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ATRACO acquisition likely to boost revenues

Gokaldas Exports (GEXP) has signed a definitive agreement with the shareholders of UAE-based apparel maker, ATRACO, to acquire 100% of the latter’s equity for a total consideration of up to USD 55mn funded through debt (73%) and internal accruals (27%). ATRACO exports 95% of its production to the US (primary market for GEXP) and has nearly mutually exclusive customer base with GEXP. Hence, we believe this deal provides GEXP an opportunity to leverage ATRACO’s existing relationships for cross-selling opportunities. Given the duty-free access to US from Kenyan operations coupled with huge cross-selling opportunities, we now value GEXP at 18x FY25E EPS (earlier: 17x) and value the ATRACO business at 20x FY25E EPS to arrive at a revised target price of INR 855/sh (earlier: INR 595). Maintain BUY.

Deal at an attractive valuation; Bangladesh capex not on priority

GEXP has agreed to buy ATRACO at an equity value of USD 55mn (~INR 4.5bn). At ATRACO’s consolidated PAT of USD 7mn (~INR 590 mn) in CY22, the implied P/E (ex. cash) works out to ~7.6x vs ~18x of GEXP (based on closing price of 28th Aug’23). Ref exhibit 2, we have arrived at FY25E EBITDA of ~INR 1bn implying RoCE of ~22% vs ~18% FY25E RoCE of GEXP’s existing business. Management is not keen on proceeding with the Bangladesh capex currently given the upcoming minimum wage hike (40-50%) in the neighbouring country, which could dilute its cost competitiveness.

ATRACO acquisition is potentially value-accretive

Management aims to add USD 20mn in revenues by CY25 on the back of capital expenditure of USD 4mn (on fresh line at Kenya) in CY24 in ATRACO. Further, led by operating leverage benefits, improvement in operational efficiencies, raw material sourcing synergies (cotton), etc., management expects EBITDA margin improvement of 100-150bps over the next 2-3 years. Ref. exhibit 3, we have consolidated ATRACO’s proforma financials and find it potentially EPS-accretive by 30% in FY25E. We value ATRACO at 20x FY25E EPS and the existing GEXP business at 18x (earlier: 17x) FY25E EPS to arrive at a revised target price of INR 855/sh (earlier: INR 595).

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