Amid economic slowdown, volume recovery key for pricey Page Industries

The Page Industries (Page) stock has lost 16 per cent in a month, compared to a 3-4 per cent decline in the Nifty FMCG and the Sensex during the same period. 

Concerns over volume recovery, after a feeble December quarter (Q3), has seen analysts cut their FY21 earnings estimates by 10-16 per cent. 

Sentiment has been turning weak for the stock, which once used to command rich valuations due to its strong growth track record.
According to analysts at ICICI Securities, while the near-term pressure is likely to continue, a sustainable improvement in the volume trajectory remains a key monitorable. Volume recovery is not only important for top line growth but also for operating leverage that supports profit margin and overall earnings, say analysts.

In Q3, Page reported a 2.8 per cent decline in volumes — the worst show in 21 quarters. The fall can be attributed to the overall consumption slowdown — which has seen consumers migrate to cheaper options — and a delayed winter. 

A higher base in the year-ago quarter, which saw 12 per cent volume growth, also weighed on volumes partly. Lower volumes led to poor operating leverage. This, along with higher sales incentives and increased employee costs, dented Ebitda margin by 490 basis points YoY to 17.5 per cent. 

This was despite a 4-5 per cent price hike and a favourable product mix. Profit before tax, thus, fell a sharp 28 per cent YoY. Net profit fell 15 per cent YoY to ~87 crore, even as the company benefited from lower corporation tax rates.

Focus on the kid’s innerwear segment, expansion of its distribution network, higher marketing spends, and capacity expansion (management aims to double manufacturing in next 5 years) are factors indicating that the long-term visibility remains intact, despite near-term growth pressures. 

These investments should yield good returns once the economy revives, believe analysts. For now, investors are recommended to await signs of recovery in volumes, given that the valuation is still expensive at 52x its FY21 estimated earnings.

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