Business transformation continues; Upgrade to ADD
Although a weak 1Q (66% sales decline), complete recovery in August is one of the fastest among discretionary companies under our coverage (some of it could be pent up demand too, in our view). Lower distributor inventory (secondary sales grew ahead of primary in 1Q) provides a potential buffer for rest of FY21 and beyond. More importantly, we like the continuation of business transformation initiatives – (1) implementation of auto replenishment system (60% distributors covered now), (2) assortment planner tool (helps in product mix improvement), (3) working on production planning tools and (4) cost control measures. We see likely market share gains given the weakness in competitive intensity. We do note the risk of action from Speedo due to alleged improper labour practices – management has denied these allegations. Upgrade to ADD (from Hold).
* Volume declined 69% in 1Q, but strong recovery in August: In Q1FY21, revenue declined 66% (volume decline of 69%) while EBITDA and PAT reported a loss of Rs 347mn and Rs 396mn due to disruptions leading to almost no sales for 2/3rd of the quarter. Recovery in sales in Aug’20 was closer to Aug’19 sales as Page has reopened 96% of its EBOs (742 outlets out of 760), 90% of large format stores (1928 stores) and 80% of MBOs (54,000+ outlets) by Aug end – some of it likely to be pent up demand though, in our view. Secondary sales in Q1FY21 were higher by around ~18% than primary sales leading to buffer of lower distributor inventory. Ecommerce business grew significantly and now contributes double-digits to overall revenues (~3% earlier), due to increased propensity for online shopping.
* Profitability significantly impacted by negative operating leverage: Gross margin declined 700bps YoY to 48.1%. EBITDA reported a loss of Rs 347mn due to negative operating leverage despite significant cost savings – other expenses (-66% YoY) and employee cost (-4% YoY).
* Strong balance sheet: Working capital improved by 22% YoY to Rs 4.1bn (driven by lower inventory and receivables) leading to significant growth in cash and cash equivalents to Rs 1.7bn (+56% QoQ, +18% YoY). Further, there have been no additional borrowings during the quarter. Page has also put on hold any capex plans till Jan’21, but intends to work on doubling installed capacity post that.
* Valuation and risks: We increase our earnings estimates by 5-8%; modelling revenue / EBITDA / PAT CAGR of 9% / 14% / 15% over FY20-22E. Upgrade to ADD (from HOLD) with a DCF-based revised target price of Rs22,000 (Rs19,000 earlier). At our target price, the stock will trade at 48x P/E multiple Sept’22E. Key downside risks are potential labour issues in the state of Karnataka (high concentration of manufacturing facilities).
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