Neutral Page Industries Ltd For Target Rs.37,200 - Motilal Oswal Financial Services
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Disappointing results, stress to continue in 1HFY24
* PAG reported weak 4QFY23 results. Volume declined 14.6% YoY, while sales declined 12.8% (highest decline in sales since FY12, excluding the Covidimpacted period). Even the EBITDA margin of 13.9% was the lowest in over a decade in a non-Covid-hit quarter, affected by the lack of fixed cost absorption due to a volume decline and the consumption of high-cost inventory during the quarter.
* While material consumption costs are likely to ease going forward as indicated by the management, a recovery in sales to double-digit growth appears uncertain in the near term due to the implementation process of Auto Replenishment System (ARS) and increased competitive intensity in the post-Covid period. Maintain Neutral on the stock
Weak revenue growth leads to substantial miss on EBITDA
* Sales declined 12.8% YoY to INR9,691m (est. INR10,995m) in 4QFY23.
* EBITDA declined 49.7% YoY/30.3% QoQ to INR1,343m (est. INR1,723m). PBT fell 56.7% YoY/35.2% QoQ to INR1,065m (est. INR1,439m).
* Adj. PAT was down 58.9% YoY/36.7% QoQ at INR784m (est. INR1,077m). ? Gross margin contracted ~280bp YoY to 56.6% (est. 53.5%).
* As a percentage of sales, higher employee expenses (+470bp YoY to 22.7%) and other expenses (+270bp YoY to 20%) led to EBITDA margin contraction of ~1,020bp YoY to 13.9% (est. 15.7%).
* FY23 sales/EBITDA/adj. PAT grew 23.2%/9.8%/6.5% YoY to INR47.9b/ INR8.6b/INR5.7b
Highlights from the management commentary
* emand was subdued in 4Q (even on QoQ basis) but is improving now.
* 4QFY23 was also affected by the ARS implementation. It will take some more time to fully implement ARS as it has 4,800+ distributor accounts. There will be some impact for two more quarters.
* PAG has a ~17-18% market share in the men’s innerwear category and in high single digits in other categories.
* Inventory is nearly at an all-time high with inventory days at ~120 v/s 92 YoY. It purchased advance inventory in anticipation of growth, which did not come. However, high-cost inventory is now fully consumed
Valuation and view
* There are no material changes to our model.
* After a few years of an earnings decline (-4.3% PBT CAGR over FY18-21), PAG’s performance in FY22 was encouraging with strong 57.5% EPS growth YoY. This seems to have petered out to a sedate growth of 6.5% in FY23. If demand recovers in the next six months, we believe that the company can still grow its earnings by ~20% over the next two years.
* PAG’s medium-term earnings prospects have improved due to investments made in distribution, designs, and technology. RoCE is likely to be ~45% after falling to the late 30s in FY20/FY21. However, since the valuation at 53x FY25E EPS is expensive, we reiterate Neutral with a TP of INR37,200.
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