Are Page Industries' rich valuations sustainable?

Slowing revenue growth likely to catch up with stock valuations

Page Industries’ — the Indian franchisee of Jockey innerwear and Speedo swimwear — scrip trades at rich valuations of 63 times FY16 estimated earnings. This is at a significant premium not only to its own historical average one-year forward price/earnings ratio of 26 times, but also its peers such as Lovable Lingerie, which trades at 23 times FY16 estimated earnings. To some extent, Page's premium valuations appear justified, given its bigger size, high growth rates, higher margins, as well as return ratios. But there is a good chance valuations could witness some correction and align with normalising revenue growth rates.

In the June quarter, the company's revenues grew 16 per cent year-on-year to Rs 438 crore on the back of delay in new launches in the sports segment (19 per cent of revenues) and slowing growth in the men's innerwear segment (60 per cent of revenues). Women's innerwear segment was more resilient and maintained its revenue growth trajectory in recent quarters. Page's revenue growth in the quarter was its lowest since FY10 and lagged the 24-40 per cent annual revenue growth witnessed in the past 10 quarters.

Analysts are not worried though they see growth rates slowing a bit.

“Page’s revenues have grown at a compounded annual growth rate of 35 per cent in FY10-15. We expect the growth rate to slow down to 29 per cent during FY15-20 owing to a larger base effect,” says Bharat Chhoda, analyst at ICICI Securities.

However, there are potential near-to medium-term factors that need to be watched and can hurt sentiments. Increasing competitive intensity from global players such as Triumph, Enamor, La Senza, among others, will keep advertising spends high for Page and thus margins in a range, say analysts. While Page's strong distribution network is a key differentiator, increasing adoption of e-commerce portals will provide a level-playing field for all players. Even though Page's products are available on all key e-commerce portals, its digital strategy will be crucial in driving future growth.

Analysts have mixed views. Of the 11 analysts polled by Bloomberg in August so far, four each have ‘buy’ and ‘sell’ rating on the stock with the rest being ‘neutral’. Their average target price of Rs 14,236 a share indicates a downside of two per cent from Wednesday's closing price of Rs 14,565. Long-term investors, thus, should wait for a better entry point.