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Strong growth albeit on lower base; margins weak

* Campus Activewear (Campus) delivered 29% YoY revenue growth (8% beat) on a lower base, driven by 36% YoY volume growth.

* However, EBITDA (13% miss) and PAT (23% miss) were weaker as margin was impacted by higher discounts in retail meet/online channel, non-BIS inventory liquidation, and higher advertisement spends ahead of festive sales.

* Despite weaker margins in 1HFY25 (~13.4%), management expects FY25 margins to be higher than FY24 levels (14.6%), fueled by operating leverage benefits with strong sales momentum in 2H.

* We cut our FY25-26 revenue estimates by 2-3% and PAT estimates by 6-8%. We build in a CAGR of 13%/21/34% in revenue/EBITDA/PAT over FY24-27. We reiterate our BUY rating with a TP of INR360 based on 55x Dec’26 P/E.

Strong growth recovery offset by weaker GM and higher ad spends

* Revenue grew 29% YoY on a low base (-22% YoY in 2QFY24) to INR3.3b (8% beat) during the quarter.

* Volume grew 36% YoY to 5.4m (on a low base), while ASP declined 5% YoY to INR622. ASP was adversely impacted by non-BIS inventory liquidation and higher discounts in online/retailer meets.

* Gross profit was up 24% YoY to INR1.75b (6% beat) despite the gross margin (GM) contraction of 200bp YoY to 52.4% (95bp miss).

* EBITDA rose 56% YoY to INR382m (13% miss) due to weaker GM and higher other expenses (+16% YoY, 18% higher) on account of higher ad spends ahead of the festive season.

* EBITDA margin improved 200bp YoY to 11.5% (275bp miss), led by operating leverage benefits.

* PAT improved to INR143m (23% miss) with a margin of 4.3% (170bp miss).

* For 1HFY25, Campus’ revenue grew ~10% YoY (on a low base), while EBITDA was largely flat YoY. Based on our estimates, the implied ask rate for 2HFY25 revenue/EBITDA growth is 8%/21%.

* Campus’ net working capital (NWC) days improved to 93 in 1HFY25 (from 125 in 1HFY24), driven mainly by a reduction in inventory days (118 vs. 142 YoY).

* The company’s 1HFY25 FCF (post-interest and leases) stood at INR17m (vs. an outflow of INR147m YoY).

Key takeaways from the management commentary

* Demand environment: Management highlighted that the markets have opened in 3Q and demand has improved (vs. 3Q), driven by the festive season. Further, tertiary demand has also improved in 3QFY25.

* ASP dilution: The non-BIS inventory clearance impacted ASPs by INR 8-12 per pair (or ~1.5-2%), while the rest of ASP dilution was on account of incentives to retailers and higher discounts in online sales. Management expects ASPs to improve in the coming quarters as the impact of retailer meets and non-BIS inventory clearance subsides.

* Margins: Management indicated that margins were hit by non-BIS inventory clearance-led lower ASPs (~50bp), higher advertisement spends on performance marketing ahead of the festive sales, and higher commission on online sales. Despite weaker margins in 1H, Campus guided for YoY margin expansion.

* Capex: Campus will incur INR350m capex at the Haridwar and Ganaur plants for increasing the backward integration by 10-12%. The new capacity will be more focused on the sneaker range and is likely to be commercialized by end-4QFY25.

Valuation and view

* Campus’ innovative designs, color combinations, and attractive price points make it a market leader in the Sports and Athleisure category. We expect the revival of demand environment in 2H and stabilization in D2C online channel to aid Campus’ growth recovery.

* We cut our FY25-26 revenue estimates by 2-3% and PAT estimates by 6-8%. We build in a CAGR of 13%/21/34% in revenue/EBITDA/PAT over FY24-27. We reiterate our BUY rating with a TP of INR360.

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