Page Industries Ltd’s shares are close to their all-time highs, and valuations are steep at around 60 times estimated earnings for the current fiscal year. But if you thought there is a demand spurt for the company’s innerwear products, you got it wrong.
Volume growth at Page Industries is at multi-quarter lows. In the March quarter, volumes grew by 5.5% year-on-year, compared to 11%, 8% and 13%, respectively, in the preceding three quarters.
With volume growth turning sluggish, the company is turning to brand extensions and controlling costs to boost profits. The strategy seems to be helping— profits grew 41% year-on-year in the fourth quarter despite soft volumes.
Page Industries’ sports and womenswear businesses continue to see healthy growth. These segments have relatively better realizations, say analysts. Thanks to price hikes, realizations in the menswear segment also expanded, helping the company report strong double-digit growth in revenue.
But soft volumes in menswear—down 0.9% year-on-year—have been a dampener. It is the primary reason for the volume slowdown at the company level. The segment generates more than half of Page Industries’ total volumes and 45% of revenue.
Despite this, there haven’t been any noticeable cuts in earnings estimates. Rather, analysts remain sanguine about the company’s prospects. They are banking on the healthy growth in non-menswear segment (sports, plus womenswear). Given their superior realizations and expanding reach, analysts see these segments contributing notably to Page Industries’ earnings in the coming quarters.
Second, the volume softness in the menswear segment is due to supply-chain constraints and growth should normalize once the issues are resolved, says an analyst at a domestic broking house. Underlying demand is strong for the company’s Jockey brand at retail stores, says an analyst with another broking firm who recently did channel checks. This is despite the fact that competing brands offer superior margins to retailers, adds the analyst.
The third reason for the bullishness is the company’s superior operating metrics. “We continue to like Page Industries, given its industry best asset/turnover ratio, superior RoCE (return on capital employed), robust CFO (cash flow from operations) and controlled working capital days,” ICICI Securities Ltd said in a note.
But Page Industries’ valuations capture all this and more. Earnings growth in FY18, at 30%, was about half of what its valuations (60 times) suggest where earnings growth should be. And while investors are ignoring low volume growth for now, if the trend continues, they may conclude that analysts’ bullishness was all talk and no substance. The coming quarterly results will test their belief, especially in the light of intensifying competition in the menswear segment.