Campus Activewear stock gains over 18% on improved Q4 margin showing

The stock of footwear major Campus Activewear surged 18.6 per cent on Wednesday to touch Rs 296.7 per share, logging the biggest gain in the BSE 500 index. This came on the back of better-than-expected operating profit margins in the March quarter, a reduction in debt, and expectations of market share improvement.

The company expects volume growth, which has thus far missed expectations, to recover going ahead, on the back of multiple triggers.

The company’s revenue performance was broadly in line with a 4.6 per cent growth in revenues brought on by a 4 per cent improvement in volumes and a marginal gain in realisations. The growth was led by the trade distribution channel, which grew at 7.5 per cent while the direct-to-consumer channel declined by 6.5 per cent. 

On the profitability front, the gross margins fell by 155 basis points (bps) over the year-ago period and 140 bps on a sequential basis to 49.9 per cent. This was on account of a 100 bps impact and lower average selling prices. There was also a 40 bps one-time impact due to the liquidation of old inventory. 

The company, however, surprised the Street with robust growth in operating profit and expansion in margins. While the operating profit was up 13 per cent, the margins expanded 130 bps year-on-year (Y-o-Y) to 17.6 per cent.

The gains on the operating level were on account of the reduction in factory overhead, lower advertising spends, and a rebate from online commissions. The company expects the advertising and promotions spends to remain elevated at 6-7 per cent of sales and is eyeing a margin band of 17-19 per cent, going ahead.

In addition to the company’s initiatives to turn around the multi-brand outlet channel (distributor consolidation, exclusive/channel-specific design launch, and optimised schemes/incentives), which is reflected in the Q4 showing. 

Kotak Securities expects the renewed focus on the economy segment to bolster the company. 

The move could help it recoup market share lost to small/regional brands in the past few quarters and defend market share in the event of liquidation of non-BIS inventory by peers. The brokerage has an ‘add’ rating with a target price of Rs 285. 

In addition to the growth prospects, an improving balance sheet is positive for the company. It has repaid borrowing of Rs 156 crore in FY24, thereby achieving a net-debt-free status during FY24. The company indicated that there has been a significant improvement in its working capital days from 108 days in FY23 to 79 days in FY24 led by lower inventory and conscious trimming of receivable days.

The Street will keep an eye on volume growth, going ahead. The management believes the transition phase is done and a combination of factors such as launches, increased brand spends, renewed thrust on mid-economy segments, consolidation of distribution channel, tailwinds from BIS implementation over the long term should help revive volume growth.

Say analysts led by Mehul Desai of JM Financial, “Volume delivery has lagged expectation; pace of recovery in the same and sustainability of margins will be a key monitorable for the stock in the near term.” The company has a ‘buy’ rating with a target price of Rs 285.  

Motilal Oswal Research has reiterated its buy rating on the stock with a target price of Rs 295. The brokerage points out that the stock had corrected sharply, and was down 24 per cent from January to the lows in March, before it began its recovery.

However, its strong market position and a long runway for growth should result in market recovery in H2FY25, it added.  At the current price, the stock is trading at 52 times its FY26 consensus earnings estimates.