Page Industries: Muted earnings visibility, high valuation hurt sentiment

Page Industries’ management has highlighted the speedy recovery in business, with sales in August back to the year-ago level. This was despite the June quarter (Q1) being severely affected by the Covid-led disruption. Though the Street has, in many cases, responded well to positive management commentary on post-Covid recovery despite weak Q1 numbers, the story has been different for Page.

Consequently, the stock has slid 7 per cent since its results last Thursday — more than the 1.7 per cent decline in the Sensex during the same period.

 
Muted earnings visibility is a key factor behind the decline. Further, recent reports alleging improper labour practices have compounded woes.

Emkay Global analysts, however, said in a report: “Page termed the allegations of human rights violation by erstwhile investor ‘Norges Bank’ as outrageous and baseless.” Another area of concern is valuation. The stock’s current 1-year forward price-earnings ratio of 59.3x is 12 per cent higher than its long-term historical mean.

According to an Axis Securities report, deferment of non-essential spends and down-trading is likely by consumers, given the financial insecurities, which could accentuate the growth slowdown.

 

 
During April-December 2019 — the pre-Covid period in FY20 — top line growth had already decelerated to 7 per cent YoY, from at least 16 per cent during similar periods in the past few years. Analysts at Motilal Oswal Securities, who have maintained a ‘neutral’ rating, also said category slowdown and competitive headwinds presented other near-term woes. Competition could hit pricing power, limiting its ability to protect profit margins from feeble operating leverage.

 
Therefore, Axis Securities, with a ‘sell’ rating on the stock, expects Page’s operating margin to remain flat at 18-19 per cent over the next few years, compared to its historical margin levels of 21-22 per cent. However, a better product mix, along with a higher share of athleisure products, could offer some comfort.

Page also witnessed 12 per cent growth in sales realisation in Q1, thanks to better growth in high-margin athleisure products and selective price hikes.

 
However, the 69 per cent fall in overall volumes spoiled the show, causing a 66 per cent YoY decline in sales to Rs 284.8 crore. Page reported Rs 34.7 crore in losses at the Ebitda level, and Rs 52.4 crore of loss before tax. In the year-ago quarter, it had recorded profit before tax of Rs 170 crore.

Unless Page returns to double-digit growth and raises its margin profile, there is risk of further de-rating for the stock, which has risen just 9.6 per cent from its March lows.



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