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MOSL: PAGE INDS. (Neutral)-Margins surprise, weak sales growth likely to persist

PAGE INDS.: Margins surprise, weak sales growth likely to persist

(PAG IN, Mkt Cap USD2.9b, CMP INR18477, TP INR19110, 3% Upside, Neutral)

 

• 1QFY20 sales grew 2.4% YoY to INR8.4b (in line with est.). Overall volume declined 2.4% YoY (v/s est. flat growth). EBITDA declined 1.4% to INR1.9b (v/s est. INR1.6b) and Adj. PAT declined 11.1% to INR1.1b (v/s est. INR1.05b).
• Gross margin was up 10bp YoY to 55.1%. EBITDA margin was down sharp 90bp YoY to 22.4%, as employee costs as % of sales were up 220bp YoY, offset by other expenses, which were down 120bp. Adjusting for Ind-AS 116 impact, EBITDA margins were actually down 200bp YoY on comparable basis.
• Key conference call highlights: (1) Quarter to date growth in 2QFY20 is not too different from 1QFY20. (2) Demand slowdown witnessed across categories. (3) After a spike up towards end-FY19; inventory days have returned to FY18 levels of around 80 days. (4) Management stated that it intends to increase MBO reach sharply in the current year (currently around 55,000). EBOs currently contribute 16-17% to sales
• Valuation and view: Weak topline growth visibility leads to a reduction of 3.3%/3.4% in FY20/FY21 EPS. While working capital improvement (after the spike up in FY19) and another interim dividend declared are welcome steps, growth still remains a concern given (a) prevailing trade liquidity crunch, (b) off-take not having completely recovered yet after GST, and (c) increasing threat of competition for the first time in the form of Van Heusen. Despite correction of ~50% from peak, the stock is not cheap at 41.2x FY21EPS. Nevertheless, it is also true that two of these factors inhibiting earnings are unlikely to be structural. Maintain Neutral with a target price of INR19,110 (40x June 2021 EPS).