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Business transformation initiatives driving growth

Q3 growth of 17% with double-digit growth in athleisure and women’s innerwear is one of the faster recovery (growth) among apparel companies (some of it could be pent up demand too, in our view). We believe that this performance is driven by Page’s continued focus on business transformation initiatives – (1) implementation of auto replenishment system, (2) assortment planner tool (helps in product mix improvement) and (3) working on production planning tools. Further, we like Page’s efforts to find new avenues for growth – in the process of launching new segment for rural regions which could increase brand penetration. We see potential market share gains given the weakness in competitive intensity. However, underperformance of men’s innerwear is a concern. ADD.

* Volume grew 10% in 3Q; strong performance: In Q3FY21, revenue / EBITDA / recurring PAT grew 17% / 63% / 77% respectively. Revenue growth was driven by 10% volume growth; realisation improved due to better product mix towards athleisure and women innerwear; both the segments witnessed high double-digit growth). Page has witnessed acceleration in revenue growth from Aug’20 to Dec’20 – driven by network expansion (~7,000 new outlets and EBOs) and reopening of 100% of EBOs (873 outlets), 93% of large format stores (2,229 stores) and 94% of MBOs (67,500+ outlets). However, we believe that some of this growth is likely to be pent up demand too. Men’s innerwear (largest segment for company) is yet to fully recover – marginal decline during the quarter.

* Profitability significantly improved by lower ad-spends and cost savings: Gross margin expanded 230bps YoY to 55.4% due to lower input cost. Management expects input costs to be stable in near-term. EBITDA margin further expanded 690bps to 24.4% driven by operating leverage, lower ad-spends and cost saving initiatives – other expenses (-340bps) and staff costs (-120bps).

* Other highlights: 1) Cash and cash equivalents at Rs5bn (+23% QoQ) driven by working capital improvement, 2) Repaid all outstanding borrowings and is now debt free, 3) 28 new EBOs for Kidswear, and 4) New launches in athleisure segment (athleisure grew by double-digit in Q3 as well).

* Valuation and risks: We increase our earnings estimates for FY22 by 13%; modelling revenue / EBITDA / PAT CAGR of 14% / 25% / 27% over FY20-23E. Maintain ADD with a DCF-based revised target price of Rs35,000 (Rs31,000 earlier). At our target price, the stock will trade at 55x P/E multiple Mar’23E. Key downside risks are potential labour issues in the state of Karnataka (high concentration of manufacturing facilities).

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