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Strong topline growth, fair valuations limit upside

* PAG reported a strong performance in 2QFY22, with all segments delivering a sales growth of ~40% YoY on a weak base. With in-home consumption dominating in recent quarters, the Athleisure segment has been a key driver on a two year CAGR basis. During the same period Men’s Innerwear (~40% of sales) has seen a tepid performance after declining sharply in 1HFY21.

* Two-year sales CAGR of ~18% is likely to have been led primarily by: a) an extraordinary and unsustainably high growth in the Athleisure segment, driven by in-home consumption during the lockdowns, b) significant and ongoing expansion in distribution network, c) improved growth in Women’s Innerwear compared to its 4-5 year average, and d) reportedly strong traction in the Small Kids Innerwear segment in which the company has been a recent entrant. While topline growth, led by the above three factors, is sustainable, overall sales growth in mid-teens cannot be sustained when Athleisure demand tapers off from FY23E onwards and until PAG’s largest segment (Men’s Innerwear) starts showing signs of traction. We maintain our Neutral rating.

Strong beat on all fronts led by topline

* Sales grew 46.4% YoY to INR10.8b (est. INR8.5b) in 2QFY22. EBITDA grew 41.2% YoY to INR2.3b (est. INR1.8b). PBT grew 47.2% YoY to INR2.1b (est. INR1.6b). Adjusted PAT grew 44.8% YoY to INR1.6b (est. INR1.2b).

* Overall volumes grew 43% YoY in 2QFY22.

* Gross margin declined by 70bp YoY and 290bp QoQ to 54.8%.

* As a percentage of sales, lower employee expenses (-120bp YoY to 16.3%) were offset by higher other expenses (+140bp to 17%). This led to an EBITDA margin compression of 80bp YoY to 21.5% (in line).

* On a two-year CAGR basis, sales/EBITDA/PAT grew 18.2%/25.1%/18.4%.

* In 1HFY22, sales/EBITDA/PAT grew 54.7%/105%/140%.

* PAG declared a second interim dividend of INR150 per share (first interim dividend of INR50 per share).

* Cash and cash equivalents stood at INR5.3b, up 33% YoY. Liquidity continues to remain strong, with robust cash flow management.

* It added 13,950 MBOs in 2Q v/s an addition of 2,250 MBOs in 1QFY22. Total MBO reach stood at over 94,200.

* PAG added 54 EBOs in 2Q v/s an addition of nine EBOs in 1QFY22. It is currently present in more than 1,000 stores in over 350 cities.

* Mr. Rohan Genomal has been appointed as ‘Executive Director - Strategy’ of the company for a five-year period effective 11th Nov’21.

Highlights from the management interaction

* The price of cotton yarn has significantly increased YoY. The management PAG had stocked up on inventories early on, recognizing the inflationary trend. This helped it offset RM inflation to some extent. 11 November 2021 2QFY22 Results Update | Sector: Consumer Page Industries 12 November 2021 14

* Inflation has been unprecedented, and the management will find it difficult to predict its movement going forward.

* The company saw a 65% expansion in outlets during the COVID-19 pandemic to 100k MBOs in Oct’21 and more than 1,000 EBOs in Sep’21. The management is targeting 150k MBOs over the next three years, with a focus on smaller towns (with populations as small as 25-30k).

Valuation and view

* While strong sales growth led to a significant beat v/s our expectations, the: a) impact of higher yarn costs in 2HFY22, b) extremely high base of sales in 2HFY21, and c) unsustainable current momentum of Athleisure sales as consumer mobility returns has limited FY22E EPS growth to ~2%.

* 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 apparently gained some traction. Kids’ Innerwear has gotten off to a good start. However, the momentum needs to pick up in Men’s Innerwear. The momentum in the Women’s Innerwear business needs to sustain, especially as factors favoring the rapid growth in the Athleisure segment would not be present beyond FY22E. Valuations at 80x FY23E EPS are expensive. We maintain our Neutral rating, with a TP of INR38,660/share (65x Dec’23E EPS).

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