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Margin recouped well, volume recovery will be key

Campus Activewear’s 3QFY23 earnings print was ahead of our already subdued expectation. Revenue trajectory moderated compared to previous quarters, primarily led by sales decline (13.3%) in trade distribution channel (c.55-60% of overall sales) as challenging demand environment impacted the primary offtake as well as curtailed pricing growth. On the positive side, its execution on D2C (+45.6%) side remains healthy which helped offset the weakness in trade channel to some extent resulting in overall volume growth of 6% yoy, as company continues to make strong in-roads in the frontier & emerging market. Better channel mix and receding RM headwinds resulted in qoq improvement in gross margin which along with tight control over other expenses, resulted in EBITDA margins recouping back to high teen levels in the quarter (from lows of 13% in 2Q). Commentaries on demand trajectory has not turned positive yet; however, with secondary sales not seeing deterioration, management is hopeful of recovery in a couple of quarters. To that extent, Pace of recovery in volumes will be a key monitorable in the near term. We remain positive on the industry opportunity & Campus’s execution machinery to capitalise on the same. Maintain BUY.

* Trade distribution channel performance deteriorates, D2C continues to remain on strong footing: : Campus revenue increased by 7.4% yoy to INR 4.7bn while EBITDA and PAT declined by 1% yoy and 11.7% yoy to INR 919mn and INR 483mn respectively. Revenue growth was 3.3% ahead of our expectations. Overall volumes grew by 5.5% yoy to 7mn pairs while ASP was up marginally by c.2%. Trade distribution sales declined by 13.3% yoy. Cautious stance by channel partners, due to demand weakness in select cohorts (rural/semi-urban areas of UP & Bihar) resulted in lower primary offtake. Further, company refrained from taking price hikes in this channel, which curtailed the ASP growth. Since secondary sales have not deteriorated, management believes primary offtakes in trade channel to improve in a couple of quarters. D2C channel continued to exhibit strong growth of 45.6% yoy (41%/75% yoy growth in E-comm/D2C offline sales respectively) led by continued traction in West & South markets. We reckon that incremental sales of INR 250-300mn, pertaining to flagship platform events, got shifted to Q3FY23 for D2C channel. Demand environment in Jan & Feb so far has seen some improvement but remains challenging.

* EBITDA margin recovers back to high teen levels: Gross margin compression was higher than our expectation, down 58bps yoy, due to consumption of high cost inventory but was up 80ps qoq to 48.6% (vs our estimate of 49%) aided by stabilisation in input costs and better channel mix. Management highlighted that while EVA/resin prices have stabilised, packaging/adhesive costs remain volatile. Staff cost increased by 39.2% yoy. Other expenses were controlled well and grew by 7.3% yoy, in-line with sales growth, despite higher A&P. Sequential moderation in A&P spends (cost pertaining to flagship events of platforms was booked in Q2FY23) could be one of the elements. Resultant EBITDA declined by 1% yoy to INR 919mn (4.5% ahead of our expectations), with a margin compression of 167bps yoy to 19.7%.

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