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Monday, March 8, 2021

After 9,800% rally, this stock has lost 50% value. Why Page Industries fell from grace?

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NEW DELHI: From Rs 350-odd level sometime in 2008 this stock rallied to Rs 34,688 by August 2018 – that’s a whopping 9,800 per cent rise in just over 10 years riding on the company’s growth prospects.

In last two financial years, this maker of innerwear products has reported flattish EPS growth and has seen a 50 per cent correction in share price.

As of Friday, September 4, the stock had two ‘sell’, eight ‘underperform’ and four ‘hold’ ratings on the on the publicly available with Reuters Eikon database, besides one ‘buy’ and two ‘underperform’ calls.

This company is Page Industries, an exclusive licensee of Jockey innerwear and Speedo swimwear brands.

So why has this stock fallen from grace?

Analysts say the company, which derives 60 per cent of its revenues from metros and mini-metros, could at the most report industry average earnings in the near future. Thus, they feel the growth stock no more deserves high price multiples.

Meanwhile, there have also been reports of alleged human rights violations at the company’s manufacturing unit. Analysts see no upside for the stock, for now.

Motilal Oswal Securities said there is no indication that the company, which reported flattish EPS over the past two years, has turned the corner in terms of topline and earnings growth. Rich valuations at 47.6 times FY22 EPS, it said, present a significant stumbling block to turning constructive on the stock.

Kotak Institutional Equities said disappointing June quarter earnings did not do any justice to the super-bullish

qualitative commentary offered by the management in March quarter earnings call. The domestic brokerage said the management’s openness to offer quantitative colour on August sales was in contrast with the philosophical stance it took in the March quarter call.

This brokerage has a ‘reduce’ rating on the stock.

Q1 results tepid

The company reported Rs 39.55 crore loss for the Covid-hit June quarter compared with Rs 110.67 crore profit reported for the same quarter last year. Revenue for the quarter plunged 65.89 per cent YoY to Rs 284.80 crore, which analysts said was worse than peers.

The company made attempts to cut operating cost by 37 per cent YoY to Rs 171.70 crore, which it claimed to have achieved without lay-offs and salary cuts.

Gross margin for the quarter plunged to 48 per cent from 59 per cent in March quarter and 55 per cent in the year-ago quarter due to under-absorption of costs, inventory provisioning and full payment of salaries for the entire quarter.

The innerwear maker said cash & cash equivalent for the quarter climbed 56 per cent to Rs 173.40 crore due to efficient working capital management. “We continue to have a strong balance sheet and have not borrowed any additional funds during this period,” it said.

Management view
The management says more than 80 per cent of its multi-brand outlets, 96 per cent of its EBOs (exclusive brand outlets) and 90 per cent of its large format stores are fully functional now. Attendance at its manufacturing units has improved from

64 per cent in May to 87 per cent in end-August. Overall business it claims is back at last year’s level in August.

The management remains confident about the medium term, given its strong business model, product range and healthy balance sheet and said it was witnessing a rising trend of sales on the ecommerce channel and of the athleisure category.

Anand Rathi Financial Services said the prevailing valuation estimates factor in the company’s growth in the second half of the financial year. While the company’s balance sheet remains strong; consistency in revenue growth holds the key, it said.

Alleged human rights violations

Earlier last week, Norway’s sovereign wealth fund, the world’s largest, excluded Page Industries from its portfolio citing ‘unacceptable risk’ due to human rights violations. Page ‘does little’ to prevent the abuse of labour rights in its operations, failed to provide information on the findings and did not permit an inspection of the factory, the report by fund’s Council on Ethics’ suggested.

Following this, partner Speedo International said it would investigate the report. As per a Reuters report, the company manufactures Speedo products in only one Indian factory. Page Industries denied the allegations and said the report does not reflect the correct state of affairs of the units of the company.

Analyst views

Kotak Institutional Equities is not amused. It said the management offered half-quantitative inputs on sales performance in the month of August. The openness to share August numbers were in stark contrast to the strong, philosophical stance of high moral ground taken by the management in March quarter. The company top brass refrained from offering anything more than a qualitative statement despite multiple participants probing it, it noted.

“As analysts, while we find the half-quantitative colour in August sales helpful, we would happily trade this opportunistic utility for consistency in philosophical stance. To be sure, such opportunism isn’t limited to Page Industries; it is rather common,” the brokerage said.

Edelweiss said it expects Page to clock revenue growth in line with the industry, which would be breaking away from the past performance. It has built in 10 per cent annual growth in revenues for Page over FY2020-2028 per cent against 27 per cent growth seen in FY2009-2019.

“Page has an immensely impressive earnings growth track record. Its recent efforts on balance sheet improvement have been commendable. Also, the management endeavours to improve channel efficiency and revitalise growth are likely to eventually turn fruitful. However, the path to earnings recovery is unclear,” Motilal Oswal Securities said.

Valuations hint at tepid stock performance

Anand Rathi said the protracted economic slowdown has led to consumers’ hesitancy regarding discretionary spending, which could lead to sluggish demand. Keener competition from international and domestic brands threatens market share of the company, it said. This brokerage has a ‘sell’ rating on the stock with a target of Rs 17,687.

Page valuations have primarily been a function of its growth, said Edelweiss, which now values the company at Rs 19,195.

Emkay Global said that the company’s recovery has been faster than other apparel players, but much slower than its smaller innerwear competitors.

“Factoring in the weak Q1 print, we reduce FY21 EPS by 13 per cent but largely maintain FY22-23 estimates. Valuations at 47 times FY22 EPS are not attractive,” it said and revised the price target on the stock to Rs 17,800 from Rs 17,500 earlier.

Kotak has tweaked its FY22-23 estimates for the company marginally and sees the fair value of the stock at Rs 18,250 against Rs 16,000 earlier. This stock closed at Rs 18,470.05 on Friday.

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