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PCG Research | Textiles Initiating Coverage

Page Industries

PAGE INDUSTRIES INR 372

The right fit BUY

Indian innerwear industry: Gaining ground


May 28, 2007
The Indian innerwear market, valued at ~INR 78 bn, has been growing at ~14% CAGR
over the past few years, with branded innerwear growing at ~20% CAGR during the same
Pranav Parekh
period. The premium and super premium segments, Page Industries (PIL) forte, have been +91-22-4097 9841
growing at ~30% and ~40% CAGR, respectively. Higher disposable incomes, increased pranav.parekh@edelcap.com

urbanization, brand awareness, and rapid retail growth are influencing consumers to Sanjeev Rohra
migrate to premium branded innerwear. With unorganized sector commanding 70% of the +91-22-4097 9844
sanjeev.rohra@edelcap.com
Indian innerwear market, we expect organized players to outpace the industry growth rate.

Capacity expansion to improve operating margins


PIL, the exclusive licensee of Jockey International, US, in India, Bangladesh, Nepal, and Sri
Lanka, is in the process of augmenting its manufacturing capacity by more than 50%, from
47 mn pieces currently (33 mn pieces in FY07) to 74 mn pieces by Q1FY09. Operating
efficiencies emanating from increased capacity coupled with a 100bps reduction in central
sales tax (CST) from 4% to 3% w.e.f. April 1, 2007, would increase PIL’s EBITDA margins
from 20% in FY07 to 22.1% in FY09E. Excess capacities in FY09E could lead to a
probable outsourcing agreement with Jockey International, US, which currently outsources
its excess requirements from its licensee in China. This could boost our FY09E revenues,
which do not account for such an outsourcing tie up. Reuters : PAGE.BO
Bloomberg : PAG.IN
Marketing and brand building: Fuelling growth
Jockey, the only innerwear brand in India to be awarded the Superbrand status, has
Market Data
helped transform the innerwear segment in India from a low customer involvement
52-week range (INR) : 489 / 241
category to a brand conscious and high involvement category. In a survey conducted by
Share in issue (mn) : 11.2
IMAGES-KSA Technopak, Jockey has been ranked as the most preferred brand in the
M cap (INR bn/USD mn) : 4.16 / 102.9
premium segment and the second most preferred brand in the overall innerwear segment
Avg. Dly Vol.BSE (‘000) : 993.1
in India. PIL has earmarked INR 230 mn out of the IPO proceeds which are to be deployed
in advertising and brand building over the next three years, which we believe will lead to
better brand recall and higher market penetration. Share Holding Pattern (%)

Valuations and outlook Promoters : 72.4


MFs, FIs & Banks : 10.2
We expect PIL’s revenues and net profits to grow a CAGR of 38% and 43% respectively
FIIs : 5.7
from FY07-09E. At the current market price of INR 372, the stock trades at 15.6x and 12x
Others : 11.7
our FY08E and FY09E EPS of INR 23.9 and INR 31, respectively. Considering its capacity
expansion, renowned brand name, healthy return ratios and attractive valuations, we
initiate coverage on Page Industries with a ‘BUY’ recommendation.
Financials
Year to March FY06 FY07 FY08E FY09E
500 8,000
Revenues (INR mn) 1,012 1,359 1,936 2,579
EBITDA (INR mn) 188 271 421 571 375 6,000
Net profit (INR mn) 114 170 266 346
('000)
(INR)

EPS (INR) 47.0 15.2 23.9 31.0 250 4,000


EPS growth (%) 169.8 (67.6) 56.7 30.1
P/E (x) 7.9 24.4 15.6 12.0 125 2,000
EV/EBITDA 22.8 15.0 10.0 7.5
- -
ROAE (%) 119.4 42.4 34.8 35.4
Mar-07 Apr-07 May-07
ROACE (%) 75.0 42.4 39.0 42.4

1 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Page Industries

Risks

Š Competition from international premium innerwear brands.

Š Any delay in planned capacity additions will affect revenues and profitability

Industry Overview

The Indian innerwear industry, currently valued at ~INR 78 bn (INR 60 bn in 2005), contributes ~7%
of the total apparel market in value terms. With an annual growth rate of ~14%, the innerwear
segment has been outstripping the overall apparel industry growth rate by 100-150bps since the
past three years. Within the innerwear segment, branded innerwear has been growing at ~20%
CAGR during the same period.

Of the total apparel industry, innerwear is the only segment wherein the women’s segment
dominates the market with ~63% market share. On the flip side, only 10% of the women’s innerwear
segment is organized, whereas 65% of the men’s innerwear market belongs to the organized sector.
Considering the fact that only one-third of the total innerwear market is organized, coupled with the
retail revolution spreading across the country, there is a huge unorganized market waiting to be
explored.

Fig. 1: Indian innerwear market (2005)

Indian innerwear market


(INR 60.2 bn)

Men’s innerwear Women’s innerwear


(INR 21.8 bn) (INR 38.4 bn)

Unorganized Organized Organized Unorganized


(INR 7.6 bn) (INR 14.2 bn) (INR 3.8 bn) (INR 34.6 bn)

Source: Company

Table 1: Segment-wise average industry MRP


Basic / Economy Mid-Premium (INR) Premium (INR) Super Premium
(INR) (INR)
Men’s 37 74 112 134
Women’s 60 143 251 549
Source: IMAGES Business of fashion, August 2005, Company

2
Page Industries

Company Overview

Page Industries (PIL) was incorporated in 1995 with the objective of getting the 130-year-old
international innerwear brand Jockey to India. The company caters to the growing demand for branded
innerwear products in India, Bangladesh, Nepal, and Sri Lanka. Prior to 1995, the promoters had been
associated with Jockey International, US, as their sole licensee in Philippines for 36 years.

In the early 1990s there was no international innerwear brand retailed in India as consumers
perceived innerwear as a low involvement product. Jockey, one of the biggest international innerwear
brands, has been instrumental in revolutionizing the Indian innerwear industry. Since inception, the
company has many firsts to its credit, including innovative box packaging, fabric innovations, and
eye-catching display modules targeted at increasing consumer’s involvement with the purchase.

PIL retails its products in over 14,000 stores across four retail formats viz., large format stores,
hosiery stores, multipurpose stores, and multi-brand outlets with prominent retail fixtures.

Fig. 2: Business model

Yarn Woven fabric Accessories

Processing charges Sourcing

Fabric knitting &


processing

Material inspection

Fabric cutting & garmenting


In-house

Garment packing

Source: Company, Edelweiss research

PIL is one of the few players in the industry to have an integrated business model right from material
inspection to fabric cutting and garmenting and packaging. Although the company does not process
the yarn in-house, it follows stringent checks at each level of the value chain. It procures and supplies
yarn to its dedicated suppliers for knitting and processing operations. This model helps the company
maintain a strict control on the quality and packaging of its products.

Jockey International, US: Jockey, incorporated in 1876, is a recognized brand in more than 120
countries. Jockey International, US, innovator of the first ‘Y’ fronted brief in 1935, today commands
~35% of the branded innerwear market in the US. Apart from the US and UK, where it has a direct
presence, Jockey follows the franchisee model with 35-40 licensees present across 120 countries.

Tie-up with Jockey International, US: Jockey International, US, operates on the franchisee model,
wherein all its licensees pay 5% of their annual turnover as royalty fees. Being an exclusive licensee
for Jockey International, US, for the regions of India, Bangladesh, Nepal, and Sri Lanka till 2020, PIL
pays 5% of its total turnover as royalty. PIL historically has always exceeded the revenue target set
by its licensor.

3
Page Industries

Business segments

PIL operates through three business verticals; viz. men’s innerwear, women’s innerwear, and leisure
wear.

Chart 1: Segmental breakup of PIL’s revenues


FY07 - INR 1.35 bn FY09E - INR 2.58 bn

Leisure Leisure
wear wear
13% 12%

Women's
innerwear
Women's
14%
innerwear
20%

Men's
Men's innerwear
innerwear 68%
73%

Source: Company, Edelweiss research

Men’s wear: PIL has predominantly been in the men’s segment, which contributed 73.1% of
revenues in FY07, down from 81% in FY04. Products in this segment include inner tees, vests, briefs,
trunks, and thermal wear. Within men’s wear, the premium and super premium segments account
for ~60% of total sales for this segment. This segment witnessed a CAGR of 25.3% during FY04-07.
Although two-thirds of the INR 21.8 bn (as in 2005) men’s innerwear market is organized, we expect
this segment to grow at ~30% over the next two years fuelled by increased purchasing power,
urbanization, and structural changes in the retail sector.

Women’s wear: Of the INR 38.4 bn (as in 2005) women’s domestic innerwear market, branded
products contribute a mere 10% and the remaining 90% belongs to the unorganized sector.
Products in this segment include brasseries, panties, crop tops, sport tops, camisoles, leggings,
spaghetti tops, and thermal wear. For FY04-07, sales from this segment grew rapidly at an annual
rate of 59%. We expect this segment to have a CAGR of ~63% for the next two years. We anticipate
contribution from this segment to increase from 14.4% of total revenue in FY07 to 20.2% in FY09E.

Leisure wear: Contributing 12.5% of revenues in FY07, this division has grown at an annual rate of
34.2% over the past three years. Products include boxers, bermudas, jersey pants, t-shirts, polo
shirts, and socks. Although the innerwear segment contributes a lion’s share of revenues, this
segment enables PIL to offer a complete range of leisure wear products, including innerwear, under
one roof. We expect this segment to grow at ~35% over next few years.

4
Page Industries

Strong distribution set-up

PIL operates through a network of 144 distributors who supply to over 14,000 retail outlets
across 1,100 cities and towns throughout the country. The retail outlets are spread over the
following retail formats: exclusive stores, multi-brand outlets (MBOs), hosiery stores, and multi-
purpose stores. Baring VIP, which dominates the economy to mid-premium segment, PIL has a
far wider reach than its premium segment competitors such as Hanes, Triumph, and Bodycare.

Table 2: Comparison of distribution reach


Exclusive stores Hypermarts & MBOs
departmental stores
Jockey 18 14,000
Bodycare 8,000
Triumph 2 70 230
Hanes 2,000
VIP 3 80,000
Enamor 70 750
Lovable 60 2,000
Source: IMAGES, Business of fashion, August 2005

Probable outsourcing agreement with Jockey, US, could further boost revenues

Chart 2: Installed capacity and production

80

Production (mn pieces) Installed capacity (mn pieces)


64

(in MN pieces)
48

32

16

0
FY05 FY06 FY07 FY08E FY09E

Source: Company, Edelweiss research

PIL’s current capacity stands at 47 mn pieces which is likely to be ramped up to 74 mn pieces


by Q1FY09 at its existing location in Bangalore. Although the company has historically operated
at a capacity utilization of 80-90%, we have assumed 72.3% and 60.8% utilization levels for
FY08E and FY09E, respectively.

Number of pieces sold is a function of the production capacity of the company as well as its
marketing reach and penetration. Hence, although the capacity is more than doubling from
FY07 levels, we have assumed a more realistic sales target of 34 mn pieces and 45 mn pieces
for FY08E and FY09E, respectively.

Unutilized capacities and benefits of mass scale production would give PIL the opportunity to
manufacture and supply to Jockey, US, which currently sources most of its production
requirements from its licensee in China. This could boost our estimated revenues which do not
account for such an outsourcing tie-up.

5
Page Industries

Financial Statements

Income statement (INR mn)


Year to March FY05 FY06 FY07 FY08E FY09E
Total revenues 746 1,012 1,359 1,936 2,579
Raw material 375 481 639 885 1,179
Other manufacturing exp 62 51 62 93 121
Employee cost 91 128 204 266 347
Selling & administrative exp 142 164 183 271 361
Total operating expenses 670 824 1,088 1,515 2,008
EBITDA 77 188 271 421 571
Depreciation 7 8 15 18 24
Deferred expenditure written off 18
EBIT 69 180 256 402 529
Interest expense 13 16 24 31 31
Other income 4 10 27 32 27
Profit before tax 61 174 260 403 525
Provision for tax 18 59 89 137 178
Profit after tax 42 114 171 266 346
Prior period items (1)
Net profit 42 114 170 266 346
Earnings per share (INR) 17.4 47.0 15.2 23.9 31.0
Shares outstanding (mn) 2.4 2.4 11.2 11.2 11.2
Dividend (INR/share) 11.3 22.8 5.0 8.0 9.0

Common size metrics as % on revenues


Year to March FY05 FY06 FY07 FY08E FY09E
Operating expenses 89.7 81.4 80.0 78.3 77.9
Depreciation 1.0 0.8 1.1 1.0 0.9
EBITDA margins 10.3 18.6 20.0 21.7 22.1
Net profit margins 5.7 11.3 12.5 13.8 13.4

Growth metrics (%)


Year to March FY05 FY06 FY07 FY08E FY09E
Revenues 19.5 35.6 34.4 42.4 33.3
EBITDA (13.0) 145.6 44.2 55.0 35.8
PBT (15.0) 186.8 49.3 55.3 30.1
Net profit (20.6) 169.8 48.4 56.7 30.1
EPS (20.6) 169.8 (67.6) 56.7 30.1

Cash flow statement (INR mn)


Year to March FY05 FY06 FY07E FY08E FY09E
Cash flow from operations 50 123 185 285 370
Cash for working capital (19) (30) (133) (126) (168)
Net operating cash flow- A 31 93 52 158 203
Net purchase of fixed assets (29) (33) (92) (100) (90)
Net purchase of investments 0 (4) (130) (13) 0
Net cash flow from investing- B (29) (37) (222) (113) (90)
Proceeds from equity 0 0 458 0 0
Proceeds/Repayments from borrowings 25 (0) 99 7 0
Dividend payments (27) (55) (56) (89) (100)
Net cash flow from financing- C (2) (56) 502 (82) (100)
Net cash flow (A+B+C) (0) (0) 332 (37) 12

6
Page Industries

Balance sheet (INR mn)


As on 31st March FY05 FY06 FY07E FY08E FY09E
Equity capital 24 24 112 112 112
Reserves & surplus 42 101 566 743 989
Shareholders funds 67 125 677 854 1,100
Secured loans 132 132 253 260 260
Net deferred tax liability 12 12 10 10 10
Source of funds 211 269 940 1,124 1,370
Gross block 129 158 258 358 448
Depreciation 35 44 59 77 101
Net block 94 115 199 281 347
Capital work in progress 5 8 - - -
Net fixed assets 98 123 199 281 347
Investments 3 7 137 150 150
Cash, bank bal & deposits 0 0 332 205 145
Inventory 193 234 372 530 707
Sundry debtors 50 59 74 106 141
Loans & advances 21 31 90 90 90
Total current assets 264 324 868 931 1,083
Sundry creditors 53 52 69 99 132
Others 96 103 140 140 140
Provisions 6 31 56 89 100
Total current liabilities 155 185 265 328 372
Net current assets 109 139 604 603 711
Misc expenditure not written off 0 0 0 90 162
Application of funds 211 269 940 1,124 1,370
Book value (BV) per share (INR) 27 51 61 77 99

Ratios
Year to March FY05 FY06 FY07 FY08E FY09E
ROAE (%) 71.6 119.4 42.4 34.8 35.4
ROACE (%) 36.6 75.0 42.4 39.0 42.4
Inventory days 94 84 100 100 100
Debtor days 24 21 20 20 20
Fixed assets t/o 5.8 6.4 5.3 5.4 5.8
Debt /Equity 2.0 1.1 0.4 0.3 0.2

Valuation parameters
Year to March FY05 FY06 FY07 FY08E FY09E
EPS (INR) 17.4 47.0 15.2 23.9 31.0
Y-o-Y growth (%) (20.6) 169.8 66.3 56.7 30.1
CEPS (INR) 20.4 50.4 16.6 25.5 33.2
P/E (x) 21.3 7.9 24.4 15.6 12.0
Price/BV (x) 13.6 7.2 6.1 4.9 3.8
EV/sales (x) 5.7 4.2 3.0 2.2 1.7
EV/EBITDA (x) 55.9 22.8 15.0 10.0 7.5

7
Page Industries

Technical View
Page Industries: (CMP INR 372)

The stock has more than doubled during last two months and it has rallied with significant expansion in trading
volumes. The stock has corrected almost 20% during last 2 weeks and price has come closer to critical support at
INR 360-350 levels.

It is important to see that stock declined with out any trading volumes which suggest absence of selling presser and
continued interest of long term investors.

We expect consolidation in short term and recommend to use further decline into the support areas as buying
opportunity. Stock has resistance at A: INR 420 B: INR 445.

8
Edelweiss Securities
Page Industries
th
8 Floor, Chander Mukhi,
Nariman Point, Mumbai – 400 021
Board: (91-22) 4097 9797
Email: pcg.research@edelcap.com

Naresh Kothari – 2286 4246 Head, Private Client Services

Nirmal Rungta – 4097 9759 Head, Private Client Services

Direct Clients DERIVATIVES DESK BRANCHES (CONT’D)

Biren Shah – 40979720 Mitesh Thakkar – 40979806 Hyderabad


Ashok Nagori(Technical) – 40979811 Vinay Pratti – 040-66849440/1
Jai Mehra – 40979815
Hitesh Shah – 40979804
Indore
Ajay Saraf – 40979820 WEALTH MANAGEMENT Uttam Srimal – 0731-266631/32/33/34
Anurag Mehrotra – 22864987 Jaipur
Amit Mamgain - 40979818
BUSINESS DEVELOPMENT Dharmendra Sharma – 0141-2378053/72
Satish Pujari – 40979715 Jodhpur
RESEARCH TEAM
Priti Devpuria – 40979846
Amit Choudhary – 0291-3204551/4/7
Fundamental
BRANCHES Kolkata
Prakash Kapadia – 40979843 Andheri-Mumbai Kamal Jeswani – 033-30580101/02/03/04
Nitin Maheshwari – 022-67252555-58 Mulund – Mumbai
Pranav Parekh – 40979841
Ahmedabad Rajendra Joshi – 022-5615441/42/43/44
Rajiv Jhaveri – 079-30088445
Sanjeev Rohra – 40979844 Nashik
Bangalore
Pratyush Singh – 0253-66102442/43
Grishma Shah – 40979842 Rajrashi Panigrahi – 09900249231/32
New Delhi
Borivali - Mumbai
Prachi Hattangadi – 40979845 Gaurav Kulshrestha – 011-41531011/2/3
Purvesh Desai – 022-28944701
Chennai Opera House – Mumbai
Branches & Channel Partner’s Satyanarayan Y – 04442148976/7/8 Keyuri Kapadia – 022- 23675621/3/4

Alpesh Busa – 40979773 Cochin Pune


Brijesh Mathew – 0484 2359204/8/10 Amol Erande – 020-66048461/2/3/4
Bhaumik Vora – 40979802
Gurgaon Vile Parle – Mumbai
Tejas Shukla – 40979775 Varun Mahendru – 0124 4300070/71/72 Puneet Jain – 022-26102505/6

RATING INTERPRETATION
Buy Expected to appreciate more than 20% over a 12-month period Accumulate Expected to appreciate up to 20% over a 12-month period

Sell Expected to depreciate more than 10% over a 12-month period

Email addresses: firstname.lastname@edelcap.com eg. naresh.kothari@edelcap.com unless otherwise specified

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