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Shanthi Venkataraman

Clientele that includes top brands such as Tommy Hilfiger should drive growth - Shashi Ashiwal .

THE stock of Gokaldas Exports, after recording strong gains on listing and in the initial weeks of trading, has cooled off over the past few of days, on the back of a lower-than-expected rise in profits.

The stock, however, continues to trade at a rich valuation of 21 times the expected earnings for FY-06.

Given the relatively larger scale of its operations, strong fundamentals and paucity of pure-play garment exporters in the listed space, the stock is likely to continue to command premium valuations.

Despite robust revenue growth, Gokaldas Exports' performance fell short of expectations because of a decline in operating margins. The pressure on margins is unlikely to let up in the near term, as the pricing situation is likely to be fluid.

There are, however, a couple of factors that augur well for the company over the long term. Expansion plans are on track.

With a buoyant export market, the additional capacities would provide a boost to revenues. A widening of product offerings and an expanding client profile are also likely to ensure that the company remains a preferred vendor.

Shareholders can, therefore, stay invested in the stock.

Revenue-led growth

The group consolidated its operations spread across several firms under the fold of Gokaldas Exports in FY-05. For comparison, the consolidated numbers of FY-04, as disclosed in the offer document, have been considered.

The removal of quantitative restrictions on textiles and clothing in 2005 has resulted in several companies registering a sharp growth in volumes.

Mr Madanlal Hinduja, Chairman.

Gokaldas, one of the larger garment exporters in India, is no exception. Having recorded a strong revenue growth of 33 per cent in FY-05, the company is set to log robust revenue growth over the next couple of years too.

The company's expansion plans, for which it mobilised funds from the public in April, appear to be well underway.

As demand appears to be strong on the export front, the additional capacities would provide a kicker to revenue growth. Gokaldas already has orders worth Rs 400 crore for the autumn-winter season, which accounts for a little more than half its annual revenues.

Gokaldas also outsources some of its production to meet demand, which would fuel its revenue growth till its capacities are commissioned.

The growth in volumes is, however, likely to be at the expense of margins, which declined by 160 basis points to 8 per cent in FY-05.

With interest and depreciation cost also on the rise, profits before tax grew by a more sedate 16 per cent.

The pricing pressure on garment exports is likely to persist in the near term, as importers re-align their sourcing arrangements.

Gokaldas is also likely to sacrifice some of its margins during this period to gain market share. Over the next year or two, revenue growth is likely to be the major driver of earnings.

Wider clientele, product range

Despite suffering a decline in margins, Gokaldas may be better placed to protect its margins over the long term than its peers. A part of the decline in margins this year, for instance, could be attributed to higher costs incurred in obtaining quotas in 2004, as the company strove to widen its client base.

Gokaldas claims to have added several customers over the past year; it already caters to renowned brands such as Nike, GAP, Tommy Hilfiger and Abercrombie & Fitch.

A diversified client base would enable Gokaldas achieve a mix of volume-driven and premium clothing.

Gokaldas is also broadening its product bouquet. As a supplier of outerwear such as jackets, parkas and ski-wear, Gokaldas sets itself apart from exporters of mainstream clothing items such as T-shirts, skirts and blouses.

About 50 per cent of its sales come from these items. Gokaldas now also offers knits, denim bottomwear and formal trousers.

A wider complement of products would help Gokaldas expand its market share. The extent of price declines in the post-quota months has varied across categories.

As the share of these newer products increase, the price fluctuations are likely to even out across categories, offering some protection to Gokaldas' margins.

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