Page Industries: Comforting future

Valuation premium likely to sustain due to expectations of strong volumes over the next 2-3 years, say analysts

The scrip of Page Industries, maker of undergarments and other innerwear, has run up almost 20 per cent in the past month, against a flattish S&P BSE Sensex. This adds to the stupendous gains the stock has seen in a year, from Rs 4,487 to Rs 9,162 currently. And, there’s more in the offing, believe analysts.

Consistent financial performance over the past few years, the strong ‘Jockey’ brand equity and a robust distribution network are some factors supporting the premium valuations (about 40 times the FY16 estimated earnings). Analysts believe these factors are here to stay.

“We believe Page should command premium valuations, considering its strong fundamentals and consistent dividend payouts. Page has been able to grow consistently, while many of its peers are struggling,” says Bharat Chhoda of ICICI Securities.

Despite weakening macro economic growth, Page managed to hold volume growth at 14-19 per cent in each of the past two years. During FY10-14, overall volumes grew at a compounded annual rate (CAGR) of nearly 20 per cent. In the June quarter, though, overall volume growth slid to nine per cent. Muted volume growth in men’s innerwear (1.6 per cent, due to a high base) was one reason. The management expects volume growth in this segment to stabilise at eight per cent for the financial year.

Over the next few years, however, analysts expect volume growth to pick up. And, to expand market share by three and one percentage point in the men and women segments, respectively. In the organised space, Page currently has 20 per cent market share in men's innerwear (about half of Page's revenues) and three per cent in the highly fragmented women's innerwear segment. That the unorganised segment forms 69 per cent of the innerwear market indicates the potential growth for companies such as Page, a key positive.

Notably, Page is way ahead of listed peers in size and return ratios. It operates in the premium and mid-premium innerwear segment. Lovable Lingerie, its closest listed peer, operates in the economy and mid-premium segment. The other listed entities primarily operate in the low/economy segment. Over FY08-14, Page recorded a revenue CAGR of 35 per cent versus 18 per cent for Lovable Lingerie, 25 per cent for Lux Industries, 16 per cent for Rupa and four per cent for Maxwell Industries (VIP).

There is a flip side in the form of risk. Rising competitive intensity from multinationals such as Hanes, Fruit of the Loom and Tommy Hilfiger, among others, is one. Another is availability of the Jockey and Speedo products on e-commerce portals, gaining momentum recently. Analysts are closely watching the company's response to this high growth medium.

"Sharp offtake of online retail is swiftly diminishing the advantage of a vast distribution network created over the years by incumbents in the retail garment space, more so for urban-centric brands. Hence, it will be crucial to monitor whether Page handles this strong surge of a new channel as an opportunity or an impediment," says Tejash Shah of Spark Capital.

The bright side is that such mediums also throw up opportunities in the form of higher growth, by expanding the accessibility of products. For Page, brand loyalty is also strong, which should help mitigate any disruption in the interim.

Continued innovation and an improving balance sheet will be key growth drivers. Page places high emphasis on innovation and has launched new products every year such as a seamless shapewear collection in FY14 and four products in FY13. More new launches are expected.

The growth rates could be higher than expected if the company can add another brand to Jockey and Speedo, which analysts is a possibility.

Meanwhile, Page's financials are estimated to look even better. Its net debt to equity ratio was 0.6 in FY14 and is likely to come down to 0.3 this financial year as it deleverages the balance sheet. Analysts at Ambit Capital expect Page's return on capital employed (a key valuation parameter) to improve from 41.9 per cent in FY14 to 49.4 per cent in FY16.