Despite stock's rise, Page Industries' near-term outlook not comforting

Delayed winter, higher competition, challenging demand scenario, higher input costs and a high base may hurt volume growth and margins

The stock of Page Industries has risen by 7.5 per cent in the last one month, outpacing leading indices like the S&P BSE Sensex. The latter has gained 1.3 per cent during the same period. Recent reaffirmation of good credit rating (AA/A1+) by ICRA, and expectations of higher growth of high-margin winter wear in December quarter has turned investor sentiment positive towards Page. However, these expectations may not turn true at least in the December quarter, and may lead to some correction in the stock price.

An analyst at a domestic broking house said, "Page would continue to report muted volume growth in the December quarter. Sustained demand pressure and delayed winter are likely to have hurt its volumes. This could wash off the recent gains by the stock."

Page is the Indian maker of popular premium innerwear brand, Jockey and high-margin winterwear products have an approximate share of 20-25 per cent in the company’s overall business, according to estimates of some analysts.

The recent price hikes in select products taken in November and December and the high base of December 2018 quarter when volumes grew 12 per cent, will also have a bearing on volume growth figures of the recently concluded quarter. While winter has picked up now, growing volumes may not be easy in the challenging demand environment. In fact, higher competitive intensity could restrict Page’s volume growth even beyond the December quarter. As per Anand Rathi’s report, “While, in the past, the competition wasn’t credible, the newer competition (Van Heusen from Aditya Birla Fashion & Retail, US Polo Innerwear by Arvind Fashions) is more credible, has sound brand equity and better distribution.” Thus, how the company navigates this in the coming quarters would be crucial.

Additionally, prices of key raw materials are still higher, even as some correction has been seen recently. This could continue to hurt the gross margin, say analysts. In September 2019 quarter, while lower base, retail schemes and higher sales incentives by the company had led to volume growth of around 9 per cent, higher raw material cost had resulted in a 145 basis point year-on-year contraction in EBITDA (earnings before interest, tax, depreciation and amortisation) margin to 19.2 per cent.

Overall, it is advisable that investors await management’s commentary on volume and margin fronts post December quarter earnings, even as Page’s long-term growth potential appears healthy. The stock, which had halved over a year’s period ending August 2019 and has seen some rebound thereafter, is still trading at a rich 48 times FY21 estimated earnings.