Strong quarter; upsides priced in
* Q3FY21 operating performance beat our/Street estimates by 20%. Revenue grew strongly at 17% YoY (4-7% ahead of our/Street estimates) and EBITDA margin expanded ~700bps YoY to 24%.
* Volumes rose 10% led by faster growth in Athleisure and women’s innerwear segments. Recovery was slow in men’s innerwear segment (marginal decline in Q3). Commentary points to continued momentum in Athleisure and increased aggression on store additions/new segments, which offer an improved growth outlook.
* Margin outlook also remains healthy and PAG maintains its guidance of near 22% EBITDA margins. It expects some of the discretionary savings to reverse in FY22. Cost savings and higher sales growth may drive higher margins in the near term, in our view.
* We raise EPS estimates by ~14%. PAG now offers an improved growth outlook, with faster recovery, tailwinds in Athleisure and higher store expansion. We rerate PAG to 50x FY23E EPS (vs. 40x earlier), in line with its historical multiples/other discretionary peers. But we retain Hold with a TP of Rs28,000, given rich valuations post the sharp run up.
Faster recovery and increased aggression on growth initiatives:
Revenues grew 17% YoY, helped by 10%/6% volume/realization growth in Q3. PAG attributed strong growth to new outlet additions in MBO/EBO channels, benefits of its supply chain automation and strong acceleration in high-value Athleisure segment. Interestingly, even after the festive season, PAG recorded continued MoM growth in Dec’20. PAG sees acceleration in store additions with 10,000 MBO additions in FY21E and 1,000 EBOs by Q3FY22E (vs. 873 currently). It also highlighted kids-wear and rural expansion (currently in pilot phase) to be the next big growth drivers. It currently has 28 EBOs for kids-wear and has presence in 174 cities (through MBOs) with independent sales team of 150 people. Distribution/manufacturing network is now largely open with 93%/95%/100% MBO/EBO/LFS openings. Capex outlay has been increased to Rs3bn.
Margin gains driven by lower discretionary spends and operating leverage:
Margins surprised positively with ~700bps YoY improvement, led by 240bps gross margin expansion and operating leverage. PAG attributed margin improvement in Q3FYF21 to price hikes in Aug’20, shop-floor optimization and cost savings. It expects discretionary/marketing costs to rise in FY22 and margins to remain at ~22% levels in the future.
Increase estimates by 13-14%; valuations limit upsides:
We increase EPS estimates by 13%-14%. PAG now offers an improved growth outlook with faster recovery, tailwinds in Athleisure segment and higher store expansion. We re-rate PAG to 50x FY23E EPS (vs. 40x earlier), in line with its historical multiples/other discretionary peers. But we maintain Hold with a TP of Rs28,000, given rich valuations post the sharp run up.
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