Page Industries turns the page on inflation; bookmarks expansion

Sharp stock rebound, however, caps upside from current levels

Notwithstanding inflationary pressures, the country’s largest innerwear maker, Page Industries, posted better-than-expected performance in the April-June quarter (first quarter, or Q1) of 2022-23 (FY23). Higher volumes and operating leverage helped the exclusive licensee in India and neighbouring countries of US-based Jockey log its highest-ever quarterly revenue and net profit.

In response to the results and a strong outlook, the stock hit an all-time high on Friday, before ending the day marginally higher at Rs 49,192 per share.

The all-round beat in the Q1 performance was led by revenue growth - up 167 per cent on a low base - to a record Rs 1,341 crore. The gains, on the back of price hikes and a distribution network, were also robust on a sequential basis, rising 21 per cent.

While the Indian manufacturer and retailer of innerwear, loungewear, and socks hiked prices by 3-4 per cent in the quarter, what aided overall growth was the 150 per cent jump in volumes (26 per cent sequential uptick) due to strong demand across its categories, with healthy premiumisation, geographic expansion (across metros, smaller cities, and towns), and normalised operations.

The strong sales momentum with revenue over the Rs 1,100-crore mark in the past three quarters has led to an increase in the earnings per share (EPS) estimates by Motilal Oswal Research. The brokerage has hiked its estimates by 7.5 per cent each for FY23 and 2023-24, even as it highlights the near-term challenges with respect to higher raw material costs.

Gross margins in the quarter at 54.5 per cent contracted 322 basis points (bps) year-on-year (YoY) and an even steeper 490 bps on a sequential basis due to raw material inflation. On a soft base, operating profit grew nearly ninefold (11.5 per cent sequentially) to Rs 298 crore.

Lower employee costs and other expenses as a percentage of sales helped expand the operating profit margins by 15 percentage points YoY to 22.2 per cent.

While pricing action helped the company maintain its margins, even with cotton prices, fuel, and power costs going up, it expects cotton prices to settle down by October-November due to harvesting. The company expects to maintain margins in the 20-22-per cent band - its long-term average.

Prerna Jhunjhunwala of Elara Capital expects operating profit margin to remain in the 21 per cent-plus territory in the near term due to adequate inventory, leading to easing raw material inflation risk and continued operating leverage benefit from an aggressive expansion strategy. 

The company added 3,000 multi-brand outlets during the quarter, with the current count up 42 per cent over the year-ago levels and 1.7x the 2019-20 (FY20) levels at 113,000. It also has expanded the exclusive branded outlets to 1,144, which is 1.5x FY20 levels.

The company continues to focus on womenswear, kidswear, and athleisure, where the growth rate has not tapered off, even in a post-Covid scenario.

While the company has been able to augment capacity 1.4x by increasing labour shifts, it has major capital expenditure plans in the current financial year (FY23). In addition to incremental capacity additions at the units in Hassan, Mysuru, and Tiruppur, it plans to set up a greenfield facility in Odisha.

In an earlier report, Centrum Research had highlighted that an in-house manufacturing capability was a key economic moat for Page Industries, compared to those who relied on vendors and faced supply issues and increased labour costs during the pandemic.

With a 70 per cent in-house manufacturing capacity of 260 million pieces per year (9 per cent annual growth over 2011-12 through 2021-22), the company is well positioned to continue to enjoy the benefits of in-house manufacturing, observe analysts at the brokerage.

While the growth trajectory is expected to be robust and the company has reversed the sluggish earnings performance over 2017-18 through 2020-21, and return ratios are now at 50 per cent levels (had slipped to sub-40 per cent levels in recent years), further gains could be challenging due to high valuations.

Analysts of IIFL Research, led by Sameer Gupta, have a ‘reduce’ rating on the stock.

“Among the discretionary names with a healthy return on invested capital of 45 per cent-plus, Page is among the most expensive, at a valuation 74x its FY23 EPS, and a growth profile lower than the peer set,” they add.