Page Industries’ Research Report By Motilal Oswal

Strong earnings traction continues; deserves high valuation

– PAGE’s net sales grew at a strong 17.1% YoY to INR6.26b (est. of INR6.45b), with 7.9% YoY volume growth. Mix improvement was well ahead of expectation. Men’s innerwear, Women’s innerwear and Sportswear segments grew at 14%, 20% and 20% YoY, with volumes increasing 4%, 14% and 15% YoY, respectively. Speedo sales grew 27% YoY, with 7% YoY volume growth.

– Gross margin shrunk 200bp YoY to 57.6%. This was offset by lower employee costs (-90bp YoY) and other expenses (-160bp YoY), resulting in EBITDA margin expansion of 40bp YoY to 20.5% in 2QFY18. Thus, EBITDA grew at a healthy 19.5% YoY to INR1.28b (est. of 1.29b). Adj. PAT rose 22.4% YoY to INR841m (est. of INR825m).

– Robust cash flow generation: We note that the net working capital increase of 16% YoY has been far lower than the sales increase of over 20% in 1HFY18. Other current and non-current assets have declined both YoY and QoQ. Net cash and cash equivalents have thus gone up from INR813m at end-1HFY17 to INR2.27b at end-2QFY18.

– Management interaction takeaways: (1) Management expect sales trajectory to continue. (2) Yarn costs remain soft – have been on a downtrend since August (saw a blip-up in October before coming down).

– Valuation view: We believe PAG offers a compelling, capital-efficient long-term lifestyle play on the premiumizing innerwear category. A widening branded product portfolio, coupled with distribution expansion, will aid market share expansion and drive multiple years of growth, in our view. Unlike retail peers, PAG has shown a remarkable ability to maintain strong double-digit volume growth and high RoEs, making it fully deserving of high valuations. Continued impressive performance leads us to upgrade forecasts for FY19/20 by 4%/7%. Maintain Buy with a TP of INR25,580 (50x December 2019E EPS, a 10% discount to three-year average P/E).