PAGe reported a disappointing set of numbers on both volumes and earnings, with EBITDA declining 16% YoY in 3QFY20. Reported operating margin was the lowest in 30 quarters, and adjusted for the Ind-AS 116 impact, the margin was among the lowest ever. While the long-term growth potential is high and the past track record impressive, valuations of 55.7x/47.6x FY21/22E EPS are expensive.
Management commentary also did not assuage concerns about the lack of earnings recovery in the near term. Overall volumes declined 2.8% Y-o-Y (our estimate: 0% YoY). EBITDA came in 16% Y-o-Y lower atRs140 crore (our estimate:Rs160 crore), PBT was down 28.1% Y-o-Y atRs120 crore (our estimate:Rs150 crore) and adj. PAT declined 14.6% Y-o-Y toRs87 crore (our estimate:Rs110 crore). Gross margin shrank 390 bps Y-o-Y to 53.2%. EBITDA margin contracted 490bp YoY to 17.5% due to higher employee costs (+110bp YoY), partly offset by lower other expenses (-20bp YoY).
For 9MFY20, revenue/EBITDA/PAT growth was at 7.1%/-4.6%/-2.1% Y-o-Y. Investments in technology implementation and staff recruitment (mainly on tech and kids businesses) have also impacted the EBITDA margin. Inventory days have come down to ~75 from 85 as of March 2019. Kidswear has shown an encouraging demand trend. A 120+ member team is now headed by a separate division head.
PAG has an immensely impressive track record on earnings growth, recent efforts on balance sheet improvement are commendable, and management’s efforts to improve channel efficiency and revitalise growth are likely to eventually bear fruit.
Category slowdown, weak channel liquidity and competitive tailwinds present significant near-term challenges. Our channel checks across various cities in the country also do not indicate green-shoots of recovery. Changes to the model have resulted in 9.3%/7.7% cut to our FY20/21 EPS forecasts. Expensive valuations leave no room for upside, in our view. We derive a TP ofRs22,250 set at 45x Mar’22E EPS ofRs495. Maintain ‘neutral’.