Weak results; No earnings recovery in sight
* Page Industries’ (PAG) 4QFY20 results missed estimates significantly on top line, and particularly, on EBITDA/PAT levels. Even with gradual reopening of stores, demand trend for the first 2-3 quarters of FY21 is likely to be weak.
* There is no evidence yet that the company has turned the corner toward recovering anywhere close to the ~30% earnings CAGR witnessed during FY08-18. The PAG stock is fully valued at 50.5x FY22E EPS.
Significant miss on estimates
* In 4QFY20, PAG posted 11% YoY sales decline to INR5.4b (v/s est. INR5.7b). Volumes declined 18.8% (v/s est. 11.5% decline). EBITDA/PBT/Adj. PAT declined 51.4%/62.9%/58.6% YoY to INR581m/INR432m/INR310m (v/s est. INR981m/INR797m/INR608m).
* Gross margins contracted by 480bp YoY to 58.8%. EBITDA margins contracted by 890bp YoY to 10.7% as employee costs as a % of sales were up (+440bp YoY), which was offset by lower other expenses (-20bp YoY).
* FY20 revenue/EBITDA/PAT grew +3.3%/-13.7%/-12.9% YoY.
* Balance sheet performance: Cash conversion cycle stood at 90 days on an average basis. This was driven by lower debtor days (12 days), lower creditor days (13 days) and higher inventory days (91 days). OCF was up 125% while PAT was down 12.9%. FCF stood at INR4.4b (+130% YoY).
Highlights from management commentary
* Current situation is better than feared. Production facilities are running at 85% now.
* According to management, in 6-9 months, the company would be back to where it was last year unless there is a second wave of COVID-19.
* PAG received INR900m worth of orders in 4QFY20 that were not dispatched or billed; however, the same will now be part of 1QFY21 revenues.
Valuation and view
* Changes to the model have resulted in 26.4%/2.9% decline in FY21/FY22E EPS owing to the weak near-term top line/earnings outlook and lack of clarity on recovery.
* PAG has an immensely impressive earnings growth track record. Its recent efforts on balance sheet improvement are commendable. Also, management’s endeavors to improve channel efficiency and revitalize growth are likely to eventually bear fruit. However, the path to earnings recovery is unclear.
* Category slowdown, weak channel liquidity and competitive headwinds present other significant near-term challenges in addition to the COVID-19 impact.
* The stock is trading at 50.5x FY22E EPS. We value the company at 45x Jun’22E EPS to arrive at TP of INR17,905. Maintain Neutral.
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