MOSL: PAGE INDUSTRIES (Downgrade to Neutral)-Massive growth opportunity-fair valuations limit near-term upside

Page Industries: Massive growth opportunity; fair valuations limit near-term upside

(PAG IN, Mkt Cap USD5.3b, CMP INR32391, TP INR31600, 2% Downside, Downgrade to Neutral)

• PAGE reported healthy net sales growth of 17.1% YoY to INR8.2b (est. of INR8.4b). Overall volume growth stood at 9% YoY for 1QFY19. Men’s Innerwear, women’s innerwear and sportswear segments grew by 16%, 14% and 21% YoY, led by volume growth of 6.2%, 6.7% and 18.3% YoY, respectively.
• The company posted another quarter of strong EBITDA growth (+38.6% YoY to INR1.9b v/s est. of INR1.8b). Adj. PAT increased by a healthy 45.9% YoY to INR1.2b (in-line).
• Gross margin expanded 70bp YoY to 54.9%. Strong operating leverage led to employee costs as % of sales being lower by 130bp YoY and other expenses as % of sales being lower by 160bp YoY, resulting in EBITDA margin expansion of 360bp YoY to 23.2% in 1QFY19

Valuation and view: PAG is among the most compelling investment cases in the Indian consumer space. The company’s structural earnings growth prospects have improved over the past year, aided by its strategic changes (EBO expansion and outsourcing) and ongoing/likely balance sheet improvements (). The stock has seen a massive re-rating. In FY18, the stock witnessed a 55% spurt compared to 30% earnings growth. Even in YTD FY19, the stock has rallied by a further 42%, now trading at a P/E of 61x FY20E EPS. We expect earnings momentum to remain strong with a CAGR of 30% over FY18-20. However, valuations are now at a sharp premium. Post results, we cut our FY20 earnings estimate by 5%, led by moderation of volume growth forecasts for FY19 and consequently for FY20 as well. We value PAG at 53x one-year forward P/E (in line with three-year average). At our price target of INR31,600, we see no upside, and thus, downgrade our rating to Neutral. Since our initiation in November 2015, the stock has delivered 42% CAGR return compared to 18% return for Nifty FMCG and 15% for the broader Nifty Index. Risks to our rating would be continued expansion in valuation multiples, as we see limited upsides to our estimates.