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Athleisure, festive demand drive sales beat

* Page Industries (PAG) reported double-digit topline growth in 3QFY21, led by healthy festive demand, continued strong demand in the Athleisure segment, and strong winter product sales. While growth is still well below the ~29% topline CAGR reported over FY08–18, the quarter seems to be a step in the right direction. Interestingly, whether there is sustained momentum in Athleisure – a segment that has benefitted immensely from people spending more time at home and thus spending less on Formal Wear – remains to be seen.

* The management indicated operating margins would be closer to historical levels of 21–22% going forward as discretionary spending was still not back at normalized levels in 3QFY21.

* Changes to the model have resulted in EPS estimates for FY21/FY22/FY23E being revised by +17.2%/+5.5%/+7.2%. Rich valuations of 69.9x FY22E and 61.1x FY23E EPS lead us to maintain our Neutral rating on the stock – despite incipient growth revival and ROEs likely to rebound to FY19 levels of over 50% of going forward.

Beat on all fronts v/s estimates

* PAG posted 16.8% YoY sales growth to INR9.3b in 3QFY21 (est. INR8.7b). EBITDA grew 62.9% YoY to INR2.3b (est. INR1.9b). PBT grew 77.3% YoY to INR2.1b (est. INR1.7b). Adj. PAT grew 76.6% YoY to INR1.5b (est. INR1.2b).

* Overall volumes grew 10% during the quarter.

* The gross margin expanded 230bp YoY to 55.4%.

* Employee expenses rose 8.6% YoY to INR1.5b, while other expenses declined 4.7% YoY to INR1.4b.

* As a percentage of sales, employee expenses decreased 120bp YoY to 15.8%; other expenses also decreased 340bp YoY to 15.3%. This led to EBITDA margin expansion of 690bp YoY to 24.4% (est. 21.5%).

* 9MFY21 sales/EBITDA/PAT declined 18.8%/24.8%/27.9% to INR19.5b/INR3.6b/INR2.3b.

* The company has repaid all its outstanding borrowings and is now debtfree.

* Cash and cash equivalents increased 23% QoQ and 275% YoY to INR4.9b.

* The company has declared a second interim dividend of INR150 per share, in addition to the first interim dividend of INR100 per share announced in Nov’20.

Highlights from management commentary

* While yarn prices have been sharper than usual, the company has sufficient low-cost inventory and is willing to take a price increase possibly in March to mitigate increasing RM costs.

* Medium-term margins would be in the 21–22% range as discretionary expenses would return to normal levels, unlike in 3QFY21.

* A&SP spend, usually 4–5% of sales, has been around half of the usual levels thus far.

Valuation and view

* PAG has an immensely impressive earnings growth track record. Its recent efforts on balance sheet improvement are commendable. Also, management endeavors to improve channel efficiency and revitalize growth are likely to turn fruitful eventually. However, the path to earnings recovery is unclear. EPS growth has been flat for the preceding two years.

* Category slowdown and competitive headwinds present other significant challenges. While 3QFY21 topline growth was good, led by Athleisure, the festive season, and winter sales growth, it has only been the second quarter of double-digit topline growth since 3QFY19. It also remains to be seen whether the sales boost from Athleisure in recent quarters could be sustained in forthcoming years.

* The stock is trading at 69.9x FY22E and 61.1x FY23E EPS. We value the company at 55x FY23E EPS to arrive at TP of INR28,800. Maintain Neutral.

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