Recovery a couple of quarters away for Page Industries; stock falls 8.8%

Disappointing results for the January-March quarter of the 2022-23 financial year (Q4FY23) has led to high volume selling of the Page Industries stock. 

In Q4, unit volume declined 14.6 per cent year-on-year (YoY), while sales dropped by 12.8 per cent (highest decline in sales since FY12, if we exclude the Covid-19 period). The Ebitda (earnings before interest, tax, depreciation and amortisation) margin of 13.9 per cent was also a multi-year low if Covid-19 is excluded.

The issues included lack of an ability to absorb fixed costs due to volume decline and also the consumption of high-cost inventory. The raw material costs will ease going forward according to the management, but a sales recovery appears uncertain in the near term due to an implementation of the process of auto replenishment system (ARS) and also due to increased competition. 

Sales declined to Rs 969 crore (down 12.8 per cent YoY) while Ebitda went down 49.7 per cent YoY and 30 per cent QoQ to Rs 134 crore. Profit before tax (or PBT) fell 56.7 per cent YoY and 35 per cent QoQ to Rs 106 crore. Profit after tax (PAT) -- adjusted for extraordinary items -- was down 58.9 per cent YoY and lower by 36.7 per cent QoQ at Rs 78.4 crore. The gross margin contracted by 280 basis points (bps) YoY to 56.6 per cent. Higher employee expenses (up 470 bps YoY to 22.7 per cent of sales) and higher other expenses (up 270 bps YoY to 20 per cent of sales) led to Ebitda margin contraction of 1,020 bps YoY to 13.9 per cent. For FY23 sales, Ebitda, and adjusted PAT grew 23.2 per cent, 9.8 per cent and 6.5 per cent, respectively. 

The management guidance was that demand was subdued in Q4 (even on a QoQ basis) but is improving. The Q4 was affected by the ARS implementation which will take some more time to fully implement and stabilise since it has 4,800-plus distributor accounts. There will be some negative impact of this for around two more quarters. The e-commerce channel grew 34 per cent YoY in Q4FY23 vs 41 per cent YoY in Q3FY23.

Page continues to hold 17-18 per cent market share in the men’s innerwear category (Jockey has very high brand recall) and its share is in the high single digits in other categories. Inventory-related stress is visible, given very high inventory days of 120 (it was 92 days YoY). But expensive inventory is now fully consumed. Inventory in trade remains in the optimum range between 50-55 days while, for distributors, it has corrected by 20-22 days to reach the optimum range of 45-50 days. Products remain reasonably priced, and the company does not expect to make price hikes in the first half of FY24. 

Growth was moderate in FY23 but if demand recovery takes place as anticipated, EPS could grow at 20 per cent compound annual growth rate for the next two fiscals. The medium- to long-term prospects are improved by investments in distribution, designs, and technology. The RoCE (return on capital employed) could recover to 45 per cent after falling below 40 per cent in FY20-FY21 period. ARS should eventually improve channel sales and efficiencies. By FY25, Ebitda margin may recover to around 20-21 per cent levels, according to some analysts. 

The current price of Rs 37,510 for the stock, after an 8.8 per cent drop, is still a very high valuation of about 73x. Fair value could be anywhere between Rs 33,000 (pessimist’ views) and Rs 47,875 (optimists’ view). According to Bloomberg, 10 out of 19 analysts have a ‘reduce/sell/underperform’ rating on the stock; five have ‘hold/neutral’ and the rest have ‘add/accumulate/overweight’. Their average one-year target price is Rs 38,185.