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PAG’s in-line Q3 result was a combination of a 2-3% revenue beat and a 30bps margin miss. The revenue beat was likely led by a higher 39% growth in the online channel (~10% of sales). Volume growth revived, with 5%/-5% growth in Q3/9M (but economy-segment peers are seeing better trends with 15-25% growth in 9M), albeit lackluster (0-10%) revenue growth due to pricing cuts by peers. EBITDA margin improved by ~250bps to 18.7%, on better productivity, insourcing, and cut in discretionary spends. Headwinds—of weak demand, inventory-laden peers, and PAG’ focus on correcting distributor inventory—are unrelenting and will keep upgrades under check. Even distribution expansion has taken a breather in 9M. With benign RM and weak macros, PAG is not intending to take the annual price hike in FY25, but percolation of low-cost inventory will benefit margins and offset any earnings impact. We maintain REDUCE with revised TP of Rs38,500/sh, valuing PAG at 50x Dec-25E EPS.

In-line Q3; volume growth comes back but still lagging economy peers: PAG saw muted albeit modest topline growth of 2.4% in Q3 which was led by 4.6% volume growth but partially offset by a 2% dip in realizations due to lower growth in Athleisure. Volume growth revival was ahead of our expectations, but exit trends in Dec-23 and the Q4TD commentary were muted. Weak macros, higher incentives by peers to channel, and distributor inventory optimization by PAG continued to affect sales. While all categories are seeing hushed trends, the athleisure category is feeling the maximum pain. Among channels, E-commerce remained at the fore-front, with solid 39%/28% growth in Q3/9M, while EBO/General trade continue to see low-key drifts. Channel consolidation continued, as PAG reduced its MBO distribution by ~4,500/6,400 outlets in Q3/9M. EBO expansion continued, with 18/101 additions in Q3/9M, taking the total count to 1,392. EBITDA margin was up by ~250bps to 18.7%, owing to lower operating expenses and employee cost (higher throughput per labor). PAG maintained EBITDA guidance of 19-21% amid efforts to improve operating efficiency.

Earnings-call KTAs: 1) There are some signs of bottoming of the slowdown, with fading discounting pressure from peers in Q3. 2) Better supply-chain management and ARS implementation have led to 27 days reduction in inventory to 95 days from 122 days in Mar-23. NWC days increased to 71 days from 59, and cash reserves remain healthy at Rs3bn. 3) With ARS implementation, distributor-level inventory has reduced by 3 days over 9M; however, it is still higher than PAG’s internal targets; Athleisure inventory is relatively much higher than that of other categories. 4) MBO/EBO consolidation is strategic, with closures of non-performing stores that struggled to grow post-pandemic; however, contribution of such outlets to sales is not meaningful. 5) New low-cost inventory is expected to start flowing to the P/L, which is likely to boost gross margins ahead; the delay has been due to lower sales throughput in recent quarters. 6) PAG does not see any need to tweak product prices for next year, given input cost savings and weak demand environment. 7) Employee cost came in lower, with operating efficiency efforts leading to higher throughput per labor and lower hiring. 8) Capacity utilization was optimum at 80%, led by insourcing of manufacturing operations. 9) Among segments, premium innerwear and multi-pack combos witnessed higher traction.

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