Page Industries Research Report By Motilal Oswal

Massive growth opportunity available to sustain premium valuations

We met Page Industries’ (PAG) management, post which we have turned even more optimistic about the company’s growth prospects.

 Expansion of Exclusive Brand Outlets (EBOs) is happening at a massive pace. The company is adding ~80 outlets in February/March 2018 and likely another 500 in FY19, taking the total EBO count to ~1,000 by end-FY19.

 After forming ~15% of sales in FY17, EBOs are expected to contribute ~40% of sales by FY20 – the year when all the new EBOs will complete at least a year of operations.

 With average cash breakeven in 3-4 months and payback of around 2 years, EBOs are an attractive business proposition to third-party franchisees. Compared to MBOs, the potential for cross-selling is huge in EBOs.

 Apart from INR2b capex over FY17-20, the company plans to increase the proportion of outsourced manufacturing to 35% by end-FY19 from 16-17% in FY17, as the growth prospects are attractive.

 PAG has demonstrated ample discipline on margins, which the company intends to keep in a range to maximize the growth opportunity. Within its target market of aspirers and above, the share of men’s innerwear is only ~17%, and of women’s innerwear and sportswear is even lower at ~6%.

 We maintain Buy with a target price of INR27,490, based on 50x March FY20E EPS – at a 10% discount to the three-year average P/E.

Valuation view

Remarkable track record (neither revenue growth nor EPS growth has slipped below 15% in any year in the past) with healthy growth even during slowdown witnessed by other consumer peers, highly capital-efficient business model with RoCEs consistently over 40%, and among the best-of-breed earnings growth prospects mean that valuation multiples are likely to sustain. Sharply increased pace of EBO expansion and increased outsourcing reflect management’s confidence on future prospects and also have positive implications for incremental RoCE improvement. We maintain Buy with a TP of INR27,350 based on 50x Mar’20E EPS, at a 10% discount to three-year average P/E.