PAGE INDUSTRIES

Page Industries Limited manufactures, markets, and distributes garments under the Jockey brand in India, Sri Lanka, Bangladesh, Nepal, and the United Arab Emirates. It offers briefs, trunks, boxer shorts, vests, lounge pants, track pants, and T-shirts, as well as casual, formal, and sports socks for men; bras, panties, camisoles and tops, outerwear bottoms, and shapewear for women; and briefs and vests for kids.

Page Industries Limited - Potential Catalysts

• Capable circulation model prompting boundless range

• GST and E-commerce prompting additional boost to customer to spend.

• Brand Crowding

Page Industries Limited - Recommendation

With Superior project management skills, efficiency and higher service level due to streamlined process and its planned expansion Page industry will be able to grow over the next few years. For now we recommend HOLD on the stock at CMP of Rs. 12,800.

Page Industries Limited - Financial Summary

BUSINESS DISCRIPTION

Page Industries Limited is an India-based company engaged in the manufacture of garments. The Company is the licensees of JOCKEY International Inc. (USA) for manufacture and distribution of the JOCKEY brand Innerwear/Leisurewear for Men and Women in India, Sri Lanka, Nepal and UAE. The Company is also the licensee of Speedo International Ltd. for the manufacture, marketing and distribution of the Speedo brand in India. Speedo products include swimwear, water shorts, apparel, equipment and footwear. The active wear category primarily consists of sportswear, gymwear and swimwear. The various subcategories of men’s innerwear include vests, briefs/boxers, basic T-shirts, shorts/ pajamas, sleepwear, and active wear. The subcategories in women’s innerwear include brassieres, panties, camisoles, basic T-shirts, shorts/pajamas, sleepwear, active wear, and maternity wear.

The company’s factory is equipped with state of the art machinery and equipment including high tech lab testing capabilities. Combed Cotton Yarns are procured only from the largest and most modern spinning mills in India where stringent controls guarantee exacting standards. Integrated elastic weaving and fabric knitting along with carefully controlled fabrics dyeing and processing ensure consistently high standards of finished garments. With modern and efficient production and quality control systems led by a team of highly qualified technologists, quality standards are at par with Jockey products available worldwide

From 800 stores in 1996, the company’s products are now being sold in over 14,000 stores in over 1100 cities and towns spanning the entire length and breadth of the country. Page Industries exports underwear and sportswear worldwide. Its customers include Jockey licensees in Europe, Middle East, and Asia, Jockey UK, Jockey USA, as well as other top class underwear brands. The Jockey hallmark of quality is applied to every product delivered. With the backing and active involvement of seasoned promoters combined with a highly skilled and dedicated team, Page is committed to the manufacture of world class products.

MANAGEMENT & GOVERNANCE

Shareholding pattern as on Sept 30th, 2015

TOP MANAGEMENT

TOP EXECUTIVES

INDUSTRY OUTLOOK

Indian Fashion Retail is poised for high growth with multiple short and long-term catalysts - revival in economic growth leading to increase in disposable income, favorable demographics, GST implementation, and changing fashion consumption trends. Wazir Advisors, a renowned sector consultant expect fashion retail to grow at a CAGR of 12.2% over the next 10 years.

There exists a strong trend correlation between GDP growth and SSG. With the revival in the Indian economy, we expect fashion retail growth to be driven by higher Same-store-growth (SSG) i.e. it will be more consumption-driven rather than store network expansion driven, leading to higher profitability and return on capital

Fashion products are very unique among B2C product segments as they are the first to communicate a change in one's lifestyle. A consumer always looks for moving up the brand category, as it is personal and very visible. Hence, with higher disposable income the share of fashion in overall private spending increases.

Along with the change in consumer mindset, evolving ecology is also playing an important role in the consumption of fashion products. Starting with mall culture to the influx of international to e-commerce, all these entices higher awareness, better shopping experience leading to higher consumption

In the whole value chain, we prefer companies that either have a strong portfolio of licensed brands or are retail space lessors, as both these subsequently require lower investments and hence have higher room for returns. Companies with higher investments will see growth only when their investments yield high revenue, which could be a little further down the road.

We initiate coverage on Arvind (ARVND IN) & Shoppers Stop (SHOP IN) and re-iterate our positive stance on Phoenix Mills (PHNX IN) & Page Industries (PAGE IN). All four companies provide a unique value proposition in the fashion retail sector and have differentiated risk-reward profiles. We have also picked 7 unrated companies in the retail space that have room for higher growth, though factors other than business do not entice us to rate them.

Concerns surrounding the sector are – 1) Rising competitiveness with a plethora of brands entering the Indian market (although we believe it will lead to higher awareness of fashion and hence, the overall expansion of pie) and 2) Elongated sale season seen in the last 8 quarters (which should get addressed as market revives and sales pressure wanes off).

INVESTMENT RATIONALE

Brand Crowding: India is seeing a plethora of brands setting –up shop to capitalize on the growing middle-class income as well as aspirations. Every segment and category of fashion retail has seen new brands, either new domestic brands or through an international brand entering the country. We believe in the near term there would be some crowding out until the overall pie expands on the back of revival in the economy

Category Loyalty, no Brand Loyalty: Fashion Retail is a business, which has very high category loyalty but doesn’t have any brand loyalty. The consumer would switch to a different brand, but in the same price category, as the fashion trend, availability, proximity, and discounts are the selling points rather than the brand

Indians amongst most fashion-conscious people globally. In a Neilson Global Luxury Brands survey conducted in 2012, India was the 3rd most brand-conscious country globally. We do believe the same holds true today across all strata of society.

Urban India’s demographics are quite favorable for growth in fashion retail. Even without accounting for any increase in urbanization, the current urban population in age group 16–60, which consumes maximum fashion products, will increase from 244mn to 285mn by 2020 and 293mn by 2025

Per capita spend of Urban India on fashion apparels is much lower at USD 124 vs. China’s Urban consumption of USD 206, let alone the comparison with US and Europe.

GST: Retail sector will be amongst the biggest beneficiaries of GST implementation in India. The Center has already stated that GST will be their top priority policy reform. We believe the same will be implemented in the near future with the following benefits;

• Simplification of sales tax norms pertaining to service tax

• Clarity on services tax pertaining to dual taxation on property management services.

• Retailers believe that implementation of GST could impact their operating margins to the extent of one percentage point. Retailers expect at least 100bps increase in their EBITDA margins on the back of GST implementation

E-Commerce: E-tailing has emerged as a strong medium for retailing in India. Although we believe that this medium will continue to get prominence as an alternative channel, we do not see it as an alarming threat to the conventional medium, more so for fashion, in the near-to-medium future. The reasons for the same are;

• The fashion products currently sold on e-tailing sites are predominantly low category brands. Known brands are currently using the medium to monetize their slow selling inventory

• A lot of sales on e-tailing are due to huge discounts offered by the sites to entice the users. We believe these discounts cannot sustain over the long term considering most of the e-tailers are incurring losses even at gross level

• The conventional retailers will also provide e-commerce options to its customers, wherein the stores would convert in quasi regional warehouse.

• The cost of the servicing is similar between conventional and digital retailers, wherein the major cost of rental for physical retailers is more or less equal to the transportation cost of digital retailers

Capable circulation model prompting boundless range

“Jockey” distribution model is aptly spread across various exclusive brand outlets (EBO), large format stores (LFS), multi brand outlets (MBO) and traditional hosiery/multipurpose stores. Currently, the company has a pan-India reach through approximately 30,000 retail outlets, 193 EBOs and has tie-ups with several e-commerce companies. During FY10-15, revenues grew at a CAGR of 35% YoY, supported by volume growth of 19.5% over the same period. With front-end expansion, the company is also ramping up its manufacturing capacity, which increased from 2.2 crore pieces in FY07 to 19.4 crore pieces in FY15. We believe the company will continue its growth trajectory and expect sales volume to grow at a CAGR of 18.4% YoY to 28 crore units over FY15-20E.

VALUATION

Page is currently trading at 12,800 per share with a market capitalization of 13765 Cores. It has total debt of 157.28 Cr with long term Debt to Equity of 0.41. It has total cash and bank balance of 4.42 Cr. Its payout decreased to 44.49% (FY15) from 47% last year (FY14).

We value PAGE using DCF at price of 12,965 for current quarter with expected growth rate at 26.76% per annum. For valuation we assume that over the period company will keep capital structure unaltered and tax rate unchanged.

RATIOS - KEY FINANCIAL RATIOS

Turnover Ratios

Credit Rating

Long Term Debt Rating: AA

The instrument rated AA are judged to offer high safety of timely payment of interest and principal. They differ in safety from AAA issues only marginally.

RATIOS - DUPONT MODEL(NEW)

RATIOS - VALUATION RATIOS

CONCUSSION AND RECOMMENDATION

With Superior project management skills, efficiency and higher service level due to streamlined process and its planned expansion Page industry will be able to grow over the next few years. For now we recommend HOLD on the stock at CMP of Rs. 12,800.

RISKS AND CONCERNS

• Debt on the rise: Increase in working capital days along with sustained capacity addition to maintain current growth trajectory could result in gradual uptick in debt levels. This could weigh on the cash flow generation of the company.

• The industry is growing at a fast pace, in a highly labour intensive sector and demand for experienced and trained manpower is outstripping supply.

• Despite some pick-up in demand from both global and domestic markets, most new capacities in the apparel and home textile segments are not operating at full capacities.

• High and very fragmented industry. Competition from other low cost producing nations is likely to intensify.

• Appreciation of Rupee will be a threat for export segment.

FINANCIALS

For the quarter ended 30-Jun-2015, the company has reported Standalone sales of Rs. 4465.50 Cr., up 1.81% from last quarter Sales of Rs. 4385.95 Cr. and down -6.41% from last year same quarter Sales of Rs. 4771.44 Cr. Company has reported net profit after tax of Rs. 1435.17 Cr. in latest quarter.

Page Industries Ltd. key Products/Revenue Segments include

• Innerwear & Leisurewear which contributed Rs 1481.85 Cr to Sales Value (96.00% of Total Sales)

• Others which contributed Rs 32.53 Cr to Sales Value (2.10% of Total Sales)

• Other Operating Revenue which contributed Rs 15.19 Cr to Sales Value (0.98% of Total Sales)

• Scrap which contributed Rs 12.87 Cr to Sales Value (0.83% of Total Sales)

• Duty Drawback which contributed Rs 0.99 Cr to Sales Value (0.06% of Total Sales) for the year ending 31-Mar-2015.

With 50% share, men’s inner wear have the largest share of revenues, followed by Women’s wear with 18%, followed by leisure wear with 30% and Swim wear with 2%.

The size of the Indian Innerwear market is INR 17,750 crore; the category is also growing at an impressive CAGR of 13% and is expected to reach INR 32,210 crore by 2018 and INR 59,540 crore by 2023.

Company’s strategy is to be a market leader in this segment in coming years. Major revenue comes from innerwear segment which is the cash cow for the company.

Swimwear which contributes marginal revenue, but has a good growth potential in the future.

Boston Consulting Group has recently come out with a report on Indian apparel industry under the name “The Tiger Roars”, suggests that consumption of apparel will go up four times between 2010 and 2020 and indicates that the consumption of premium brands, like Jockey, is expected to be even higher than the industry average