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Growth outlook remains upbeat

* Q1 performance was slightly better, with revenue recovery at 60% (10% ahead of estimates) and EBITDA margins at 6.8%. Sales grew 76% yoy to Rs5bn on low comparables, but declined 43% qoq due to the Covid-induced restrictions.

* Management indicated that Jul’21 sales recovery is healthy and similar to Apr’21. Strong growth plans in Kidswear/Athleisure and aggressive network expansion into Tier-3/4 and rural towns offer good visibility of mid-teens growth ahead.

* Margin trends are healthy with better cost control despite a steep increase in RM prices and relatively lower price hikes (~7-8% vs. 20% of its peers in the economy category). PAG hinted at returning to 21%+ margins ahead, as sales recover.

* Strong on-the-ground execution during lockdowns and focus on fast-growing categories (Kids/Athleisure) and strong network expansion keep us positive on PAG. Maintain Buy with a revised TP of Rs37,500 ((55x Sep’23E EPS)

Relatively better recovery; growth outlook remains upbeat: Revenues grew ~76% yoy in Q1, led by 70% volume growth on a low base and 4% realization growth. Revenue recovery of ~60% was better than ~35% recovery seen last year, both compared to pre-Covid levels. Better volumes were driven by ~20% network expansion, higher footfalls and strong online growth (up 250%). Among segments, Athleisure, Kids and Women innerwear saw stronger growth than Men’s innerwear. While disruptions continued in Jul’21, PAG indicated a healthy recovery to Apr-21 levels (June was ~25% lower). Management remains upbeat on growth prospects, helped by market share gains with a robust supply-chain during lockdowns, large opportunities in Kidswear/Athleisure, rural expansion and online. Jockey Junior now has a separate 200-member salesforce and athleisure has seen healthy new customer acquisitions on WFH trends. Since FY20, PAG’s EBO/MBO network has expanded strongly by 20-25%, with ~50% of that added in Tier-2/3/4 and rural markets (now forming ~50% of sales).

Margins to recover to ~21% levels: EBITDA margins of 6.8% were better than expected, supported by cost control and higher gross margins (up ~1,000bps; ex-subcon expenses) on better manufacturing overhead absorption. The commentary was strong with PAG indicating 21%+ margins on full recovery ahead. PAG has also been able to contain the impact of strong increase in RM prices with better cost control – has effected only ~4% price hike (cumulative 7-8%) vs. ~20% cumulative hike by peers that operate in the economy segment.

Expect a strong recovery ahead; Buy: With manufacturing operations normalized and the store network fully operational, we expect a strong recovery ahead. PAG’s strong product expansion plans and fast scale-up of distribution network provide better visibility of mid-teens growth sustaining ahead. Valuations at 52x FY23E EPS are at a discount to other high-growth peers. Maintain Buy with a revised TP of Rs37,500 based on 55x Sep’23E EPS.

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