Manufacturing And Distribution Expansion Set To Improve Future Efficiency And Market Reach

Key Takeaways

• Strategic production expansion and operational efficiency improvements are set to boost revenue growth and margins via enhanced capacity and economies of scale.
  
• Aggressive market expansion strategies, including geographical and online reach, alongside premium product focus, aim to drive revenue and earnings sustainability.
  
• Declining gross margins, subdued market growth, and inventory issues may hinder Campus Activewear's profitability and expansion efforts amid challenging macroeconomic conditions.

Catalysts

Engages in the manufacture, trading, distribution, and sale of sports and athleisure footwear and accessories for men, women, and kids and children in India and internationally.

• The expansion of manufacturing facilities, such as the Gannaur sole manufacturing unit and the upcoming Haridwar facility for producing high-tech uppers, should enhance production capacity and operational efficiency. This capacity increase is expected to support revenue growth and potentially improve margins by achieving economies of scale.
  
• The company's aggressive distribution strategy, including entering new markets like the southern regions of India and expanding its online presence, should drive revenue growth by increasing market reach and product availability.
  
• Campus Activewear's focus on expanding its sneaker category, which has experienced 116% growth, along with new products and marketing campaigns, targets high-demand segments with premium pricing potential. This should contribute to increased revenue and improved margins.
  
• The strategic decision to manage inventory levels and the focus on reducing non-BIS inventory should support margin stability. As the inventory liquidation impact lessens, this should lead to better gross margins over time.
  
• Implementing price increases selectively in response to rising raw material costs is aimed at mitigating margin compression. This strategy, along with improved product mix and premiumization efforts, should enhance earnings sustainability.

Campus Activewear Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Campus Activewear's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 10.2% in 3 years time.
• Analysts expect earnings to reach ₹2.3 billion (and earnings per share of ₹7.63) by about February 2028, up from ₹1.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 63.2x on those 2028 earnings, down from 69.7x today. This future PE is greater than the current PE for the IN Luxury industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.72%, as per the Simply Wall St company report.

Campus Activewear Future Earnings Per Share Growth

Risks

• The company reported a slight decline in gross margins due to raw material price increases and an adverse product mix, which could continue to affect profitability if not addressed. This impacts net margins and earnings.
  
• The revenue growth of 9.1% year-on-year suggests only moderate expansion, potentially influenced by competitive pressures and an overall subdued market environment, which might limit revenue and earnings growth.
  
• The average selling price (ASP) witnessed a decline of 1% year-on-year, and the footwear ASP remained flat, indicating challenges in passing on cost increases to consumers, potentially affecting revenues and gross margins.
  
• The liquidation of non-BIS inventory and adverse mix has negatively impacted gross margins, and there's a noted presence of some non-BIS inventory still to be liquidated, which might affect short-term financial performance.
  
• The management highlighted a challenging macro environment and subdued demand, which could pose risks to sustained growth and expansion efforts, impacting future revenues and earnings.

Valuation

• The analysts have a consensus price target of ₹317.125 for Campus Activewear based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹390.0, and the most bearish reporting a price target of just ₹260.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹22.7 billion, earnings will come to ₹2.3 billion, and it would be trading on a PE ratio of 63.2x, assuming you use a discount rate of 14.7%.
  
• Given the current share price of ₹271.35, the analyst price target of ₹317.12 is 14.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.