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Structural long term play in apparel export space…

About the stock: Gokaldas Exports (GEL) is one of India’s leading apparel exporters with an annual capacity of 30 million pieces. Gokaldas focuses on manufacturing complex garmenting products that insulate it from other price based competition.

* Impressive clientele of leading international brands with ‘GAP’ and ‘H&M’ being major contributor to revenues. US contributes ~65% of sales

* Under the leadership of the new MD (post exit of Blackstone in FY18), Gokaldas has scripted a successful turnaround of its business operations.

Q1FY22 Results: Strict lockdown measures in Karnataka (factories shut) for most of the period in Q1FY22 had a material impact on production for Gokaldas Exports.

* Revenue declined 35% QoQ to | 241.0 crore (up 3% YoY)

* Recognised RoSCTL incentives for Q1FY22 and also recognised the balance income to the extent previously not recognised in Q4FY21 (~| 4 crore)

* EBITDA margins remained flattish QoQ at 7.4%, with absolute EBITDA

What should investors do?

Since our initiation report, the stock price has appreciated ~3.4x (from | 60 in September 2020 to | 202 in August 2021).

* We like GEL as a structural long term story to play the apparel export space. We maintain our BUY recommendation on the stock

Target Price and Valuation: We value GEL at | 280 i.e. 15x FY23E EPS.

Key triggers for future price performance:

* Production currently operating at peak utilisation levels with robust order book for the next six months

* Demand from the US apparel market (key market from GEL) continues to remain healthy (trading ahead of pre-Covid levels)

* Planned capex of | 120 crore over the next two years that will have potential to generate incremental revenue worth | 450 crore (asset turn: ~4.0x)

* B/s strength continues to remain stable with net debt/equity: 0.6x

* Enhanced government focus on apparel exports and China +1 strategy of global brands provide long term growth opportunity for players like GEL.

Alternate Stock Idea: Apart from GEL, in our textile coverage we also like KPR Mill.

* KPR Mill is among select vertically integrated textile players in India having one of India’ largest knitted garment manufacturing capacity of 157 million pieces. It has two major capex projects in the pipeline worth | 750 crore towards garmenting facility (| 250 crore) and ethanol facility (| 500 crore)

* BUY with a target price of | 2310

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