The Hindu Business Line : Gokaldas Exports: Buy

Fresh capacities, a diversifying product and client mix and the identification of the domestic retail market as a new revenue stream would ensure that revenue growth remains in strong double-digit.

The Wearhouse store at Mangalore. Demand from domestic retailers will be an additional source of revenue.

An investment can be considered in the stock of Gokaldas Exports, India's largest garment exporter. The extension of TUFS is likely to benefit companies such as Gokaldas, which are on an ongoing expansion drive. Import of fabrics is likely to be cheaper with the cut in Customs duty. The inclusion of income from its export-oriented units under the Minimum Alternate Tax may not have too adverse an impact on net margins, considering that the company already bears an effective tax rate of more than 10 per cent.

From a long-term perspective, the stock valuations are reasonably attractive. The stock trades at 10-11 times its likely FY-08 per-share earnings, assuming its expansion programme remains on track. Fresh capacities, a diversifying product and client mix and the identification of the domestic retail market as a new revenue stream would ensure that revenue growth remains in strong double-digit. Gokaldas has been fairly conservative both in its expansion strategy and growth targets. We are inclined to view this positively, however, as it limits the downside. The stock may be suitable for investors with modest return expectations of 15-20 per cent.

Capex plans

In the first nine months of this fiscal, Gokaldas invested about Rs 65 crore in expanding its facilities. Four factories came up in the third quarter in Chennai and in and around Bangalore; utilisation is likely to be ramped up over the next couple of quarters.

A plant in Mysore and a bottoms facility near Bangalore are likely to become operational in April 2007, while a unit in Hyderabad is likely to come up later this year. By the end of FY-08, Gokaldas' annual garment capacity would go up by about 25 per cent to 30 million pieces.

As Gokaldas is operating at optimum capacities, there is room for volume growth once these capacities come on stream.

Domestic retail, a new avenue

Ramping up production to full utilisation levels should not be much of a problem for Gokaldas, which recently set its eyes on the rapidly-growing domestic market as well. Gokaldas' retail initiative,

The Wearhouse, has not made much of an impact beyond the South Indian market.

Given its reputation as a quality garment exporter, the company, however, appears well-placed to capitalise on the demand from domestic retailers such as Reliance and Bharti that will be sourcing locally for their labels.

Diversifying product mix

Gokaldas has a product portfolio that is fairly untapped by other organised players, with jackets, coats, windcheaters, ski wear, sportswear forming a significant portion of its exports.

Given the fashion edge these products tend to have, Gokaldas is less vulnerable to severe price undercutting that takes place in volume-based segments such as cotton knitwear. It has, however, been diversifying its product portfolio and ramped up the contribution of trousers, chinos and other bottomwear and casual wear and babywear.

A new suits facility is likely to go on stream this quarter. Gokaldas is also in talks with an international player for a joint venture to start a apparel line. It has also diversified its customer base and appears to have made greater inroads into Europe since its public offer.

With an expanding number of customers, including those of repute, there is likely to be demand for its new products as well.

More Stories on : Stocks | Recommendation | Readymade Garments

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page