Q4 margin show and recovery hopes drive gains in Campus Activewear

From its lows over the past month, the stock of footwear major Campus Activewear gained 13 per cent to Rs 280.4 a share.

The gains came on the back of better than expected operating profit margins in Q4, reduction of debt and expectations of market share improvement.

The company expects volume growth, which has thus far missed expectations, to recover going ahead on the back of multiple triggers.

The company’s revenue performance was broadly in line with a 4.6 per cent growth in revenues, brought on by a 4 per cent improvement in volumes and a marginal gain in realisations.

Growth was led by the trade distribution channel, which grew 7.5 per cent, while the direct-to-consumer channel declined 6.5 per cent.

On the profitability front, gross margins fell by 155 basis points over the year ago period and 140 basis points on a sequential basis to 49.9 per cent.

This was on account of a 100 basis points impact and was due to lower average selling prices.

There was also a 40 basis points one-time impact due to liquidation of old inventory.

The company, however, surprised the street with robust growth in operating profit and expansion in margins.

While operating profit was up 13 per cent, margins expanded by 130 basis points Y-o-Y to 17.6 per cent.

The gains on the operating level were on account of a reduction in factory overhead, lower advertising spends and a rebate from online commissions.

The company expects the advertising and promotions spends to remain elevated at 6-7 per cent of sales and is eyeing a margin band of 17-19 per cent going ahead.

In addition to the company’s initiatives to turn around the multi brand outlet channel (distributor consolidation, exclusive/channel-specific design launch, and optimised schemes/incentives) which reflected in the Q4 show, Kotak Securities expects the renewed focus on the economy segment to help the company.

The move could help it recoup market share lost to small/regional brands in past few quarters and defend market share in the event of liquidation of non-BIS inventory by peers.

The brokerage has an add rating with a target price of Rs 285.

In addition to the growth prospects, an improving balance sheet is positive for the company.

It has repaid borrowing of Rs 156 crore in FY24, thereby achieving net-debt free status during FY24.

The company indicated that there has been a significant improvement in its working capital days from 108 days in FY23 to 79 days in FY24 led by lower inventory and conscious trimming of receivable days.

The street will keep an eye on volume growth going ahead.

The management believes the transition phase is largely done and a combination of factors such as new launches, increased brand spends, renewed thrust on mid-economy segments, consolidation of distribution channel, tailwinds from BIS implementation over long term should help revive volume growth.

According to analysts led by Mehul Desai of JM Financial, “Volume delivery has lagged expectation; pace of recovery in the same and sustainability of margins will be a key monitorable for the stock in the near term.”

The company has a buy rating with a target price of Rs 285.

Motilal Oswal Research has reiterated its buy rating on the stock with a target price of Rs 295.

The brokerage points out that the stock had corrected sharply and was down 24 per cent from January to lows in March, before it started its recovery.

However, its strong market position and a long runway for growth should result in market recovery in H2FY25, it added.

At the current price, the stock is trading at 49 times its FY26 consensus earnings estimates.