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Soft growth; gross margin improving

* Campus Activewear (Campus) posted soft revenue growth at 5% YoY (in line) as volume growth remained flat in 1QFY24. However, premiumization led to an improvement in ASP and moderating RM prices resulted in healthy gross margin (GM) improvement of 370bp. The improvement in GM cushioned the adverse impact on PAT, which was flat QoQ (10% beat).

* While demand is likely to remain weak in the near term, moderating RM prices may help in reviving demand and also improve margin. We model 31% PAT CAGR over FY23-25E led by gradual revenue recovery and margin improvement. Campus’ strong market position and a long runway for growth should result in a recovery by 2HFY24E once market recovers. Reiterate BUY with a TP of INR335 (premised on 51x P/E on FY25E EPS).

EBITDA up 7% (in line); RM moderates

* Revenue grew 5% YoY to INR3.5b (in line) led by 5% increase in ASP and flat volume YoY.

* RM cost declined 3% YoY, which resulted in 13% YoY increase in gross profit to INR1.9b (in line). Subsequently, GM improved 370bp/200bp YoY/QoQ to 53.4%.

* EBITDA grew 7% YoY to INR662m (in line) and margin improved 40bp YoY to 18.7%. SG&A remained high at INR988m, i.e., 28% of revenue (vs. 27% of revenue in FY23).

 * Lower-than-expected depreciation and interest led to 10% beat on PAT.

* PAT was flat YoY at INR315m and margin came in at 8.9%.

* Total store count stood at 225 EBOs. It added 24 stores in 1QFY24 and closed one store.

Key takeaways from the management commentary

* Macro environment has been weak since the last 12-14 months. However, the upcoming election, strong monsoon, and the impending festive season could revive revenue growth and margin improvement in 2HFY24.

* Price sensitivity in the Campus products is strong. Company has not taken any significant price hike and intends to sell a majority of the products at full price.

* The GM improved as a result of better sourcing and an improved channel/ product mix. Management expects margins to rise as 2HFY24 (the closed footwear season) approaches. Hence, it anticipates an increase in EBITDA margin to 19.5%–20.5%. Post this, management expects margin to expand 100bp annually.

* Trade distribution channel declined 5.5% YoY, D2C online grew 10% YoY while D2C offline jumped 82% YoY due to store additions.

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