PCG Research | Textiles

Initiating Coverage

Page Industries

PAGE INDUSTRIES
The right fit
Indian innerwear industry: Gaining ground

INR 372

BUY

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 period. The premium and super premium segments, Page Industries (PIL) forte, have been growing at ~30% and ~40% CAGR, respectively. Higher disposable incomes, increased urbanization, brand awareness, and rapid retail growth are influencing consumers to migrate to premium branded innerwear. With unorganized sector commanding 70% of the 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 PILs 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. Marketing and brand building: Fuelling growth

May 28, 2007

Pranav Parekh +91-22-4097 9841 pranav.parekh@edelcap.com Sanjeev Rohra +91-22-4097 9844 sanjeev.rohra@edelcap.com

Reuters Bloomberg

: :

PAGE.BO PAG.IN

Jockey, the only innerwear brand in India to be awarded the Superbrand status, has
helped transform the innerwear segment in India from a low customer involvement category to a brand conscious and high involvement category. In a survey conducted by IMAGES-KSA Technopak, Jockey has been ranked as the most preferred brand in the premium segment and the second most preferred brand in the overall innerwear segment 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. Valuations and outlook We expect PILs revenues and net profits to grow a CAGR of 38% and 43% respectively from FY07-09E. At the current market price of INR 372, the stock trades at 15.6x and 12x 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 Revenues (INR mn) EBITDA (INR mn) Net profit (INR mn) EPS (INR) FY06 1,012 188 114 47.0 FY07 1,359 271 170 15.2 FY08E 1,936 421 266 23.9 FY09E 2,579 571 31.0 346

Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) Avg. Dly Vol.BSE (000) : : : : 489 / 241 11.2 4.16 / 102.9 993.1

Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 72.4 10.2 5.7 11.7

500 375 (INR) 250 125 Mar-07 Apr-07

8,000 6,000 4,000 2,000 May-07 ('000)

EPS growth (%)

P/E (x) EV/EBITDA ROAE (%) ROACE (%)
1

169.8
7.9 22.8 119.4 75.0

(67.6)
24.4 15.0 42.4 42.4

56.7
15.6 10.0 34.8 39.0

30.1
12.0 7.5 35.4 42.4

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

Page Industries

Risks

Competition from international premium innerwear brands. 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 womens segment dominates the market with ~63% market share. On the flip side, only 10% of the womens innerwear segment is organized, whereas 65% of the mens 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)

Mens innerwear (INR 21.8 bn)

Womens innerwear (INR 38.4 bn)

Unorganized (INR 7.6 bn)

Source: Company

Organized (INR 14.2 bn)

Organized (INR 3.8 bn)

Unorganized (INR 34.6 bn)

Table 1: Segment-wise average industry MRP

Basic / Economy (INR) 37 60 Mid-Premium (INR) 74 143 Premium (INR) 112 251 Super Premium (INR) 134 549

Mens Womens

Source: IMAGES Business of fashion, August 2005, Company

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 consumers 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 Processing charges Woven fabric Sourcing Accessories

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. mens innerwear, womens innerwear, and leisure wear. Chart 1: Segmental breakup of PILs revenues FY07 - INR 1.35 bn
Leisure wear 13% Women's innerwear 14%

FY09E - INR 2.58 bn

Leisure wear 12%

Women's innerwear 20%

Men's innerwear 73%

Men's innerwear 68%

Source: Company, Edelweiss research

Mens wear: PIL has predominantly been in the mens 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 mens 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) mens 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. Womens wear: Of the INR 38.4 bn (as in 2005) womens 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 lions 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.

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 multipurpose 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 Jockey Bodycare Triumph Hanes VIP Enamor Lovable
Source: IMAGES, Business of fashion, August 2005

Hypermarts & departmental stores

MBOs 14,000 8,000

18 2 70 3 70 60

230 2,000 80,000 750 2,000

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

FY05

FY06

FY07

FY08E

0 FY09E

Source: Company, Edelweiss research

PILs 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 Year to March Total revenues Raw material Other manufacturing exp Employee cost Selling & administrative exp Total operating expenses EBITDA Depreciation Deferred expenditure written off EBIT Interest expense Other income Profit before tax Provision for tax Profit after tax Prior period items Net profit Earnings per share (INR) Shares outstanding (mn) Dividend (INR/share) Common size metrics as % on revenues Year to March Operating expenses Depreciation EBITDA margins Net profit margins Growth metrics (%) Year to March Revenues EBITDA PBT Net profit EPS FY05 19.5 (13.0) (15.0) (20.6) (20.6) FY06 35.6 145.6 186.8 169.8 169.8 FY07 34.4 44.2 49.3 48.4 (67.6) FY08E 42.4 55.0 55.3 56.7 56.7 FY09E 33.3 35.8 30.1 30.1 30.1 FY05 89.7 1.0 10.3 5.7 FY06 81.4 0.8 18.6 11.3 FY07 80.0 1.1 20.0 12.5 FY08E 78.3 1.0 21.7 13.8 FY09E 77.9 0.9 22.1 13.4 42 17.4 2.4 11.3 114 47.0 2.4 22.8 69 13 4 61 18 42 180 16 10 174 59 114 256 24 27 260 89 171 (1) 170 15.2 11.2 5.0 266 23.9 11.2 8.0 346 31.0 11.2 9.0 402 31 32 403 137 266 FY05 746 375 62 91 142 670 77 7 FY06 1,012 481 51 128 164 824 188 8 FY07 1,359 639 62 204 183 1,088 271 15 FY08E 1,936 885 93 266 271 1,515 421 18 (INR mn) FY09E 2,579 1,179 121 347 361 2,008 571 24 18 529 31 27 525 178 346

Cash flow statement Year to March Cash flow from operations Cash for working capital Net operating cash flow- A Net purchase of fixed assets Net purchase of investments Net cash flow from investing- B Proceeds from equity Proceeds/Repayments from borrowings Dividend payments Net cash flow from financing- C Net cash flow (A+B+C)
6

(INR mn) FY05 50 (19) 31 (29) 0 (29) 0 25 (27) (2) (0) FY06 123 (30) 93 (33) (4) (37) 0 (0) (55) (56) (0) FY07E 185 (133) 52 (92) (130) (222) 458 99 (56) 502 332 FY08E 285 (126) 158 (100) (13) (113) 0 7 (89) (82) (37) FY09E 370 (168) 203 (90) 0 (90) 0 0 (100) (100) 12

Page Industries

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

(INR mn) FY09E 112 989 1,100 260 10 1,370 448 101 347 347 150 145 707 141 90 1,083 132 140 100 372 711 162 1,370 99

Ratios Year to March ROAE (%) ROACE (%) Inventory days Debtor days Fixed assets t/o Debt /Equity Valuation parameters Year to March EPS (INR) FY05 17.4 FY06 47.0 FY07 15.2 FY08E 23.9 FY09E 31.0 FY05 71.6 36.6 94 24 5.8 2.0 FY06 119.4 75.0 84 21 6.4 1.1 FY07 42.4 42.4 100 20 5.3 0.4 FY08E 34.8 39.0 100 20 5.4 0.3 FY09E 35.4 42.4 100 20 5.8 0.2

Y-o-Y growth (%)

CEPS (INR) P/E (x) Price/BV (x) EV/sales (x) EV/EBITDA (x)

(20.6)
20.4 21.3 13.6 5.7 55.9

169.8
50.4 7.9 7.2 4.2 22.8

66.3
16.6 24.4 6.1 3.0 15.0

56.7
25.5 15.6 4.9 2.2 10.0

30.1
33.2 12.0 3.8 1.7 7.5

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.

Edelweiss Securities Page Industries

8 Floor, Chander Mukhi, Nariman Point, Mumbai 400 021 Board: (91-22) 4097 9797 Email: pcg.research@edelcap.com Naresh Kothari Nirmal Rungta 2286 4246 4097 9759 Head, Private Client Services Head, Private Client Services
th

Direct Clients Biren Shah Jai Mehra Ajay Saraf Amit Mamgain 40979720 40979815 40979820 40979818

DERIVATIVES DESK Mitesh Thakkar Hitesh Shah 40979806 40979804

BRANCHES (CONTD) Hyderabad Vinay Pratti Indore Uttam Srimal 22864987 Jaipur Dharmendra Sharma 0141-2378053/72 Jodhpur Amit Choudhary Kolkata Kamal Jeswani 022-67252555-58 Mulund Mumbai Rajendra Joshi 079-30088445 Nashik Pratyush Singh 09900249231/32 New Delhi 022-28944701 Gaurav Kulshrestha 011-41531011/2/3 0253-66102442/43 022-5615441/42/43/44 033-30580101/02/03/04 0291-3204551/4/7 0731-266631/32/33/34 040-66849440/1

Ashok Nagori(Technical) 40979811

WEALTH MANAGEMENT Anurag Mehrotra

BUSINESS DEVELOPMENT RESEARCH TEAM Fundamental BRANCHES Prakash Kapadia Pranav Parekh Sanjeev Rohra Grishma Shah Prachi Hattangadi 40979843 40979841 40979844 40979842 40979845 Andheri-Mumbai Nitin Maheshwari Ahmedabad Rajiv Jhaveri Bangalore Rajrashi Panigrahi Borivali - Mumbai Purvesh Desai Chennai Branches & Channel Partners Alpesh Busa Bhaumik Vora Tejas Shukla 40979773 40979802 Gurgaon 40979775 Varun Mahendru 0124 4300070/71/72 Satyanarayan Y Cochin Brijesh Mathew 0484 2359204/8/10 04442148976/7/8 Satish Pujari Priti Devpuria 40979715 40979846

Opera House Mumbai Keyuri Kapadia Pune Amol Erande Vile Parle Mumbai Puneet Jain 022-26102505/6 020-66048461/2/3/4 022- 23675621/3/4

RATING INTERPRETATION
Buy Sell Expected to appreciate more than 20% over a 12-month period Expected to depreciate more than 10% over a 12-month period Accumulate Expected to appreciate up to 20% over a 12-month period

Email addresses: firstname.lastname@edelcap.com

eg. naresh.kothari@edelcap.com

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