Near-term demand worries likely to weigh on Page Industries stock

Brokerages have mixed view after correction in stock price

Since its October high last year, the stock of innerwear major Page Industries has been on a downtrend, shedding a little over 30 per cent of its market value. Higher competitive intensity, muted volumes, pressure on margins, and rich valuations have led to downgrades for the stock.

The October-December quarter (third quarter, or Q3) performance was lower than the Street’s expectations — both on volumes/sales and margins. While volumes fell 11 per cent over the year-ago period, sales saw muted 2.8 per cent growth. However, the volume fall came on the back of a high base, with the year-ago quarter delivering 24 per cent volume growth.

Before a fall in the last quarter, volumes have been in positive terrain, growing at double digits in six of the last eight quarters. While the men’s innerwear segment saw double-digit growth, the rest of the portfolio witnessed decline.

Operating profit margins, too, fell 532 basis points to 15.8 per cent due to higher employee costs and other operating expenses, including advertising and promotions.

Elara Securities highlights that Q3 of 2022-23 (FY23) margins were the lowest the company has reported, except for pandemic peaks since the fourth quarter (Q4) of 2007-08. This is the third consecutive quarter of margin decline reported by the company. 

With most of the high-cost inventory being consumed, the company could see some benefits (low-cost stock) from the current quarter. The brokerage expects operating profit margins to improve gradually, given the cost structure alignment, completion of automatic replenishment system (ARS) implementation, and improving demand.

The ARS system was implemented to optimise inventory and strengthen the supply chain. The company was able to clear the secondary channel inventory of 7 million pieces in the quarter.

The weak demand trend is expected to continue in the near term.

Research analyst Antu Eapan Thomas of Geojit Research expects tepid volume growth and pressure on margins to continue into Q4FY23 due to competitive pressures and higher spending on promotional activities. While competition was lower during the Covid-19 period, more players have entered the athleisure sector. 

There is expectation of demand recovery from the April-June quarter of 2023-24 (FY24) and the company’s expansion of its distribution footprint could help support its sales trajectory. It added 37 exclusive business outlets in Q3FY23, taking its presence to over 415 cities and store count to over 1,228. It increased its presence in the multi-brand outlet format by 750 in the quarter and is now present in over 118,000 stores across 2,850 cities and towns.

Most brokerages have cut their earnings estimates, citing the performance in the December quarter and near-term challenges.

While stating that the robust core innerwear growth is a positive, Anand Rathi Research cut its FY24 earnings by 14 per cent due to lower margin assumptions. It has, however, upgraded the stock to ‘buy’ after a sharp correction in stock prices.

Elara Securities has also upgraded the stock and expects a 17-18 per cent growth in sales, operating and net profit over 2021-22 through 2024-25 (FY25).

Motilal Oswal Research believes that medium-term earnings prospects have improved because of investments made in distribution, design, and technology (which led to significantly lower inventory levels, except for a temporary spike in Q3FY23).

It also expects the return on capital employed to be sustained at over 50 per cent, having dipped to the late 30s in 2019-20 and 2020-21. It, however, finds the valuation at over 46x its FY25 earnings estimates to be expensive, and has a ‘neutral’ rating on the stock.