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Re-rating to sustain for RMG exporters…

Textile stocks, in the past one year, have witnessed a significant re-rating with readymade garment exporters (RMG) stocks like KPR Mills and Gokaldas Exports (GEL) rallying ~6x since our initiation reports. A material improvement in financial performance (RoCE for KPR improved 440 bps to ~24% in FY21), deleveraging of b/s (D/E for GEL declined from 0.9x to 0.5x) and robust order book for the companies have been key triggers for the re-rating. We continue to like KPR and GEL to play the structural long term story in the apparel export space owing to their strong business models and long standing relationships with marquee global clients.

Capacity enhancement to support long term growth story

Apparel exporters, in the past couple of quarters, have witnessed strong customer interest owing to many large global retailers diversifying their sourcing and reducing dependence on China. Overall order booking from India has increased rapidly due to the China+1 strategy of global retailers. Indian apparel players are exploring opportunities to expand their garmenting capacities to capitalise on long term growth opportunities. Both KPR and GEL have embarked upon greenfield capacity expansion. We bake in cumulative capex worth | 700 crore for both companies (KPR ~| 480 crore, GEL~| 220 crore) in FY22-24E. Majority of the capex requirements are expected to be funded through internal accruals. With an average asset turnover of ~3x we expect companies to generate incremental revenue worth ~| 2000 crore (KPR garmenting division | 1250 crore and GEL | 750 crore).

Large capacity positions KPR to benefit from enhanced demand

KPR is among select vertically integrated textile players in India having India’s largest knitted garment manufacturing capacity. In Q3FY22, it commissioned one of its largest garmenting capacity in Tamil Nadu (42 million pieces) post which its total capacity has grown by 37% to 157 mn pieces. With robust demand for athleisure wear, the company expects new capacity to be fully ramped up in the next eight to 12 months. Post 50% ramping up of new capacity, KPR will continue on its trajectory of adding ~40 mn pieces. We expect KPR’s garmenting division to benefit from enhanced global demand and report revenue CAGR of 27% in FY21-24E.

Gokaldas Exports scripting turnaround

Gokaldas focuses on manufacturing complex garmenting products (mainly woven garments) with capacity of ~30 million pieces (220 manufacturing lines). It has embarked on a capex of | 340 crore over the next four years (FY25E), which will have the potential to generate revenue worth | 1300 crore. Its production is currently operating at peak utilisation with capacity fully booked for Q3FY22E, Q4FY22E. During the quarter, GEL set up two units in Karnataka (potential revenue worth | 160 crore) and initiated work on a new greenfield unit that is expected to be commissioned in early FY23E. We build in revenue CAGR of 21% in FY21-24E.

Valuation and Outlook

We believe robust opportunities for Indian apparel exporters (current market share of ~5%) warrant a re-rating given strong and sustainable earnings visibility. We roll our estimates to FY24E and build in EBITDA CAGR of 21% and 36% in FY21-24E for KPR and GEL, respectively. Subsequently, high asset turnover and capital efficient business model is expected to translate to enhanced RoCE for KPR (~29%) and GEL (~17%) by FY24E. We maintain our BUY rating on KPR Mill and Gokaldas Exports with a revised target price of | 820 and | 425, respectively.

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