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Headwinds in H2FY23 could subdue performance

About the stock: Gokaldas Exports (GEL) is one of India’s leading apparel exporters with an annual capacity of 36 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 ~80% 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

Q1FY23 Results: Gokaldas Exports (GEL) reported resilient performance in Q1FY23, despite various challenges.

* On a significantly high base of Q4FY22 revenue grew 4% QoQ (up 153% YoY) to | 610.6 crore. The growth is expected to be driven by a mix of price hikes and contribution from its recently commissioned plants in Karnataka.

* On a sequential basis, gross margins remained flattish at 45.4% (down 675 bps YoY). Employee expenses grew 11% QoQ to | 170.7 crore mainly on account of wage hike (~5%) and capacity expansion. Subsequently, EBITDA margins declined by 130 bps QoQ to 11.8% (up 439 bps YoY).

* PBT declined by 3% QoQ to | 50.9 crore.

* What should investors do? Since our initiation report, the stock price has appreciated ~6x. GEL witnessed significant re-rating on the back of consistent outperformance despite various headwinds.

* Demand headwinds in key markets in H2FY23 could subdue revenue growth. However, we believe GEL is a long term play in the apparel export space. We maintain HOLD recommendation on the stock

Target Price and Valuation: We value GEL at | 415 i.e. 16x FY24E EPS.

Key triggers for future price performance:

* Production currently operating at peak utilisation levels with steady order book for the next quarter. Order book traction for H2FY23 will be critical.

* Charted out capex of | 350+ crore over the next four years (by FY25E) which will have potential to generate incremental revenues worth ~| 1300 crore ? With the recent fundraise (QIP: | 300 crore), the company has strengthened its balance sheet with repayment of ~| 300 crore debt, post which GEL has become net debt free (net cash surplus: | 105 crore)

* 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

* it has consistently maintained average RoCE of ~20%

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