MD.

ASIF MUNTASIR
5/9/21
SHORT EQUITY NOTE ON BATA SHOE

Bangladesh Footwear Industry overview

Secular growth to continue despite few major challenges
Bangladesh is the 8th largest footwear producer in the world with a market share of 1.6%. Out of the total production,
20.0%-25.0% is used to meet local demand and rest of them are exported. The industry has enjoyed a significant
growth in the range of 12.0-15.0% over the past five years and stood at BDT 170bn despite several macro and industry
challenges. On the back of favourable demographics, increasing health & fashion consciousness among consumers
and, rising per capita income, the footwear industry of the country would continue the growth momentum. My CAGR
estimation for the footwear industry is 8.0% over FY20-25.

The dynamics of the footwear industry has been changing over the past decade. Competition among the manufacturing
companies has increased considerably. Relatively smaller and new players such as Jennys, Orion, Walker, Crescent,
etc. has entered the market and slowly gaining market share too. On the other hand, the larger and older companies –
Bata Shoe, Apex Footwear, Fortune Shoes are facing severe competition to keep their market shares. In addition to
that, the unbranded market has introduced cheaper foreign products which is shifting consumer demand too. In such
dynamic industry scene, the companies with more focus on more dynamic sales strategy, deeper pockets to adjust
prices, and strong distribution network would gain or retain market share.

Around 30.0% of revenue of Bangladesh’s footwear industry comes from the branded footwear market and top 10
players hold majority market shares. Raw hide, which is one of the major component of leather footwear, is procured
locally. However, there has been unrest among tanners and raw hide traders due to price conflict. However, the conflict
seems to be concluding which removes one risk factor for the industry players.

10.00% *Footwear industry is

divided into branded &
unbranded segment
30.00%

60.00%

Branded footwear market Unbranded footwear market Import

Investment Theses
Branded footwear market might grab more market share due to steady population growth rate, rapid
urbanization, rising per capita income and, increasing health & fashion consciousness among consumers
The footwear industry is divided into two segments – a) Branded footwear market, and b) Unbranded footwear market.
Branded market is dominated by few large companies like Bata, Apex, Fortune, Bay, Walker, etc. However, unbranded
market is still dominating the market with 60.0% of total revenue while branded market and import accounts for 30.0%
and 10.0% of total revenue, respectively. I expect the branded footwear market to grab a bigger pie of the market share
in the next five years due to a steady growth in population, rapid urbanization, rising per capita income, and increased
consciousness among consumers.

Page 1|8
 MD. ASIF MUNTASIR
5/9/21
SHORT EQUITY NOTE ON BATA SHOE

Bangladesh has an average population growth rate of above 1.0% in the past decade and among them ~43.0% are
under the age of 0-24. The young population will drive growth in branded footwear market as they like trendy fashionable
shoes and will also be frequent buyers.

The country has seen rapid urbanization growth in the past decade and expects it to go up further in the next five years.
Moreover, urban population is expected to overtake rural population which will favour the branded footwear market.
This rising urban class will drive sales growth in urban areas where the top players have more visible presence with
big showrooms.

The country has seen a rapid rise in per capita income with a five year CAGR of 10.28% in 2013-2018. Rising income
level will increase affordability of consumers. Hence, the branded footwear products might reap benefits from the rising
income level.

Rising health consciousness among consumers has been another key factor for the growth in branded footwear market.
Chronic disease class of the country has seen a strong growth in the past five years. Hence, people have become more
health conscious. This development has positively impacted the branded footwear market as people are purchasing
good quality branded shoes.

High rent fees, cyclicality impact, and cheaper alternatives poses significant risk for the branded market
One of the key risks of the branded footwear market will be the high rent of showrooms which might eat out profitability.
Moreover, the industry has cyclicality effect as 30.0%-35.0% of revenue comes from events like Eid and Puja. Apart
from that, “Rexine” has been posing a big challenge for branded leather products because of its fashionable appeal
with a cheaper price.

39

38.17 *Robust economic growth

led to a steady rise in
38

37.4 urbanization
37
36.63
36
35.85
35.08
34.3
35

34
33.53
33
32.76

32

31

30

2011 2012 2013 2014 2015 2016 2017 2018

Urban population as % of total population

Page 2|8
 MD. ASIF MUNTASIR
5/9/21
SHORT EQUITY NOTE ON BATA SHOE

2,5 0 0

1,969 *Positive economic growth

2,0 0 0

1,856 has impacted the GDP per

1,698 capita positively
1,564
1,5 0 0
1,402
1,248
1,119
982
1,0 0 0

50 0

2011 2012 2013 2014 2015 2016 2017 2018

GDP per capita (USD)

Huge potential lies in the export arena

The leather industry has seen a huge demand in exports in the past five years due to comparatively lower wages, lower
cost of production, zero tariff rate, and US-China trade war. These factors has led to an increase in local and foreign
investments in the sector. Several local players have entered the market in the past few years to reap the benefits.
According to market insiders, 15-20 new leather footwear factories are opening up each year. Moreover, several foreign
companies have started investment in the sector which bumped up the foreign direct investment (FDI) in the country.
As a result, the industry has been receiving continuous investment to grow its production capacity. Apart from that, the
government has been planning to build two leather industrial parks in near future. Hence, the leather footwear and
leather products industry looks very lucrative with significant available investment and headroom for further growth.

Few major risks might hamper the growth in export arena

Leather products has seen a positive growth in 2012-2017 but the pace has slowed down in the next two years as the
industry was rigged with conflicts between tanners and raw hide businessmen, relocation of tanneries, and the failure
to adopt environmental regulations. Although, the raw hide issues have settled down a bit but the relocation of tanneries
haven’t been smooth. Several tanneries are yet to relocate to Savar, the new leather industrial park and majority of
tanners haven’t followed the environmental regulations yet. Hence, they are losing international orders as buyers
maintain strict environmental policies. Moreover, tanners syndicate is hurting the raw hide distribution business as
suppliers are throwing away hides due to lower than the fixed Cattle and Goat hide prices. Apart from that, the
government’s announcement to export raw hides to reduce wastage is also not an ideal situation for the industry as
they might face scarcity of hides which is a key ingredient of leather footwear and other leather products.

Overall, the export sector has potential to grow and boasts the investment to do so. However, several industrial issues
might hamper the growth in the next two to three years.

Page 3|8
 MD. ASIF MUNTASIR
5/9/21
SHORT EQUITY NOTE ON BATA SHOE

7 00

607.88 *Leather footwear posted

6 00
565.6 positive growth due to
536.96 higher international
483.81 494.83 478.75 demand
5 00

4 00
378.54
305.11
3 00

2 00

1 00

2013 2014 2015 2016 2017 2018 2019 2020

Leather Footwear (in mn USD)

Overall, the footwear industry has seen a robust growth due to several macro-economic factors while exports faced
few hurdles after a healthy growth in prior years. Although there are several risks lies ahead which might hamper the
industry’s growth but my estimation for the footwear industry is 8.0% CAGR in the next five years.

Bata Shoe Company

The five decade long legacy continues for the international giant in Bangladesh
Bata Shoe Company (DSE: BATASHOE) is the largest footwear manufacturer and retailer in Bangladesh enjoying
about 40.0% market share and 262 outlets. With more than five decades of operation in Bangladesh, Bata Shoe has
been the most dominant player in the country with a long track record and a strong presence in the local footwear
industry. Currently, Local Shoes, Hosiery & Accessories, and Export Sales account for 95.5%, 4.3%, and 0.2% of the
total revenue of the company respectively. Bata Shoe also has exclusive distributorship of major global brands i.e.
Adidas, Nike, Hush Puppies, Scholl, etc. in the local market which accounts for more than 10.0% of the company’s
shoe segment revenue. Bangladesh’s growing population with rapid urbanization & rising per capita income coupled
with Bata Shoe’s strong brand image, superior distribution network, and effective marketing strategies resulted in
decent revenue and earnings growth in the last ten years.

Performance analysis of the past five years

Revenue growth slowed down before pandemic wreak havoc
BATA revenue segment consists of – a) Retail and b) Wholesale. The management had undertaken a plan to
diversifying product mix in 2014 where it focused more on selling high end products to the upper middle income group
and it helped achieve margin expansion. Interestingly, BATA’s volume growth slowed down since 2013 while price
growth was aggressive (2019 price growth was 26.7%). Thus, the company was aggressively targeting the upper
income group which led to a more price driven revenue rather than volumetric growth. Notably, retail segment
contributes 80.0% to the total revenue of BATA and high end products belongs to this segment. The high price of retail
products adds more to the margin of BATA than wholesale segment which consists of lower end products and a cut of
commission from dealers. Hence, BATA’s margin growth attributes more towards retail sales than wholesale. However,
the strategy seemed to be losing strength as BATA’s retail business couldn’t support the revenue growth and the
company gave away big credit lines to the dealers in hopes of driving wholesale business revenue. Moreover, the
macro-economic scenario turned gloomy in 2018-2019 which put additional pressure on the topline of BATA. Ultimately,
the company had to reduce the big overdue of wholesale business but it meant halting the segment business. Hence,
revenue suffered and posted a de-growth of 10.0% in 2019. After that, COVID - 19 wreaked havoc as the world
economy stood still. Majority of the countries imposed lockdown which meant BATA’s topline suffered badly as it posted
a revenue de-growth of 40.7% in 2020.

Page 4|8
 MD. ASIF MUNTASIR
5/9/21
SHORT EQUITY NOTE ON BATA SHOE

2 0.0 0 %

11.10%
1 0.0 0 %

*BATA’s growth in
6.70% 5.50% 2.90% 5.30% revenue was driven by
0 .00 %
2.50% 3.10% higher price growth

2013 2014 2015 2016 2017 2018 2019 2020

-10.00%
-1 0.0 0 %

-2 0.0 0 %

-3 0.0 0 %

-40.70%
-4 0.0 0 %

-5 0.0 0 %

Net Revenue Growth (YoY)

Combating the pandemic with e-com site and moving towards a distribution model to drive revenue growth
To combat the pandemic’s crunch on sales, the management focused more on e-com business of BATA and currently
the company leads as an e-com footwear company in Bangladesh. BATA’s online sales posted staggering growth in
2020 and plans to achieve 10.0% of total sales from its e-com site in 2021. Moreover, the company is going forward
from a dealership to a distribution model which will be a cash model and has targeted to cater the entire unbranded
market through a distribution model. I believe, these moves might help the company to manage its receivables well but
the company might find it hard to maintain its presence in remote areas of the country. Overall, revenue posted a 5-
year CAGR of 1.2% in 2014-2019. I expect even with few dynamic management decisions, the topline might suffer until
end of 2021 as the supply chain is yet to fully recover and customer buying power has deteriorated.

*BATA’s growth in
-23.20% 2020
revenue was driven by
-23.10% higher price growth

2019 26.70%
-29.10%
-1.70%
2018
7.40%
-0.20%
2017
3.40%

2016 1.00%
2.00%

2015 6.20%
0.00%
-40.00% -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00%

Price Growth Volume growth

Page 5|8
 MD. ASIF MUNTASIR
5/9/21
SHORT EQUITY NOTE ON BATA SHOE

Operating margin and net margin fell due to high growth in OPEX and higher interest burden
BATA has always posted improving gross margin as they reaped the benefits of stable or lower raw materials prices
which pushed the COGS downward. However, BATA’s operating expenses rose due to a higher salaries increment
(27.0% of total OPEX) which put pressure on the operating margin. Moreover, the company took a big amount of lease
(41.0% of total assets) on 2019 which resulted in higher interest burden. Hence, both operating and net profit margin
suffered since 2017. Moreover, this had an effect on return on assets (ROA) and return on equity (ROE) as both
dropped in the past three years. Overall, net profit posted a 5-year CAGR of -6.8% in 2014-2019.

3 0.0 0 %

18.30% *OPEX increased due to

16.80% 15.40% higher salary increment,
2 0.0 0 %

14.60%
11.90% increasing commission of
dealers and royalty fees
1 0.0 0 %

0 .00 %

2015 2016 2017 2018 2019 2020

-1 0.0 0 %

-2 0.0 0 %

-28.00%
-3 0.0 0 %

-4 0.0 0 %

Operating Profit Margin

*Higher interest
1 5.0 0 %

11.90% 12.70% burden has put

9.80% 10.40% pressure on net profit
margin
1 0.0 0 %

5.80%
5 .00 %

0 .00 %

2015 2016 2017 2018 2019 2020

-5 .00 %

-1 0.0 0 %

-1 5.0 0 %

-2 0.0 0 %

-26.10%
-2 5.0 0 %

-3 0.0 0 %

Net Profit Margin

Page 6|8
 MD. ASIF MUNTASIR
5/9/21
SHORT EQUITY NOTE ON BATA SHOE

4 0.0 0 %

30.00% 32.00%
3 0.0 0 %

29.40% *ROA and ROE

dropped as the
2 0.0 0 %
22.20% company couldn’t
17.70% manage to maintain its
16.80% 16.00% profitability growth
1 0.0 0 %
12.00% 10.10%
5.50%
0 .00 %

2015 2016 2017 2018 2019 2020

-1 0.0 0 %

-2 0.0 0 %
-16.90%

-3 0.0 0 %

-30.70%
-4 0.0 0 %

ROA ROE

Other observations
 Cash conversion cycle experiencing higher growth each year due to lower inventory turnover, lower receivables
turnover but a higher payables turnover. The cycle increased from 167.2 days to 306.4 days in 2015-2019.
 The installed capacity of BATA peaked in 2015 with 45.4mn pairs in 2016 but dropped to 36.0mn pairs by 2017.
BATA has maintained an average utilization rate of 79.2% in 2011-2015 but when it installed additional capacity in
2016, the utilization rate was 73.2%. The surprising decision to increase capacity when utilization was in normal
range and production seemed abnormal.
 BATA’s significant additions in furniture and fixtures is referred to its high-sized showrooms in each city or urban
outlets. The disposals of its furniture and fixtures is referred to closing of outlets. BATA consolidates its losing
outlets while renovates and opens new outlets with a heavy additions. Interestingly, in 2020 the pandemic hit year,
the additions outweighs the disposals. Hence, it signals BATA’s strong focus on adding more big showrooms while
closing negative EBT generating outlets.

5 0.0 9 0.0 %

85.2% 83.1%
4 5.0

81.1% 80.7% 80.0% 8 0.0 %

4 0.0 73.5% 73.2% *BATA has maintained

average utilization rate with
7 0.0 %

3 5.0
64.1% 63.0% fixed install capacity.
6 0.0 %

However, in 2016, capacity

3 0.0 jumped but the abruptly fell.
5 0.0 %

2 5.0

42.5%
4 0.0 %

2 0.0

3 0.0 %

1 5.0

2 0.0 %

1 0.0

1 0.0 %

5 .0

31.7 33.0 36.0 36.4 36.4 45.5 37.2 36.1 39.9 39.9
0 .0 0 .0%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Installed Capacity (in mn pair) Utilization rate (%)

Page 7|8
 MD. ASIF MUNTASIR
5/9/21
SHORT EQUITY NOTE ON BATA SHOE

Investment Theses
 Favorable demographics, wider distribution network and aggressive marketing strategy might help shrink
unbranded market share pie.
 BATA’s revenue might cash in the abnormal growth in e-commerce industry with its e-com business segment.
 Robust brand equity and history of high dividend policy will come in handy when the whole industry starts to
recover fully from the pandemic.

4 00 %

335% 345%
3 50 %

320% 330% *BATA has given historically high

cash dividend. However, 2019
300% was a tough year in terms of
3 00 %

275% 280%
business. Hence, dividend
250% dropped.
2 50 %

2 00 %

1 50 %

125%
1 00 %

5 0%

25%
0%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Cash dividend

Investment Risk
 Bata imports around 49.0% of total materials consumed. Hence, increased import duty might hurt the
profitability of the company.
 Emergence of new COVID variant might result in loss of profit.

Page 8|8