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Aggressive network expansion and investments delivering solid results, maintain ADD on rich valuations

Our view

PAG delivered another strong quarter with continued momentum on volume growth, benefit of sharp price hikes taken in 1Q and 3Q and positive operating leverage driving sharp margin expansion. The company’s distribution expansion drive continued unabated with addition of more than 5,000 MBOs and 100 EBOs during the quarter. The company’s strategic build‐up of inventory of core products (to take care of supply disruption) and RM stock (to insulate from yarn price volatility) in addition to strong opex controls and positive operating leverage helped improve margins. The company has now started to see benefits of aggressive expansion in less penetrated smaller geographies, which have now started contributing significantly to growth given PAG’s strong brand equity and product quality. Margin performance was also helped by price hikes of 5% in 1Q and 8% in 3Q, although 4Q margin levels might be difficult to sustain given further increase in yarn prices, albeit continued premiumization across product segments should take up margins towards 21‐22%. We believe PAG is now looking set to regain its earlier growth trajectory of ~20% driven by higher athleisure/women’s wear mix, increased distribution reach, contribution from kids wear and increasing traction in online. With the company sustaining its aggressive marketing, supply chain and technology investments, with emphasis on athleisure, womenswear, kids business and e‐com channel, strong growth should sustain given penetration levels are still in single‐digits in these segments and scope for EBO expansion and higher throughout from existing MBOs in non‐men’s segments remains strong. Ongoing capex towards increasing capacities (Orissa expected in 4QFY23) give increased confidence on achieving the USD 1bn sales target by FY26. We maintain ADD rating as expensive valuations limit the upside potential from current levels.

Result HighlightsDG             

* Revenue – Revenue up 26.2% (volumes up 8.7%) YoY to Rs 11.1bn on 63% growth in 4QFY21 implying 22% 3‐yr revenue CAGR and market share gains. Strong performance was aided by increased momentum in sales across all product categories backed by expansion in portfolio and aggressive distribution expansion in both MBOs and EBOs.

* Margins – Gross margin up 180bps/620ps YoY/QoQ to 59.4% driven by low cost inventory and price hike. EBITDA margin came in at 24% vs 19.3% led by operating efficiency. Sales incentives were at Rs 180mn vs Rs 226mn YoY.

Valuation

We now build in a revenue/EBITDA/PAT CAGR of 20%/26%/27% over FY22‐24E. We raise our estimates by 3‐4% in FY23/24 to incorporate higher sales led by aggressive distribution expansion driving market share gains across channels. We increase our TP to Rs 46,376 and maintain our ADD rating based on 60x FY24E earnings, in‐line with PAG’s LPA multiple.

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