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Add Page Industries Ltd For Target Rs.36,477

Enhancing distribution muscle to leverage strong brand equity; reiterate ADD   

Quarter Highlights

* Result highlights – Better than expected revenue growth at 76% YoY led by 72% volume growth from a low base (but still 40% lower than 1QFY20 levels); gross margin up 960bps/10bps YoY/QoQ to 57.7% led by 4% price hikes, negative operating leverage led to lower than normal EBITDA margins at 6.8%.

* Distribution expansion – Company added 1,465 MBOs and 9 EBOs during the quarter taking total count to ~80,250 MBOs and 939 EBOs in addition to increase in share of eCom revenues from 7.4% in FY21 to 19% in 1Q.

* Current situation – July sales are back to April levels as few states remain impacted; Athleisure and women’s wear performing well while kids wear business continues to gain traction.

* Other highlights – Declared interim dividend of Rs50/share, strong liquidity position despite inventory build‐up with healthy cash at Rs3.28bn, up 89% YoY.

Valuation and view –

1Q was a soft quarter mainly due to the pandemic‐related disruptions on sales and margins but July has seen a decent recovery. We believe PAG is on track to deliver double‐digit growth with normal margins once the operations fully normalize led by higher athleisure mix, increased distribution reach, contribution from kids wear and a recovery in larger cities.

With the company getting its marketing investments back on track with emphasis on POS reach‐out, kids business and e‐com channel, growth should come back to the 15‐20% trajectory given penetration levels are still very low and scope for 8‐10% annual distribution expansion still exists. Ongoing capex towards doubling capacity in 5‐6 years give increased confidence towards strong long‐term growth. Margins should also get back to the 21‐22% range from next year given strong brand equity and positioning coupled with product innovation.  

We cut our FY22E/FY23E EPS estimates by 9%/7% to build‐in lower margins and introduce FY24 estimates. We build in 20%/27%/30% CAGR in revenue/EBITDA/PAT over FY21‐24E expecting a strong recovery from 3Q onwards coupled with close to normal margins. Strong WC management and high dividend payouts of 80% plus should keep return ratios healthy further supporting premium valuations. We reiterate our ADD rating on the stock with a PT of Rs 36,477 based on 55x FY24E earnings, 10% discount to its historic average. Key risks would be intense competition in innerwear and RM inflation impacting growth or margins and prolonged operational restrictions.

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