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Sales beat, profits in line; lockdown leads to cut in estimates

* While revenue and volume growth in 4QFY21 were ahead of our estimates, lower than expected EBITDA margin resulted in EBITDA and PBT that were in line with our estimates. PAG has taken a 4-5% price increase in 4QFY21 to account for higher yarn prices.

* The ongoing lockdown in most parts of India has led to store closures. Key factories of PAG in Bengaluru have been shut for nearly a month. While the management is confident of a rebound in demand after a gradual return to normalcy once the lockdowns are lifted, the ongoing lockdowns have resulted in an 8.3%/3% impact to our FY22E/FY23E EPS forecast.

* While there seems to be a potential recovery to double-digit volume growth, it would still be below the nearly 30% sales CAGR seen over FY08- 18. For the first time since 3QFY19, PAG has reported double-digit two-year average volume growth in 4QFY21. We maintain our Neutral rating as valuations remain expensive at 62.7x FY23E EPS.

Significant beat on sales; profits in line

* PAG posted 62.7% YoY sales growth to INR8.8b in 4QFY21 (est. INR7.6b). EBITDA grew 192% YoY to INR1.7b (in line). PBT grew 253% YoY to INR1.5b (in line). Adjusted PAT grew 273% YoY to INR1.2b (in line).

* Overall volumes grew 54% in 4QFY21.

* Gross margin contracted 120bp YoY, but was up 220bp QoQ to 57.6% (est. 54.8%).

* Employee/other expenses grew 22.7%/37.2% YoY to INR1.6b/INR1.7b.

* As a percentage of sales, employee/other expenses fell 610bp/370bp YoY to 18.7%/19.6%. This led to EBITDA margin expansion of 860bp YoY (down 510bp QoQ) to 19.3% (est. 22.4%).

* Sales/EBITDA/adjusted PAT were marginally lower (-3.8%/-1.1%/-0.8%) at INR28.3b/INR5.2b/INR3.4b in FY21.

* Cash and cash equivalents continue to remain strong at INR4.3b, with a debt-free Balance Sheet.

* Distribution reach expanded by ~6,000 outlets to over 78,000 outlets in 4QFY21.

Highlights from the management interaction

* A 4-5% price increase was taken in 4QFY21, which is slightly higher than usual, to combat the steep increase in yarn prices.

* It expects revenue in 1QFY21 to be affected by the ongoing lockdowns as most stores remain closed.

* The management has maintained its 21-22% EBITDA margin guidance.

* The company had 930 EBOs at the end of FY21, with ~180 new additions, including 38 exclusive outlets for Jockey Junior.

* Inventory of finished goods was much lower than usual due to strongerthan-expected demand in 4QFY21. Hence, end of period inventory days of 71 in FY21 may not be sustainable.

Valuation and view

* A significant impact on 1QFY22E sales is likely due to the ongoing store closures (PAG’s products do not qualify as essential goods), resulting in an 8.3%/3% impact on FY22E/FY23E EPS. The impact is expected to be higher if the lockdowns are extended.

* For the first time since 3QFY19, PAG has reported double-digit two-year average volume growth in 4QFY21. While this is a far cry from the ~30% sales CAGR over FY08-18, it seems to have turned the corner on topline growth. Recent distribution expansion and Balance Sheet improvements are impressive, leading to RoCEs in the 35-45% range, despite three years of flat EPS, albeit with FY21 substantially affected by the lockdown.

* The Athleisure segment is poised to do well for the second consecutive year, with consumers likely to stay at home for a decent part of FY22. While Kidswear has got off to a good start, momentum in the Men’s and Women’s Innerwear business needs to revive sustainably as opposed to the weak performance seen in recent years. Valuations at 62.7x FY23E EPS are expensive. We maintain our Neutral rating with a TP of INR29,000/share (55x Jun’23E EPS).

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