MOSL: PAGE INDUSTRIES (Buy)-Strong growth continues with operating margin expansion

Page Industries: Strong growth continues with operating margin expansion; Maintain Buy

(PAG IN, Mkt Cap USD3.4b, CMP INR20644, TP INR28270, 37% Upside, Buy)

• PAG posted healthy net sales growth of 17.6% YoY to INR6.2b (est. of INR6.15b), with overall volume growth of 11.3% YoY. Men’s Innerwear, women’s innerwear and sportswear segments grew by 16%, 13% and 22%, led by volume growth of 12%, 8% and 15%, respectively.
• Gross margin contracted 410bp YoY to 55.6% due to higher outsourcing relative to the base quarter. This was offset by strong operating leverage, as employee costs fell 190bp YoY and other expenses declined sharply by 410bp YoY, resulting in EBITDA margin expansion of 200bp YoY to 20.8% in 3QFY18. Thus, EBITDA grew by a robust 30% YoY (est. of +19.6%) to INR1.29b. Adj. PAT was up by a healthy 32.6% YoY to INR834m (est. of INR736m).
• 9M performance: Volumes grew 11% YoY. Sales, EBITDA and PAT rose 19%, 25% and 27% YoY, respectively. EBITDA margin expanded 90bp YoY to 20.3%.
• Management interaction takeaways: (1) Annual price hike usually taken in the fourth quarter would be lower at ~2-3% v/s the usual 5-6% due to stable yarn costs. (2) Expansion target of 400m pieces by FY20 remains intact (v/s 260m in FY17), along with an increase in outsourcing.