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In-line results; recovery likely to be gradual

* Page Industries (PAG)’s results were broadly in line with expectations on the sales front. Although sales were up sharply YoY, they were still 40% below 1QFY20 numbers. June and July saw gradual recovery to normalcy, unlike other discretionary peers in which pent-up demand has led to faster recovery.

* The management remains confident of healthy topline growth once the impact of the lockdown abates and ongoing restrictions on stores / mall openings and timings are lifted.

* PAG’s distribution expansion, rural initiatives, and efforts to build on the good start in the Kids’ Innerwear business offer the promise of better topline growth vis-à-vis the tepid growth seen over the past three years. However, growth needs to be driven by the core (Men’s/Women’s Innerwear). Sustained topline growth in the Men’s Innerwear segment (~45% of sales), which has been struggling in recent years, holds the key. We maintain our Neutral rating.

In-line sales; better-than-expected margins

* PAG posted 76.1% YoY sales growth in 1QFY22 to INR5b (in-line). EBITDA stood at INR342m (est. INR291m), against loss of INR347m in 1QFY21. PBT stood at INR145m (est. INR104m), against loss of INR524m in 1QFY21. Adj. PAT stood at INR109m (est. INR77m), against loss of INR396m in 1QFY21.

* Overall volumes grew 70% YoY in 1QFY22 on a soft base.

* The gross margin expanded 960bp YoY / 10bp QoQ to 57.7%.

* As a percentage of sales, lower employee expenses (down 1270bp YoY to 30.4%) were partially offset by higher other expenses (up 330bp YoY to 20.5%). This led to EBITDA margin expansion of 1900bp YoY, but 1250bp QoQ decline to 6.8% (est. 6%).

* PAG declared its first interim dividend of INR50 per equity share for FY22.

* Cash and cash equivalents stood at INR3.3b, up 89% YoY.

* Despite half the quarter being under lockdown for most cities and states, PAG successfully added 1,465 multi-brand outlets (MBOs) and 9 exclusive brand outlets (EBOs) during the quarter.

* The following retail stores of channel partners were active as of end-Jun’21: a) 61% of 80,250+ MBOs, b) all 939 EBOs, and c) all 2,380+ large-format stores (LFS).

Highlights from management interaction

* Volumes were 12m units in April, 5m units in May, and 9m units in June. Hence, volumes were not back at April levels. July was also disrupted in some markets, and although volumes were better v/s June levels, they were still not back at pre-COVID levels.

* EBITDA margins in July were ~19%, lower than our expectations.

* Yarn costs increased ~3% in 1QFY22, but are now moderating. Average price hikes were ~4% in 1QFY22.

Valuation and view

* While sales for 1QFY22 were in line with our expectations, they were 40% lower v/s 1QFY20 levels. Slower-than-expected recovery and lower-than-estimated margins in July have led to a 5.4% reduction in our FY22 EPS forecasts, even as our FY23 EPS has been cut by just 1.9%.

* The recent distribution expansion, rural growth initiatives, and balance sheet improvements are impressive. RoCEs are in the 35–45% range, despite three years of flat EPS, albeit FY21 was 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. Women’s Innerwear sales have also apparently gained some traction. Kids’ Innerwear has gotten off to a good start. However, momentum needs to pick up in Men’s Innerwear and the Women’s Innerwear business needs to sustain, especially as factors favoring rapid growth in the Athleisure segment would not be present beyond FY22. Valuations at 65.2x FY23E EPS are expensive. We maintain our Neutral rating, with TP of INR30,100/share (55x Sep’23E EPS).

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