Valuations cap upside in Page Industries, near-term headwinds a concern

Return to double-digit trajectory and expansion are positives from the medium term perspective

Led by strong demand in the athleisure segment, Page Industries posted better than expected revenue growth performance in the March quarter. Revenues were up 63 per cent on the back of a 52 per cent jump in volumes on a soft base.

In addition to demand, expansion of its network too was healthy. While multi-brand outlet (MBO) additions were up 18 per cent, the company added 180 exclusive brand outlets or EBOs (up 29 per cent) in FY21. The company is looking at a 8-10 per cent annual expansion in distribution over the next ten years.

Commenting on the sales trajectory, Krishnan Sambamoorthy and Dhairya Dhruv of Motilal Oswal Research highlight that this is for the first time since Q3FY19 that the company has reported a double-digit volume growth (two-year average) in Q4FY21. While this is a far cry from the 30 per cent annual sales growth over FY08-18, it seems to have turned the corner on top line growth.

While athleisure, kids and ecommerce businesses reported good volume growth, the street will await a clear trend on sustenance of demand especially for the athleisure segment as the situation returns to normalcy. The other worry is the decline in the innerwear category both for men and women.

Though the Q4 show is positive, the company faces near term headwinds on account of the second wave of Covid infections. Revenues in the current quarter could see a significant hit as most of its stores are closed; its factories near Bangalore are also shut for the last one month. The risks to revenues and earnings will be much more if the lockdowns are extended and the company’s products continue to be on the non-essentials list.

While revenue growth was strong, the company faced margin pressures in the quarter. Given the higher raw material prices, gross margins declined 122 basis points while employee and other expenses were down 23-37 per cent. Margins on a sequential basis fell by 510 basis points to 19.3 per cent. To offset the impact of rise in yarn prices, the company has taken a 4-5 per cent hike in prices in the March quarter; it remains confident of maintaining margins in the 21-22 per cent range.

At the current price (stock shed 1.4 per cent in trade), valuations at over 60 times FY23 earnings estimates are in the expensive zone; investors should await a correction before considering the stock.