax rate.
Dividend rate: Bata has been paying the different rates, so we took the average of the
past dividend rates.
WACC: The calculation of WACC includes Risk Free Rate which we taken from ten
years bond i.e. 6.55% and our company rating is AA+ as per ICRA and according to
FIMMDA spread matrix, the spread is 89 basis point which will be added to 10 year
yield which will effectively give the risk free rate to 7.44%.
Calculation of Free Cash Flows
For the calculation of Free Cash Flows, NOPAT is taken and relevant adjustments of
depreciation and Capex expenditure has been made. Under this changes in the
working capital are also taken into consideration Terminal value is calculated at the
rate of 12.25 %.
15. WACC calculation
Market Premium 12.44%
RFR 7.44%
Tax Rate 30.25%
10 Year Govt Bond Yield 6.55%
ICRA Credit Rating AA+
FIMMDA spread 89 basis points
Unlevered Cost of Equity 15.79%
WACC 15.79%
For the calculation of WACC, the cost of equity is computed using CAPM model.
The market premium is 12.44% while the risk free return which we have computed is
7.44%. For the calculation of risk free rate we have taken the 10 years government
bond as 6.55% and as per ICRA our credit rating is AA+, so the FIMMDA spread
matrix the spread is of 89 basis points. So total rate comes out to be 7.44%
For the calculation of the estimated share price for the year 2018, we have taken
terminal value of RS 70582.79 and divided it by the outstanding shares of 128.53 and
the share price comes out to be RS 549.15.
16. Share Price Trend of BATA
RECOMMENDATION
Nifty 500 as on 31st March 2017 8328.5
Bata Market price on 31st March 2017 569.55
Value as per our Model 549.15
Target Value for 31 march 2018 612.09
Projected Return (1 Year) 11%
Recommendation
BUY/
HOLD
17. As on 31 march 2017, the share price of BATA as on 31st March 2017 is 569.55 but as per
our model it coming to be 549.15 which seems that share is overvalued but from our model
projected price of share as on 31st March 2018 is coming to be 612.09 which clearly shows
that investor will be getting approx. 11% return. So our recommendation is BUY or HOLD.
