Page Industries: Doubling of exclusive network should help improve volumes

From its lows over the past month, the stock of Page Industries (established retailer of inner wear and leisure wear) has gained a little over seven per cent. On expectation that aggressive store expansion plans, better product mix and improvement in volume growth would translate to better operational performance.
 
After robust volume performance in the December quarter, the company’s confidence about growth could be gauged from both its expansion of distribution presence and its capacity. In addition to expanding the distributor network, the company is looking doubling its exclusive brand outlets over the next year, to reach the 1,000-mark by the end of FY19.
 
These outlets are expected to contribute 40 per cent of revenues by FY20, as compared to 15 per cent in FY17. They allow cross-selling and, thus, much higher sales as compared to multibrand outlets. What will add to the sales potential at these is expansion of its range into other categories, such as children's inner wear. After launching boys' wear products last year, the company is expected to launch girls' wear this month.
 
While children's wear is in initial stages, growth is expected to be led by the larger categories of men’s inner wear and leisure wear, which contribute 46 per cent and 36 per cent to revenues. While overall volume growth in the December quarter was 11 per cent over the year-before period, it was led by recovery in volume growth for the men’s segment. Volumes here had recorded fpur per cent growth in the September quarter before recovering to 12 per cent in the December one, led by trade incentives. Growth should look up as the transition to the goods and services tax regime, which has been hampering sales, nears completion.
 
The trend of high growth for the leisure segment, including swim wear brand Speedo, is expected to continue. The segment recorded 20 per cent growth in the December quarter, with swim wear volume growth up 169 per cent, while realisations were up 16 per cent. The management indicated the company would be able to maintain 10-12 per cent volume growth on an annual basis. This double-digit growth trend, say analysts, is expected to continue for the next two to three years.

To keep pace with volume demand, the company is expanding its capacity by investing Rs 600-700 million each over the next two years. It is also looking at more than doubling the outsourcing proportion of its production, from 23 per cent at the end of the December quarter to 50 per cent over the next three years. This, according to analysts at IIFL Institutional Equities, should lead to higher return ratios.
 
There are two concerns. One, higher raw material prices, which will limit its operating margin band to 21-22 per cent over the next couple of quarters. Two, more competition from international and domestic brands. Despite higher raw material costs, the operating profit margins improved by 200 basis points to 20.8 per cent in the December quarter, due to lower employee costs and other expenses. Analysts at B&K Securities, however, say that on a long-term basis, increasing capacity and an improving product mix (high value and varied end-use) will aid growth momentum.

Though the stock is trading at 43 times its FY20 earnings estimate, analysts at Motilal Oswal Securities believe its valuation multiples will sustain, given its track record, strong return ratios and growth prospects.