Shares of Page Industries Ltd, maker of Jockey garments, lost about 11% in the last two trading sessions after the company reported a sharp slowdown in growth. Revenue and profit grew around 10% in the September quarter. That’s much lower than in the preceding five quarters, when revenue grew in the range of 17-22%, while profits were up 21-44%.
Page Industries’s lofty valuations get a reality check in Q2
Worse, revenue and profit growth is largely due to higher realizations. Volumes stayed almost stagnant with a 0.1% drop as sales in the mainstay men’s innerwear segment decelerated. Part of the volume slowdown is attributed to the late arrival of the festive season this year. Even so, given the steady expansion in brand (launch of new products) and retail stores, the volume fall is surprising. Tracking the growth slowdown, analysts at Motilal Oswal Securities Ltd pared their earnings per share (EPS) estimates for the current and next fiscal years by around 6%.
According to an analyst at another broking firm, the industry volume data showed a rebound in sales in October, indicating volume recovery at Page Industries. Further, with the firm successfully expanding into other product categories, analysts see it maintaining the growth momentum in the longer run. “We believe that the continuous increase in distribution reach would help Page Industries to accelerate its revenues,” analysts at Dolat Capital Market Pvt. Ltd said in a note. “We continue to believe that the branded innerwear market presents huge growth opportunity.”
The challenge for investors, however, is valuations. The stock is trading at a lofty 56 times one-year forward earnings estimates. Earnings are estimated to increase in the range of 24-28%. “Near-term valuations at 56.6x FY20E EPS leave little room for upside from a one-year perspective. Note that valuations are at premium levels, despite assuming a healthy 26% EPS CAGR over FY18-20. We, thus, believe that slower-than-expected execution going forward can pose downside risks,” said the analysts at Motilal Oswal. CAGR is compound annual growth rate.
The high valuation is the reward for Page Industries’ consistent track record and the promise it holds. Even then it has to be seen how well the company performs in the increasing competitive environment.
Aditya Birla Fashion and Retail Ltd is rapidly scaling up its innerwear business. “Men’s innerwear is being expanded aggressively and is now available across 9,500 outlets. The company has also entered women’s innerwear category in Kolkata, Bangalore and Delhi, and is optimistic on its ramp-up,” Emkay Global Financial Services Ltd said in a note on Aditya Birla Fashion.