Page Industries: Margins to pick up from March 2015

Higher input costs, which dented margins, eclipsed strong revenue growth in Q2

Page Industries (Page) delivered a mixed set of numbers for the September quarter. While sales growth was healthy, driven by strong volume growth, higher raw material costs and marketing spends impacted Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins.

The scrip made a new 52-week high of Rs 10,380 a share on Monday, as management commentary on growth and margins remained positive. Page now trades at rich valuations of 42 times the FY16 estimated earnings, capping significant upsides from these levels. Analysts expect net profit to grow 28-29 per cent each in FY15 and FY16. They believe Ebitda margins would be stable at 20-21 per cent over the next two years.

During the quarter, sales grew 36 per cent over a year year-on-year (y-o-y) to Rs 397 crore, fuelled by strong 21.1 per cent volume growth, which stood robust at 19.6 per cent for men’s innerwear (53 per cent of total sales), 22.9 per cent for women's innerwear (including brassiere) and 27 per cent for leisure wear (29 per cent of total revenues). All segments reported 30 per cent plus revenue growth in the quarter.

Higher input costs (up 230 basis points to 47.2 per cent of sales) and marketing spends led to a 410 basis points year-on-year contraction in Ebitda margin to 18.8 per cent. The cost of most inputs such as cotton, dyes, bleaching chemicals among others stood higher compared to the September 2013 quarter. Management indicated that raw material costs are 4-6 months old costs and the recent fall in prices should start showing March 2015 quarter onwards. A 22-fold jump in other income to Rs 7 crore on a y-o-y basis led to a 22 per cent growth in net profit to Rs 50 crore.

The strong brand equity of Jockey, healthy earnings visibility and expansion of distribution network are Page's key strengths. Consumers' shift from unorganised to organised players as well as new product launches will aid top-line growth for the company. However, rising competitive intensity from MNC players such as Hanes, Fruit of the Loom, amongst others is a key risk. Another risk Page faces is availability of Jockey and Speedo products on e-commerce portals.

Page is way ahead of its listed peers in terms of size and return ratios. Page operates in premium and mid-premium innerwear segment while Lovable Lingerie operates in economy and mid premium segment and is its closest listed peer. Over FY08-14, Page recorded revenue CAGR of 35 per cent versus 18 per cent for Lovable Lingerie. However, Lovable's recent sub-licensing agreement with Adidas could intensify competition for Page- especially in the sports wear segment. Lovable too made a new 52-week high of Rs 458 on Monday (up 20 per cent) following this announcement.