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Gokaldas Exports – Turnaround Story


Company Name – Gokaldas Exports Limited (Gokaldas Exports)


Current Share Price – INR 380 (January 23, 2023)


Market Cap – INR 2,304 cr


 

1. What is interesting about the stock?

Gokaldas Exports is a turnaround story. But it isn’t the first one.


Probably the most well-known turnaround success story is the rise of the tech company Apple.


Apple went into a decade-long downward spiral after CEO Steve Jobs left the company in 1985 and lower-priced products from competitors, like Microsoft Windows, took over the personal computer market.


For 12 years its innovation, popularity, and sales continued to plummet, almost reaching bankruptcy until Jobs rejoined the company in 1997.


Apple was able to turn itself around with a successful rebrand and new technology like the first iMac. It also launched iPhone which drove revenue and profit.


Now, Apple is one of the most well-known and valuable companies in the world, with a current market cap of USD 2.2 trillion.


Almost like a fairytale!


Coming back to Gokaldas Exports.


The story started in 1978 when Gokaldas Exports was established as a partnership firm by Mr. Jhamandas H. Hinduja. The Company converted into a public limited company in 2004 and got listed in April 2005. Gokaldas Exports was one of the largest apparel exporters from India. Blackstone, the largest private equity fund in the world, acquired a 51% stake (majority control) in the Company at a share price of INR 275 with the erstwhile promoter family continuing with a 20% stake. Private equity made an open offer and ended up with a ~70% stake in the Company. It was one of the earliest buyout deals in India.


For some reason, Blackstone continued to give management control to the erstwhile promoters (Hinduja family) up to 2011. Revenue stagnated during this time but the profit after tax fell from ~ INR 70 cr in 2007 to a loss of INR 90 cr in FY11. The share price also crashed to INR 90 in March 2011 which was ~33% of the acquisition price. Finally, in 2011, the erstwhile promoters exited and Blackstone took management control of the business. The private equity fund tried turning around the business and finally business became profitable in FY15 but the share price crashed to INR 40-50 in March 2015. To add to the misery, Company again went into losses in FY17 and FY18.


Blackstone started liquidating its position from 2014-17 in tranches at prices from INR 67-126 which was a big haircut vs the acquisition price. Losses for the fund were higher in USD as INR had depreciated ~50% vs USD in the investment period.


Fund was left with a ~40% stake in April 2017 when Mr. Mathew Cyriac, the former co-head of Blackstone’s private equity business in India, bought a remaining stake in Gokaldas Exports from Blackstone for a share price of ~ INR 63. Matthew asked his IIM Bangalore batchmate (Sivaramakrishnan Ganapathi) to help him turn around the business. Sivaramakrishnan Ganapathi joined the Company as Managing Director. He focused on improving operations, adding manufacturing operations & new customers, and increasing the wallet share with the existing customers. Gokaldas Exports started making profits in FY19 and increased profits to INR 117 cr in FY22 (higher than profit at the time of the Blackstone acquisition).


Company operates from more than 20 manufacturing facilities with more than 28,000 employees, primarily in and around Bangalore. Major customers of the Company are GAP, Columbia, Carhartt, H&M, and Puma. They together account for 70-75% of revenues. GAP is the largest customer and contributes 20-22% of revenues. Wallet share of the top 3 customers has increased from 42% in FY18 to 58% in FY21. Category sales in FY22 were:

  • Casualwear – 39%

  • Outerwear – 41%

  • Bottomwear – 9%

  • Sportswear – 10%

Gokaldas Exports is increasing its capacity by ~50% over the next couple of years from 36 million pieces/annum to 54 million pieces/annum with entry into knitwear.


The largest Indian export player (Shahi Exports) is more than 4x of Gokaldas Exports in terms of revenue.


Why invest in Gokaldas Exports?

  • Professional management

  • US players are pursuing China + 1 strategy which can benefit the Indian players

  • Incremental capacities to accelerate growth momentum

  • Starting a JV in Bangladesh to take benefit of zero duty imports in Europe

2. Key Historical Financials

  • Company revenue grew 48% in FY22 and 28% in Q2FY23 on a YoY basis

  • EBITDA margins have increased to 11-12% from FY22 onwards – margins for Shahi Exports are also in this range

  • Cash flow convertibility (CFO/EBITDA) was poor in FY22 with a jump in inventory which has reduced in September 2022

  • Working capital days have improved from 108 days in FY18 to 73 days in FY22

  • ROE/ROCE are healthy at 23%/18% in FY22 – but it may not be prudent to focus on this as the Company had made losses for a long duration which reduced the equity base

  • Cash balance of ~ INR 370 cr as of September 2022

3. What is my view on company valuation?


The share price of the Company has jumped ~6x over the last 3 years duly supported by an EBITDA increase of ~ 4x implying an increase in EV/EBITDA multiple by ~ 1.5x (debt has reduced over this period).


Company’s tax rate has been low over the last few years as it has utilized carried forward losses so using P/E multiple may not be appropriate for analysis.


Gokaldas Exports trade at an EV/EBITDA multiple of 8.4x x vs KPR mills at 13.2x. Valuation looks reasonable for the business which can tend to be cyclical and faces volatility in the input raw material prices.


The Company’s customers are facing a tough environment in the US with recession fears driving lower customer spending and also have high inventory which is being liquidated. So, the Company could face headwinds for the next few quarters giving a good entry point for long-term investment. The imminent exit of Mr. Matthew (Clear Wealth) could also be a potential overhang on the stock in the medium term.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • A prolonged or deep recession in the US could significantly impact the business

  • Highly fragmented and competitive market both locally and internationally

  • Wallet share loss of key customers – GAP has recently started doing business with Shahi Exports

  • Exposed to FX risk – impacts the operating margin

  • High management compensation – MD has a salary of ~ INR 7 cr in FY22 (~6% of PAT); an increase of 58% vs FY21 (median employee salary increased by 6.5%)

 

About the Author


I have over 17 years of experience in equities with a detailed focus on autos, auto components, and media. I am an engineer and have an MBA from a premier institute in India.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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