BackWill Page Industries sustain high growth and justify valuations?
With valuations at 33 times one-year forward earnings, the stock’s rally seems to have gone a little too far
Premium(The company’s shares have risen 21% this year, compared with a 4% decline in the broad market index, on expectations of an improvement in margins and robust growth.)
Page Industries Ltd, which sells Jockey underwear and other garments, has outperformed both peers and the S&P BSE 500 index this year. The company’s shares have risen 21% this year, compared with a 4% decline in the broad market index, on expectations of an improvement in margins and robust growth. Investors have been more than willing to reward the company, especially in the backdrop of a sluggish economic growth environment.
However, with valuations at 33 times the company’s one-year forward earnings, the stock’s rally seems to have gone a little too far. What’s more, its working capital cycle has stretched and debt levels increased 27% in fiscal year 2013. Analysts expect this to impact the company’s dividend payout ability, which hitherto has been reasonably high.
For now, investors seem to be willing to ignore all of this. The company is expected to maintain strong volume growth of 16-17%, despite the fact that it has not passed on the excise duty abatement benefit of 3.6% on branded garments (announced in the budget) to customers. Bharat Chhoda, an analyst at ICICI Securities Ltd, said the company has done well compared with peers such as Lovable Lingerie Ltd, because it is an established brand and has an early-mover advantage in the Indian branded underwear market. In fact, demand for its Jockey brand is expected to remain strong even in a sluggish environment.
Also, thanks to the decision not to pass on the increase in abatement, the company’s margins should increase. According to India Infoline Ltd, the excise duty abatement may result in a 200 basis points (bps) expansion in Ebitda (earnings before interest, taxes, depreciation, and amortization) margins in FY14 to 22.9% (a basis point is one-hundredth of a percentage point). Most analysts expect earnings growth of 25-30% for Page Industries in FY14.
Page Industries also did well compared with peers in the March quarter. It reported a 35.5% year-on-year growth in net sales, at ₹ 209 crore, on the back of a 5-6% price increase during the quarter. Profit after tax grew 38% to ₹ 24 crore on the back of strong 52% growth in operating profit and realizations. Operating profit margin expanded by 205 bps to 17.5% as raw material costs eased and other expenses declined sharply. Earnings growth will have to remain at these levels for the stock to justify its current valuations.
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