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Healthy recovery on the back of robust order book

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

Q2FY22 Results: GEL reported one its best quarterly performances driven by healthy demand in the US apparel market.

* Revenue grew 30% YoY to | 443.8 crore (up 84% QoQ)

* The company maintained its gross margins at ~50% (up 140 bps YoY). On account of positive operating leverage and foreign exchange gain, GEL reported one of its highest EBITDA margins of 11.7% (up 285 bps YoY)

* NWC days increased to 90 days in Q2FY22 (vs. 85 days in FY21) due to higher RM inventory holding for Q3 production

What should investors do? Since our initiation report, the stock price has appreciated ~3.6x (from | 60 in September 2020 to | 215 in October 2021).

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

Target Price and Valuation: We value GEL at | 300 i.e. 18x FY23E EPS

Key triggers for future price performance:

* Production is currently running 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 (trending ahead of pre-Covid levels)

* Charted out capex of | 340 crore over the next four years (by FY25E) that will have potential to generate incremental revenues worth ~| 1350 crore

* The recent fundraise (QIP worth | 300 crore) would further strengthen the liquidity position wherein funds would be utilised towards accelerating capex trajectory, repayment of borrowings and funding WC requirements

* 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 having one of India’ largest knitted garment manufacturing capacity of 157 mn pieces

* BUY with a target price of | 575

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