High valuation not a big worry for Page Industries; stock gains

Analysts expect volume growth to recover; firm may curb operating expenses to protect margins

Shares of Page Industries, which have gained almost eight per cent in the past four days after the company announced extension of its licence agreement with Jockey International till 2040, scaled to an all-time high on Friday before closing at Rs 26,562. The stock is currently trading at very rich valuations of over 60 times its FY19 expected earnings. Yet, many analysts do not see the high valuation limiting further upside in the stock, aided by strong operating performance.

First, even as its March quarter (Q4) performance was good, volumes in its largest business segment of men’s innerwear were weak. Page had reported overall volume growth of only 5.5 per cent in Q4. Sales growth of 22 per cent was due to 15 per cent price hike (average) during the quarter. “Besides entry into newer segment (kids-wear) and improvement in brand loyalty, the company’s plan to expand its presence by taking its total store count to 1,000 in the next two-three years, from 470 presently, would help post higher single-digit or lower double-digit volume growth going ahead,” says Sachin Bobde, analyst at Dolat Capital.

Moreover, implementation of goods and services tax (GST) would also help the organised players such as Page grab share from the unorganised market, further supporting volumes. With this, the company’s top line is pegged to grow at a compounded annual growth rate (CAGR) of 20-22 per cent over the next two years.

Second, the Street is also expecting margins to improve. The kids and women wear segments are likely to grow faster, providing impetus to margins, as these two segments are comparatively more profitable, says Bobde. But, high input costs, as seen in the March quarter, could be a disturbing factor. However, Page had still managed to improve operating profit margins by cutting other costs. In that case, Page’s ability to further optimise expenses to sustain profit margins will be interesting to watch. 

Many analysts, however, do expect Page to sustain profitability, and consequently estimate its earnings grow between 25 per cent and 30 per cent over FY18-20. This strong performance should also help the company continue delivering above 40 per cent return on equity, best in the industry. 

While being positive on the stock, analysts recommend that investors use corrections as an entry into this counter.