This article provides an in-depth fundamental analysis of Page Industries Ltd, exclusive licensees of JOCKEY International Inc. (USA) in India, Sri Lanka, Bangladesh, Nepal and UAE and exclusive licensee of Speedo International Ltd. in India.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Page Industries Ltd Research Report by Reader
Q: Hello Dr Vijay, I would like to discuss Page Industries Ltd.
1] Business: (As described by Page Industries Ltd on its website):
Page Industries Ltd., located in Bangalore, India are the exclusive licensees of JOCKEY International Inc. (USA) for manufacture and distribution of the JOCKEY® brand Innerwear/Leisurewear for Men and Women in India, Sri Lanka, Bangladesh ,Nepal and UAE. Page Industries is also the exclusive licensee of Speedo International Ltd. for the manufacture, marketing and distribution of the Speedo brand in India.
The Company was set up in 1994 with the key objective of bringing the world renowned brand “JOCKEY®” to India. Its promoters, Genomal family, who have been associated with JOCKEY International Inc. for 50 years as their sole licensee in the Philippines. Page Industries became a public company in March 2007 and is quoted in the Bombay Stock Exchange and the National Stock Exchange of India.
The company commenced operations in the year 1995 with the manufacturing, distribution and marketing of Jockey® products. As of September 2013, the company’s workforce numbered 16,000 people with manufacturing operations spread over 9 complexes in Bangalore and Hassan, totalling 1.7 million square feet of space. Page Industries commands wide spread pan India distribution encompassing over 25,000 plus retail outlets in 1,200 cities and towns and has revolutionized the innerwear market by launching exclusive JOCKEY® outlets across India numbering 117 as of September 2013.
Page Industries was honoured by Jockey International Inc. with the ‘International Licensee of the year’ award for 2012-2013, outperforming 140 other countries where the Jockey brand is present. This award was given in recognition of outstanding brand building, consistent healthy growth in sales, and remarkable product development and innovation in our markets.
2] Financial Parameters of Page Industries Ltd:
- 10Y avg sales growth: 35%
- 10Y avg eps growth: 37%
- MCap: INR 16,400 Cr
- Market Size for inner wears: INR 17,000 Cr and growing at 13% CAGR
- Debt/Equity ratio: 0.49 and declining trend
- 5y avg gross profit margin: 20% and in an uptrend
- 5y avg net profit margin: 12% and in an uptrend
- 10Y avg RoE: 48%
- 10y Avg RoCE: 49%
- Sustainable Growth Rate: 30%
3] Valuation Analysis of Page Industries Ltd:
- Intrinsic value (Buffett way or DCF analysis): INR 37,500
- The margin of safety: 61%. …. Fair valuation
- P/E: 84
- PEG: 2.5. High valuation
- Valuation of Page Industries Ltd has remained high but all consumer companies are quoting at a high valuation. For example, Nestle quotes at 4 times growth, HUL at 3 times growth and so on.
- Earnings Yield (EY): 1.2
- Time to get 8.5% EY: 6.7 Years High valuation
4]Management Analysis of Page Industries Ltd:
High RoE/RoCE is an indication of good management. There has been no equity dilution. The dividend payment is regular. No bonus and no split is also an indication of good management decisions.
Would like to have your views and analysis.
Dr Vijay Malik’s Response
Thanks for writing to me! I am happy that you have pointed out important parameters for analysis of Page Industries Ltd.
Financial Analysis of Page Industries Ltd:
Page Industries Ltd has been growing its sales consistently at an excellent pace of 30-35% year on year since the last 10 years (FY2006-15). More important is the fact that this sales growth has been accompanied by sustained profitability. Operating profit margins (OPM) of Page Industries Ltd is consistent at 20-21% throughout the last decade. Similarly, net profit margins (NPM) have also been consistent at 11-13% in the last 10 years. Sales growth with sustained profitability margins is the first sign of any exciting investment opportunity.
Page Industries Ltd has been paying taxes at 31-34% rate, which is equal to the standard corporate tax rate in India. This is another good sign.
Operating Efficiency Analysis of Page Industries Ltd:
Over the years, Page Industries Ltd has been reflecting improved operating efficiency. This is shown by increasing fixed assets turnover and inventory turnover. Net fixed assets turnover has improved from 5.3 in FY2010 to 7.9 in FY2015. Similarly, the inventory turnover ratio has improved from 4.1 in FY2012 to 7.4 in FY2015. Improving asset and inventory turnover indicate that Page Industries Ltd is able to use its capital more efficiently and generate higher sales from the same level of assets.
One concern that I notice while analyzing financials of Page Industries Ltd, is that it has not been able to convert its profits into cash flow from operations. PAT for the last 10 years (FY2006-15) is INR 734 cr. whereas the CFO over a similar period is INR 547 cr. This is not a good sign.
This pattern of inability to collect money on time is visible from increasing receivables days as well. Receivables days of Page Industries Ltd have increased from 18 days in FY2012 to 21 days in FY2015.
As a result, Page Industries Ltd has to rely on other sources of cash (like debt) to meet the extra funds required by its growing business. Total debt of Page Industries Ltd has increased from INR 13 cr. to FY2006 to INR 134 cr. in FY2015.
The Margin of Safety in the Business of Page Industries Ltd:
i) Self-Sustainable Growth Rate (SSGR):
Self-Sustainable Growth Rate (SSGR) of Page Industries Ltd is about 40-50%. As mentioned in the article on Self-Sustainable Growth Rate, SSGR does not factor in working capital changes. However, we can estimate whether funds are being tied up in working capital by comparing cPAT with cCFO.
Analysis of SSGR indicates that if Page Industries Ltd can manage its working capital management and operating efficiency properly, then it can grow continuously at about 40-50% growth rate without creating additional debt burden on the balance sheet. However, poor receivables management has necessitated increasing debt despite very good SSGR.
An investor should keep an eye on receivables days of Page Industries Ltd for signs of improvement or worsening as part of their monitoring exercise.
Page Industries Ltd has been paying regular dividend to its shareholders. Company has been increasing its dividend payout with increasing profits. It amounts to sharing the fruits of growth with shareholders. These are signs of shareholder-friendly management.
Share market too seems to have recognized it. The market capitalization of the Page Industries Ltd has increased by INR 15,343 cr. against retained earnings of INR 456 cr. over last 10 years (FY2006-15). Management has created a value of INR 33.6 for the shareholders from every INR 1 of earnings retained & not distributed to shareholders.
The Margin of Safety in the market price of Page Industries Ltd:
Page Industries Ltd is currently available at a P/E ratio of 78.3, which does not offer any margin of safety as described by Benjamin Graham in his book.
I do not use DCF for doing the stock valuation. Therefore, I would not be able to comment on the value of INR 37,500 per share of Page Industries Ltd, arrived by you and the resultant calculation of margin of safety of 61%. I use the margin of safety concept by comparing the earnings yield to current G-Sec (govt. securities) rate and by this method; Page Industries Ltd does not provide any margin of safety.
You have opined that such valuations of Page Industries Ltd are justified by comparing it with the current valuations of HUL and Nestle. I would like to delineate a belief that I hold about investing:
There is no one path to success in stock market investing. Investors have made money in markets by following high P/E growth investing, low P/E value investing, a mix of both, arbitrage, technical investing, large-cap investing, mid/small-cap investing and many other such approaches. Therefore, I believe that there is no single standard path to succeed/make money in markets. The path an investor should follow is the one she is convinced with and feels comfortable with.
Readers are right when they mention that good business may not be available at low P/E ratios. An investor is free to invest in businesses with high P/E if she is comfortable. However, I believe in investing fundamentally sound companies, which are yet to be recognized by the markets. I believe that such companies are present in the markets. Such opportunities might not be aplenty; however, I believe that an investor does not need to find dozens of good companies. My experience in markets says that one company a year is enough.
Nevertheless, there is no one path to success in markets and therefore, if an investor believes in investing high P/E companies, which are valued fairly, then she should invest in such companies without any second thoughts. Investing methods are a personal choice.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, Page Industries Ltd appears to be a company growing at a fast pace, with sustained profitability margins & operating efficiency. However, the inability to collect cash from its customers has required it to fund its growth requirements by debt. An investor should keep a close watch on its receivables days as that seems to be only chink in its armour. Otherwise, Page Industries Ltd has a very healthy SSGR, which can ensure that it can keep on growing without needing debt to fund its growth if it can manage its working capital efficiently.
These are my views about Page Industries Ltd. However, you should do your own analysis before making any investment-related decision about Page Industries Ltd.
You may use the following steps to analyse the company: ““
Hope it helps!
Dr Vijay Malik
Readers’ Queries about Page Industries Ltd
Dr Vijay, Thanks for the detailed reply on Page Industries Limited.
I have a few more points:
- Sustainable Growth Rate (SGR) for Page Industries Ltd is around 28 to 31% based on 10year avg RoE or 3 years avg RoE, using SGR=RoE*(1-DPR). I am confused with your Self-Sustainable Growth Rate (SSGR) number of 40 to 50% being more than SGR.
- 3 year SGR is greater than 3y avg sales growth of 30% and 3yr avg profit growth of 30%. This implies debt should come down. In fact, the debt/equity ratio has come down from 0.93 to 0.35 in the last 5 years. However, your analysis indicates a likely rise in debt.
- The company gets debt at 6% rate under TUFF scheme and hence it pays a dividend and at the same time uses debt to grow. Nothing wrong here.
- Management has gradually reduced its stake to 51% by selling mainly to retail investors, right from ₹450 level to ₹17,000 level over the last 5 years.
- It is a licensee company.
- Market cap is ₹15,280 Cr and it is reported that the entire market size of innerwear market is ₹1,800 Cr. I am unable to understand this as a valuation indicator.
- Rate of return analysis: Assuming 30% CAGR in eps for next 10 years, and assuming sustainable P/E of 30 at the end of 10 years, the likely price CAGR is 18% over next 10 years. Therefore, its high growth in earnings will be negated by PE contraction in future and one may end up with 18% price CAGR.
Would like to have your opinion on above points especially 1, 2 & 6.
Hi, Thanks for your valuable inputs!
1&2) SGR (based on ROE and DPR) and SSGR though seemingly similar, are not exactly the same. The same has been discussed in the SSGR article as a response to queries of other readers. I suggest you to read these queries and my responses on the SSGR article: Finding Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential of a Company
I am sure that your queries 1 & 2 would be resolved post-reading those comments.
6) I would like to point out that the estimate of market size might or might not be correct. However, assuming that market size if indeed only ₹1,800 cr., there is no limitation that the market cap of any company or industry cannot exceed the market size.
Assume there is only one company (say Page Industries) in the entire industry and it meets the entire demand of ₹1,800cr. With 13% PAT margin, this company would earn ₹234cr. in profits (1800*0.13). Now even if the market size stays constant at ₹1,800 cr., the annual stream of profits of ₹234 cr. would be valued at least at ₹2,340 cr. Assuming 10% rate of return (or interest rates/FD rates) i.e. ₹234/0.10. (This uses the present value of an annuity).
Moreover, if market size increases even by minuscule amount every year, say 2% every year, then the value of the annuity would be more at about ₹2,925 cr. (234/ (0.10-0.02)).
Therefore, I would like to point out that there is no upper cap on market cap limited by industry size.
Stressing again, I do not think that entire market size if ₹1,800 cr. Otherwise, it would mean that current sale of Page of ₹1,500 cr. has already captured, whatever was there to be captured. There are many other competitors having their niches, huge unorganized segment. Therefore, I believe that market size is more than ₹1,800 cr.
Hope it helps resolve your queries!
Follow up Query
Sorry. It was a typo. Market size is ₹17,000 to ₹18,000 Cr not ₹1,800 Cr. In the original write-up, I had mentioned it as ₹17,000 cr.
Thanks for writing to me!
In any way, the conceptual analysis stays the same as discussed in the earlier response.
All the best for your investing journey!
Dr Vijay Malik
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Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.