Even I thought same way earlier. But look at amount of money one spends on toothpaste and tooth brushes compared to undergarments in a family of four. Now compare Page and Colgate market cap. That should put things in perspective.
Similarly, lot of urban families spend more on Pizza in year than on toothpaste/brushes.
Consumption patterns are changing…
Removing the unexpected impact of employee bonus liability the profit would have grown by 30% as gross margin expanded by 2%. Now that it will become a recurring feature one needs to deduct EPS accordingly. FY16 EPS impacted by Rs.10/share. I think this cost should grow and have a dent on valuation.
But i feel it will be a year on year only i.e next dec the effect will nullify.they can increase price to protect margin any time. its now 40 times next year earning. With roe & roce more than 40% i think it will hold at this level. let see.
disc : invested.
If 40 PE is adequate it headed to one year of stagnation One needs to keep in mind that one more year of 25% EPS growth might lead to PE contraction. It won’t stay at this level for sure as not everyone can risk stagnation for one more year.
PE can contract but looking at other MNC with lower growth & lower payout ratio and with a forward pe of more than 40 i feel it might hold. in this bear market and also as it is in FNO it might go down. I feel page is still a 25%+ growth story for 3-5 years.lets see
MNCs have inherent buyback, delisting premium and history builtin
Page is a brilliant franchise, so I think we should rationally evaluate Page based on the numbers so far and then take a call.
Let’s take YTD figures and evaluate.
9M FY15 revenue: 1164. I’m rounding off for sake of brevity.
9M FY16 revenue: 1348.
Revenue Growth = 15.8%.
9M FY15 Profit: 149.
9M FY16 Profit: 175.
Profit Growth: 17.5%.
Good thing is the bonus need not be applied retrospectively, else Page would have got a hit of another 12 crores. Ok, but the order is applicable from 2015-2016, so it provided 8.74 crore in Q3 FY16 numbers which is for the entire 9 months of FY16. In Q4 FY 16, assume another 3 crores to be provided approximately.
Now, let’s add back this with tax impact of ~ 32% 8.74 crore * (1-0.32) = 5.94 crore in Q3 FY16 profits in order to compare the profits without this bonus thing as last year this was NOT there. Remember, this is a on going concern, so this will impact the P&L for the next 1 year and then normalise in YoY comparison.
Let’s go back to profits 9M comparison again,
9M FY15 Profit: 149.
9M FY16 Profit: 175 + 5.94 = 181.
Profit growth WITHOUT the bonus thingy is 21.5%.
To sum up, (9M FY15 vs 9M FY16): (WITHOUT bonus impact)
Revenue Growth = 15.8%.
Profit growth = 21.5%.
My concerns:
Future estimates: [OPTIMISTICALLY]
Q4 FY15 revenue: 380.
Q4E FY16 revenue: 380 * 1.2 = 456. (I have factored in 20% revenue growth on the optimistic side).
Q4 FY15 profit: 47.
Q4E FY16 profit: 47*1.25=59. (I have factored in 25% profit growth on the optimistic side).
Minus 3 crore for the bonus liability in Q4 FY16 which gives the profit to be around 56 crore.
Q4E FY EPS comes to about 56/1.11= 51.
EPS FY16E = 157.25+51 = 208.
Concern:
However, to re-iterate, Page has fantastic return ratios, super management, regular dividend payments, numbers are genuine - no book cooking, assume 25% secular growth is possible, so premium PE for Page is justified.
How much PE you will give is entirely left to you, so I do not want to make any judgements here.
Note: There might be plus/minus rounding error, so do not count to the decimals. The bonus liability is NOT a big number for a company of page scale, so nothing much to bother about but the growth tapering off is something to bother about and I may actually agree to @sumi00 observations. @praveenballa take note as you have asked about the extra employee liabilities in your post.
If you do a DCF for this assuming low cost of equity (8% as business is certain) and apply growth of 15% for 10 years and tapers to terminal value of 4%, stock appears to be fairly valued now. But this may show higher growth over next couple of years when economy picks up.
One more stock coming to real valuations after the fall. I will be a buyer at 40 PE simply because companies like Dabur and all trade at similar valuations with 10-15% growth. I like the business and the brand. I won’t go for DCF calculation and all because I am bad in predicting things and most of the people are. All I understand is the strength of the business and the ratios like ROCE, ROE and PE. I am comparing Page with Dabur because people love both. One interesting thing to know would be how the business growth is in competitors like Chromosome, Calvin Klein, VIP and Rupa in the same segment. As the market is quite fragmented it would be interested to know if Page is maintaining or increasing the market share.
Disc. Not invested and wanted to invest.
Page should command a premium as topline growth is still ahead of FMCG pack. Page also is a market leader in premium and also taking away market share from others whereas likes of Dabur are getting squeezed between cheaper alternatives like Patanjali and premium products from HUL.
Having said that most of the FMCG are fairly priced and on can make decent return over 3-5 years as growth for next 10 years is given with urbanization and demographic trends.
Fund managers who have kept ranting about high valuation have been hit hard most and looks like they did not do any extrapolation for 10 years to see the size of opportunity.
Friends i need some help while i was calculating future earning of page for next 10 years taking Rs 210 as the base eps. instead of 25% cagr i did a 20% cagr and found out that page has the potential to generate more than Rs 2600 as total dividend per share for next ten years, taking a 40% payout ratio. Though i know 10 years is a very very long time but just for academic purpose. Friends am i missing something.
invested and planning to buy more but still undecided.
Guys. What if other FMCG companies also fall to PE of 25? You can’t say I will buy this dog for 1 crore because someone bought my cat for 2 crores. That can’t be the logic!
What will happen to your logic if FMCG companies fall to 25PE?
Do a DCF analysis with cost of equity as around 8% as FMCG is pretty predictable business. That is better way. You will get a PE of around 40+ for 15% grower 
PE of 40 for a 7% real grower. Inflation in India is 8% sir. What PE will you go to Bank FD growing at 8% forever. Market gives it 1 PB
Thank you very much for the elaborate response
Bank FDs on an after tax basis grow at 5-6%. Effectively the PE is 15-20 taking the same after tax interest of 5-6%. To get this growth of 5-6%, you have to invest all your interest back. Otherwise you will get the same interest every year and growth will be zero.
On the other hand an FMCG company like HUL (just as an example) only reinvests 30% of its profits and has been growing around 10%. This is because of its high ROE.
Also every additional percentage of growth matter for compounding over the longer term. That is why FMCG companies with predictable growth justifiably trade at high PEs even though absolute growth rate might not be very high.
Swimwear volumes contracted by 20% yoy while sportswear by 4%. Men and women’s segments grew 10% and 20% yoy respectively so slowdown all around. Even urban consumers are not buying or may be impact of e-commerce which has been discounting sales compared with Jockey.
One interesting fact I read from Axis securities report was that their inventory days is whopping 130 days and ROCE is 55% and in comparison ROCE of HUL is 133. FCF yield of Page is just 1%. If they reduce the inventory days from 130 to say 60 their ROCE would double. If people who are tracking it closely like @richdreamz can tell me why the inventory days are so high I might be able to make a decision to buy Page.
page is a licensee of Jockey india. If i recall correctly page will always maintain atleast a month of production in its inventory because if there is a lockout in their factory for a month their license may be cancelled. so page always keeps months of inventory.
Even then 130 days is 4 months and 10 days. So if they have a production shut down for 1 month and you keep 1 more month as a margin of safety even then 130 days are too high. I am not sure but I think they must be having their production at multiple places. So even if one plant shuts down other will still keep working.
