Page Industries needs faster growth at the core

The company underperformed peers in the June quarter

The June quarter numbers of Page Industries did not meet the Street’s expectations, leading to a 4 per cent fall in its stock price on Friday. Also, the company is underperforming peers on the growth front.

These, coupled with growth concerns in its core portfolio of men’s innerwear, are some of the worries weighing on the stock of the largest listed innerwear maker.

These worries have led to a 517 per cent cut in earnings estimates over the next couple of years. Further, the valuation — over 61 times its FY23 earnings per share estimate — is on the expensive side. Thus, the stock that has underperformed the benchmarks since the start of CY21 may remain below par in the near term.

The immediate trigger for the negative sentiment around the stock is the operating performance in the June quarter. While sales growth for the exclusive licensee of the Jockey brand in India was led by 70 per cent volume growth over the year-ago period, it came on a low base; the second wave of Covid infections hit operations hard with the company losing half its Q1 sales to the lockdown. Sequential sales and volume declined 43-45 per cent.

While revenue growth was 76 per cent YOY, according to Kotak Institutional Equities, it missed revenue estimates by 26 per cent. Moreover, revenues were 40 per cent lower than Q1FY20 levels. Lower operating leverage and higher other expenses led to a 240-basis point decline in the sequential margin to 6.8 per cent.

Positive for the quarter was growth in the e-commerce channel (up 2.5 times YOY); it now accounts for 19 per cent of sales as compared to 7.4 per cent of sales in FY21. The company indicated that the situation has improved with recovery taking hold in July and is similar to the performance in April. The margin, too, is expected to revert to 21 per cent levels, as the situation returns to normal, believes the management.

While there was a recovery in June, analysts point out that competition did even better in the quarter, riding on pent-up demand. Sales of innerwear/athleisure of Aditya Birla Fashion and Retail, for example, were up twofold over the year-ago period and were even higher than the pre-covid period. Its smaller peer Dollar Industries reported 28 per cent YOY growth, which was 88 per cent of Q1FY20 levels, while Lux Industries reported a 32 per cent increase over the year-ago period.

Though it is present in 2,900 towns and cities, Page Industries is strengthening its distribution in a phased manner to tap opportunities in rural and tier 3 and 4 centres. This should help the company post steady growth and gain share. Ashit Desai and Devanshu Bansal of Emkay Research say: “Strong growth plans in kidswear/athleisure and aggressive network expansion into tier 3/4 and rural towns offer good visibility of mid-teens growth ahead.”

While these initiatives (distribution, rural push and traction in kids segment) are positive, its core categories (innerwear for men and women) will need to post better growth to overcome the tepid growth seen over the last three years. Analysts led by Krishnan Sambamoorthy of Motilal Oswal Research say: “Sustained top-line growth in the men’s innerwear segment (about 45 per cent of sales), which has been struggling in recent years, holds the key.” This will be critical as things return to normal and the growth spurt from the athleisure segment fizzles out.

The business underperformance was also reflected in returns. While investors in the benchmarks (Nifty/sensex) would have seen their wealth grow by 45-47 per cent over the last three years, Page Industries lost 4 per cent during this period. The consensus target price at ~31,067 a share also leaves little upside from current levels. Investors should await an improvement in volumes/market share and the margin before considering the stock.

Investors should await an improvement in volumes/market share and the margin before considering the stock