The Hindu Business Line : Gokaldas Exports: Invest at cutoff

THOSE who seek an exposure to the garment sector, a main beneficiary of the post-quota regime, can consider subscribing to the initial public offering of Gokaldas Exports.

The company is one of the larger players in an industry that is extremely fragmented. Given its scale of operations, the long-term relationship with big brands and a wide product range, it is likely to remain the vendor of choice for buyers sourcing from India, even as competition hots up at the global level.

While robust demand should buoy revenues, utilisation of the planned additional capacities is likely to add significantly to the revenue base.

Gokaldas' ability to add more clients to its already illustrious list, maintain margins in a stiffly competitive market and scale-up further to gain significant economies would drive revenue and earnings growth.

At Rs 425, the upper limit of the price band, the offer price values the stock at about 15 times its expected FY-05 earnings per share. This compares well with its immediate peer in the listed space, Zodiac Clothing, which trades at about 30 times and is a much smaller player, in terms of revenues.

Gokaldas is focussed solely on the export market. Its customers include popular brands such as Nike, GAP, Old Navy, Banana Republic, Tommy Hilfiger, and Abercrombie and Fitch.

With a consolidated revenue base of more than Rs 500 crore, Gokaldas has been among the more profitable players in the garment export business. It has 12 wholly-owned subsidiaries, some of which are loss-making.

Their contribution to the group's turnover is, however, not very significant. On a consolidated basis, revenues grew at a compounded annual growth rate of about 20 per cent from FY-2000 through FY-04, while earnings rose 24 per cent.

Scaling up to fuel growth

With market access no longer restricted, Gokaldas is likely to reap the benefits of larger orders. Revenue growth is now constrained by capacities.

While 38 manufacturing units and a labour force of 31,000 places it among the larger players in India, Gokaldas is not big by global standards. It has been gearing itself in recent years by ramping up capacity. Despite this, utilisation has consistently touched 90 per cent capacity, and this, in a restricted market.

With the proceeds of this offer, Gokaldas plans to set up four more units, which would take the total number of factories, including supporting facilities, to 47. The additional capacities that would become operational over the next two years would help absorb the growth in volumes, giving revenues a boost.

Coping with pricing pressure

While capacity expansions would ensure that it copes with the additional demand, there is likely to be pressure on pricing, as competition increases.

Even as revenues expand, there may not be a corresponding rise in operating margins, due to the pricing pressure.

Gokaldas is, however, equipped to handle the competitive pressures, as, in the past, non-quota markets accounted for 40-50 per cent of its revenues. It may, therefore, be better placed to handle the stiff competition vis-à-vis exporters who have only had an exposure to restricted markets.

As a garment maker, its fortunes are also less governed by fluctuating raw material prices of cotton or synthetic fibres, which is the case with spinning and fabric companies.

Fabric accounts for 70 per cent of its raw material, which Gokaldas largely imports. As a large buyer, it is able to source fabric at competitive prices.

Widening the client base

With the end of quotas, Gokaldas now has the opportunity to diversify its clientele. Its revenues have, till now, been largely driven by bulk orders from a handful of buyers.

A wider clientele, while reducing customer concentration, would also mean increasingly catering to buyers with shifting loyalties, which would subject them to a greater degree of pricing pressure.

Gokaldas is, however, likely to continue working largely with the big buyers, as they provide large order runs and, therefore, greater cost-efficiencies. Also, Gokaldas boasts of an interesting range of products.

Besides the usual range of shirts, trousers and women's wear, it sells jackets, parkas, skiwear, windcheaters and the like, which sets it apart from most other outfits and makes it a preferred vendor. The wide product range also ensures that it has a market for all seasons.

Background to the offer

As many as 31.25 lakh shares of Rs 10 each are on offer. The price band is Rs 375-425.

The post-offer equity would be Rs 17.18 crore. The promoters' stake would decline to 76.90 per cent.

The proceeds of the issue would be used to fund the expansion and modernisation plans and repayment of working capital loans.

The offer opens on March 30 and closes on April 6. Enam is the lead manager to the issue.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Open offer for ACC: Accept; Buy at lower levels

Oil refining sector: Implications of Aramco's interest

Growth stocks: Steroids for the portfolio

Franklin India Dynamic PE Ratio Fund: Hold

Alliance Capital Tax Relief: Sell

SIP is best when you're in for the long haul