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Weak quarter, positive outlook

Campus Activewear’s 2QFY24 earnings print was disappointing – function of sharp volume decline of c.28% yoy during the quarter. Management attributed the weakness to a) tough demand condition in value segment & pro-active inventory correction undertaken especially in key Northern markets, b) decline in e-commerce sales due to loss of B2B businesses (exit of Udaan/Ajio) and c) shift in festive period. However, management highlighted that inventory correction is largely done & with onset of festive, company has seen healthy bounce back in sales for YTD3Q.The gross margin progression has been much faster and higher than what we envisaged led by better product/channel mix and better sourcing. Gross margin led tailwinds are likely to continue which provides headroom to invest behind brands to drive market share; which, along with leverage benefit due to uptick in sales, should aid EBITDA margin expansion in coming quarters. In the near term, while margin trajectory remains robust, pace of recovery in volumes & sustainability of the same will be a key monitorable for the stock, in our view.

# Revenue performance sharply below estimates: Campus Actiwear’s Sales, EBITDA and PAT declined by 22.4%, 43.7% and 97.8% yoy respectively to INR 2.6bn, INR 245mn and INR 3mn. The revenue performance was sharply below our estimate of INR 3.5bn. Volumes declined by 28% while ASP was up c.8% yoy for the quarter. In terms of channel performance, Trade distribution & E-Commerce sales declined by c.27-28% while EBO sales grew by healthy 50% yoy. Management attributed sharp decline in volumes to a) weak demand and inventory correction undertaken especially in key markets of Uttar Pradesh, Bihar & Rajasthan (impact of INR 200mn), b) Loss of B2B (Udaan/Ajio) business (impact of INR 320mn) due to change in their operating model resulting in decline in ecommerce sales and c) shift in festive season (impact of INR 200mn). The ASP increase is a function of better mix (lower decline in D2C channel compared to trade distribution channel) and lower discounting. With inventory correction largely done and onset of festive, healthy demand uptick has been seen in Q3FY24 so far. Management remains upbeat about opportunity on account of BIS implementation (likely to happen in Jan’24), given that there are a lot of FG imports from China in the MRP of INR 1000-3000, where Campus has strong presence.

Gross margin progression remains ahead of expectation; however, scale deleverage drove overall earnings miss: GM progression again was ahead of our expectation – expansion of 650bps yoy and 100 bps qoq to 54.3% (JMFe: 53%). The same can be attributed to benign input costs, sourcing efficiencies and better channel/product mix. We expect the benefit to continue as raw material scenario is benign and second half margins are typically better versus first half due to higher share of closed footwear which is a better margin product. Overhead costs were controlled well - staff costs grew 9.1% yoy while other expenses were down 2% yoy. However, scale deleverage on account of sharp decline in revenues resulted in EBITDA declining by 43.7% with a margin compression of 358bps yoy/925bps qoq to 9.5% (JMFe: 18.3%).

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SEBI Registration Number is INM000010361