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Weak quarter; recovery in volumes will be key monitorable

Campus Activewear’s 4QFY23 performance was weaker than our estimate. Revenue construct was similar to previous quarters – trade distribution channel sales (c.55-60% of sales) declined by c.10-11% while D2C channel sales grew by 14.1%. On the positive side, better channel mix and favourable input cost environment resulted in further improvement in GM; however, same was more than offset by scale deleverage on account of muted sales performance, thereby impacting the profitability metrics. From medium to long term perspective, in order to create new growth vectors, focus will be to plug portfolio gap in the value segment (introduce subbrand in INR 699-999 price point), scale up presence in Casual wear/Women’s & Kids wear & explore export opportunities, which we believe are steps in right direction. In the near term, while execution on D2C remains resilient & demand environment is seeing some improvement; however, it is not completely out of the woods yet especially in the trade distribution led markets (North & East). To that extent, pace of recovery in volumes will be a key monitorable for the stock in the near term.

* Weakness in trade distribution channel continues to drag revenue performance: Revenue declined by 1.3% yoy to INR 3.5bn, EBITDA declined by 27.9% yoy to INR 565mn while reported PAT was flat yoy at INR 229mn. The revenue performance was 5% below our estimate, driven by 2.1% yoy decline in overall volumes while ASP saw marginal growth of 0.8% yoy for the quarter. In terms of segmental performance, trade distribution sales declined by c.10-11% yoy, impacted by lower primary offtake on account of demand weakness in select cohorts (rural/semi-urban areas of UP & Bihar). Management expects channel to return to growth trajectory in 1HFY24. D2C channel grew by 14.1% yoy, led by South & West markets. Within D2C, the offline sales grew by c.50%+ yoy while online channel sales grew c.10%. Moderation in online sales was due to transient impact in B2B business (Ajio/Udaan) in Feb/March which has now normalised in 1QFY24. Going ahead, in order to revive growth in Tier 2 & beyond markets, company plans to consolidate distribution & penetrate more to gain volume market share. Further, given the downtrading seen in these markets, it plans to plug the portfolio gap by introducing subbrand in INR 699-999 price point (market size of INR10bn). Apart from this, there will be increased thrust on widening of portfolio offering (Kids/Womens wear/Casual wear/Premium open footwear) to drive overall growth.

* Positive surprise on gross margins more than offset by higher other expenses resulting in overall earnings miss: GM progression was much better than our expectation – expansion of 298 bps yoy and 275 bps qoq to 51.4% (JMFe 48%) led by moderation in input costs and better channel mix. We reckon that raw material headwinds are largely behind and second half margins are also better versus first half due to higher share of closed footwear which is better margin product. Staff costs declined by 30.6% yoy as base quarter had higher ESOP related expenses. Other expenses grew by 50.1% yoy led by higher conversion costs due to increase in minimum wages, higher commissions, continued A&P spends and higher freight costs. Resultant EBITDA declined by 27.9% yoy to INR 565mn (19% below our expectations), with a margin compression of 600bps yoy.

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