Overview of business
Page industries limited is the exclusive licensee of the US-based Jockey International Inc. (JII) for manufacturing and distributing the Jockey brand of innerwear and leisurewear in India, the United Arab Emirates (UAE), Sri Lanka, the Republic of Maldives, Bangladesh, and Nepal.
The company has a long association with JII since the commencement of its operations in 1994, with the current licence agreement valid till December 31, 2040.
The company derives the major portion (~99%) of its revenues from India. Jockey is distributed through an established pan-India multi-channel distribution network, encompassing over 110,000+ points of sale in about 2,800 cities.
Supported by its strong distribution network and aspirational brand recall, Jockey has achieved a leadership position in the premium innerwear segment in the domestic market. It is the largest selling innerwear brand in the country in value terms, with a track record of industry-leading revenue growth and profitability.
Page Industries is also the exclusive licensee of Speedo International Ltd. for the manufacture, marketing, and distribution of the Speedo brand in India.
Financial Analysis of Page Industries Limited
Let us directly come to the financial performance analysis of Page industries Limited over the last 10 years.
Sales Growth
Over the last 10 years, the sales of the company have increased at a growth rate of 18% from ₹876 Cr in FY2013 to ₹3886 Cr in FY2022. Further, the company reported higher sales too i.e. ₹4726 Cr in its last 4 quarters ending June-2022.
Initially the company was growing its sales with a beautiful growth rate i.e. 18% as 10 Year Sales CAGR is 18%. However, if we see here the sales growth rate of the company in 7 years, 5 years and 3 years, we will find out here that sales growth rate decelerated. 7 Years sales CAGR is 14% , 5 Years sales CAGR is 13% and 3 Years sales CAGR is 11%.
Further the company has again started to increase its sales growth as we can see that for TTM the sales growth CAGR is 22%.
If we analyze the trend in sales growth of the company, then we will notice here that the journey of the company was quite smooth over the last ten years except a slight decrease in sales of the company during FY2021. Sales of the company dropped from ₹2946 Cr in FY2020 to ₹2833 Cr in FY2021. This drop was basically due to the Covid-19.
Operating profit and Operating profit margin
Over the last 10 years, the operating profit of the company has increased from ₹181 Cr in FY2013 to ₹787 Cr in FY2022. Further, the company reported an increase in its operating profit i.e. ₹1049 Cr in its last 4 quarters ending June-2022.
Similarly, if we see the operating profit margin of the company over the previous 10 years, It is usually 21 to 22% which is a very healthy sign. It indicates that the company is able to protect its operating profits.
There are only three years i.e. FY17, FY20 and FY21 where operating profit margin slightly dropped i.e. 18% or 19% which is not too much reduction from its usual operating profit margin which is around 21%.
Such sustainability in the operating profit margin of the company indicates that the company has pricing power over its customers and the company will be able to withstand the volatility in the raw material prices and will be able to maintain its operating profits.
Net profit and Net profit margin
Over the last 10 years, the net profit of the company has increased from ₹113 Cr in FY2013 to ₹537 Cr in FY2022. Further, the company reported an increase in its net profit i.e. ₹733 Cr in its last 4 quarters ending June-2022.
Similarly, if we see the net profit margin of the company over the previous 10 years, It is usually 13 to 14% which is a very healthy sign. It indicates that the company is able to protect its net profits.
There are only two years i.e. FY20 and FY21 where net profit margin slightly dropped i.e. 12% or 19% which is not too much reduction from its usual net profit margin which is around 13% to 14%.
Interest coverage ratio
While I prefer a company that has interest coverage of at least 3. If we see the interest coverage ratio of the company over the last 10 years, it has increased from 16.2 in FY14 to 55.4 in FY22. It indicates a very good sign that the company is very much in a comfortable position to pay its debt. The company is able to maintain its interest coverage ratio on a healthy side. Therefore, we can think that the company would not find it difficult to service its debt even in tough times.
Debt to equity ratio
While I prefer a company that has a debt to equity ratio less than 1. If we see the debt to equity ratio of the company over the last 10 years, it has improved from 0.5 in FY2013 to 0.1 in FY2022. Debt to equity ratio is improved basically due to increase in the equity of the company.
Tax Payout ratio
Page industries limited is paying taxes in the range of 32% to 35 % during FY2013 to FY2019. It is a good sign that the company is fulfilling the need of statutory compliances.
However, if we see the tax payout during FY2020 to FY2022, we will see that the company is paying tax approx. 24% to 26% which is below the standard corporate tax rate in India. It might be due to any tax relief scheme that the company will be enjoying but need to check this once.
Operating Efficiency Analysis of Page Industries Limited
Net fixed asset turnover (NFAT)
Let us analyze the Net fixed asset turnover (NFAT) of the company in the last 10 years. We will notice here that Net fixed asset turnover of the company was continuously improving from 7.79 in FY14 to 10.76 in FY18. It indicates that the company is able to generate more sales from its assets or we can also say that the company has utilized its assets effectively.
Net fixed asset turnover (NFAT) of the company started to come down from 10.76 in FY18 to 7.16 in FY21 and again started to improve to 9.86 in FY22.
Inventory turnover ratio
Let us analyze the inventory turnover ratio (ITR) of the company in the last 10 years. We will note here that most of the time the inventory turnover ratio (ITR) of the company was in the range of 4 to 5. So, the company is able to maintain its inventory effectively.
Analysis of receivable days
Let us analyze the receivable days of the company in the last 10 years. We will note here the receivable days of the company reduced from 20 days in FY14 to 14 in FY22. It is a good sign that the company is able to collect its receivables effectively.
Cumulative cash flow from operation (CFO) vs Cumulative profit growth (PAT)
We can note here that cash flow from operation for the last 10 years is ₹3044 Cr and cumulative profit after tax for the last 10 years is ₹2921 Cr. So, we can note here that the company is able to convert its profits into cash flow from operation efficiently.
We can see here that the company is managing its working capital efficiently, converting its profits into cash flow from operation efficiently, converting its sales growth into profit growth efficiently as PAT growth is in line with the sales growth over the last 10 years.
We can see here the debt level of the company which is almost similar as it was 10 years ago i.e. ₹100 to ₹110 Cr. Company is growing its sales with a CAGR of 18% and controlling its debt level to almost similar over the last 10 years indicates that the company was able to maintain its sales growth with their internal fund sources. .
Margin of safety in the business of Page industries Limited
Self sustainable growth rate
The self sustainable growth rate of the company was continuously on a higher side than its 10 years sales CAGR (18%) till FY20 . But, it has dropped slightly below its 10 years sales growth rate in FY21 and FY22.
But if we see the sales growth of the company, we can note here that the company was growing at a much lower rate as compared with its self sustainable growth rate till FY20. In other words, we can say that the company was very much comfortable to grow with the pace as it was growing by using its own funds.
It indicates that the company will be very much able to meet its growth plan with its internal resources. Hence, the company will not have to be dependent on the outsource funds like debt and equity dilution.
Same could be seen by observing the debt on the company over the previous 10 years. If we see the debt to equity ratio of the company over the last 10 years, it has improved from 0.5 in FY2013 to 0.1 in FY2022. Debt to equity ratio is improved basically due to increase in the equity of the company.
As the self sustainable growth rate has dropped slightly below than its sales growth rate, hence it will be interesting to see how the company is managing to maintain its sales growth plan in the coming future.
Dividend payout
During the period FY13 to FY22, The company has paid a dividend of ₹1806 Cr and retained the earning by ₹1115 Cr. Company has increased the value of the fund that it has retained and reinvested in its growth plan by 47 times. It also indicates a good sign as the company has not deteriorated the trust of its share holders.
Free cash flow
Let us see here the cash flow performance of the company. During the period of FY2013 to FY2022, the company has generated cash flow from operation ₹3044 Cr. During the same period, the company has executed CAPEX of 655 Cr. So, if we determine here the free cash flow for the same period, it will be ₹2389 Cr.
Other income for similar period of FY2013 to FY2022 = ₹178 Cr
Interest expense for similar period of FY2013 to FY2022 = ₹217 Cr
Therefore, net free cash flow will be ₹2350 Cr. It indicates that the company seems to be a cash generating machine.
Comparison of Page industries Limited with its peers
Key variables that will affect the business performance of the company
Working capital management
Company is managing its working capital efficiently currently. We should track how they are managing their working capital in the coming period.
Debt level to meet the growth plan
Currently, Company is managing its debt level on a minimal side to maintain its growth plan. We should track how they are managing their debt level in the coming period.
Domestic demand prospects
Company sales are supported by favorable domestic demand prospects for branded innerwear and the company’s widening distribution reach. We have to track the above mentioned points in the coming years.
High dependence on single brand and segment
While PIL has expanded its product portfolio over the years to offer a complete range of innerwear and leisurewear, it continues to be present in a small segment of the overall branded apparel industry, with a single brand accounting for most of its revenues.
While the company has taken steps to diversify its product as well as brand presence by venturing into the swimwear segment through a tie-up with the Speedo brand, its scale remains modest. We need to see how the company is planning to diversify its product and brand profile in coming years.
Geographical concentration of manufacturing facilities
While its manufacturing capacities are spread across multiple units, these remain concentrated in Karnataka. The resulting geographical concentration of its manufacturing base is a concern, given the highly labor intensive nature of the industry with instances of labor-related troubles affecting operations of established players in the past.
In this context, the company is setting up a greenfield unit in Odisha to geographically diversify its manufacturing base, which is likely to be commissioned by the end of FY2023. This is expected to help the company mitigate the geographical concentration and associated risks to some extent.
But, we need to see that when the company is actually converting this greenfield unit in Odisha into operational and revenue generating mode.
We need to see also the future planning of the company for expanding its geographical footprint which will help it in clocking healthy revenue growth and operating margins, despite intensifying competition. The resultant robust cash flow generation and minimal reliance on debt for funding expansion, as well as working capital requirements, are expected to keep the company’s capitalization and coverage indicators robust.
High working capital intensity
Company operations are characterized by high working capital intensity (Net Working Capital/ Operating Income or NWC/OI of ~10% to 18%). This is mainly due to the high inventory holding requirements of the business (115 days as on March 31, 2022), as the manufacturing cycle is long and the number of stock-keeping units (SKUs) is large.
As a result, enough raw material and finished goods inventory need to be maintained to meet the pan-India requirements in a reasonable time frame. Nevertheless, Rating agency ICRA draws comfort from the outright sale model followed by the company for most of its sales, which mitigates the risk of obsolete inventory due to unsold stock or sale returns.
Further, Rating agency notes that the company's working capital intensity is lower than other large domestic players in the innerwear segment. The risk of obsolete inventory/design is also relatively lower in case of innerwear items compared to other readymade garments.
Vulnerability to consumption trends and increasing competition
Company sales, growth prospects and in turn profitability and cash accruals, like other apparel retailers, are linked to macro-economic conditions, consumer confidence and spending patterns. Besides, intensifying competition from the branded innerwear players with increased spending on brand building, entry of foreign brands through the franchisee route and foray of large domestic branded garment manufacturers into the innerwear segment, will continue to have a bearing on the company's growth prospects, going forward. Nevertheless, the company has an established track record of fending off competition in the past, which provides comfort.
Vessel shipping cost
The industry suffered earlier immensely from global container shortage resulting in unprecedented increase in vessel shipping costs, thereby adding to increase in costs. Therefore, we need to check whether the company is searching any way to avoid the similar issue to arise again in the coming future.
Special thanks to my mentor Anand Gurjeev Singh.
Contact me
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@harikesh_iimt
Email -
divedi.hk@gmail.com
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