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Steadying ship

Revenue growth in 4QFY21 (2-year CAGR) crossed 20%-mark after a gap of nearly three years. While there was normalcy in store operations, PAG did benefit from strong athleisure demand. Margins were slightly soft but price increases, cost savings and operating leverage should help. We like the continued focus on business transformation initiatives (implementation of ARS) and (2) efforts to find new avenues for growth – kids and athleisure range along with penetrating the rural markets. Focus also continues on expanding distribution and adding EBOs (across segments). Though operations are impacted now, there is reasonable confidence of a quicker turnaround. However, underperformance of men’s innerwear and sharper-than-expected RM inflation are key concerns. Resignation of Mr Vedji Ticku, CEO may potentially be viewed as a speed-breaker event, by some investors, in our view. ADD; TP Rs34,000.

Strong quarter with 12% 2-year CAGR volume growth:

In Q4FY21, revenue / EBITDA / recurring PAT was up (2-year CAGR) 20% / 19% / 24%, respectively. Revenue growth was driven by 12% volume growth (2-year CAGR); better mix (higher growth in athleisure) and some price increase aided realisation growth. Q4FY21 quarter was near-normal in terms of operations with all EBOs and 90% of the MBOs being active. In FY21, PAG managed to restrict the decline in revenues to only 4% yoy; EBITDA and PAT were down just 1% each.

EBITDA margin slips below 20%:

Gross margin contracted 120bps YoY to 57.6% due to slightly inflationary RM. EBITDA margin came in at 19.3% (Q3FY21 margin was 24.4%); the yoy expansion in margin was optical due to operating leverage benefit. Management is confident of returning back to 21-22% EBITDA margins as things normalise. It has (1) initiated a 4-5% price hike (RM impact is difficult to ascertain for now given the disruption), (2) undertaken cost optimisation measures and (3) should benefit from operating leverage. 

Other highlights:

 (1) Cash generation improved driven by favourable WC structure and lower capex intensity. Net working capital days were down to 61 days from 87 due to lower inventory and higher payable days; management intends to raise inventory levels going forward. OCF / FCF grew 35% / 54%. Net cash surplus was Rs4.4 bn.

(2) It now has 46 EBOs for women and 38 EBOs for kids.

Valuation and risks:

We cut our earnings estimates for FY22 by 8%; modelling revenue / EBITDA / PAT CAGR of 21% / 32% / 39% over FY21-23E. Maintain ADD with a DCF-based revised target price of Rs34,000. At our target price, the stock will trade at 57x P/E multiple Mar’23E. Key downside risks are underperformance of men’s innerwear and sharper-than-expected RM inflation.

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