The Hindu Business Line : Gokaldas Exports

Shareholders of Gokaldas Exports can tender their holdings to the open offer being made at Rs 275 per share by the Blackstone Group. The offer price is at about a 10 per cent premium to the current market price of Rs 248.

The scope for upside beyond this level is limited in the near term as a stronger rupee weakens the earnings outlook for the year ahead. The stock appears fairly valued at the offer price, at about 15 times its likely FY-08 per share earnings.

Blackstone’s acquisition of a 50 per cent stake in Gokaldas Exports from its promoters was the first by a private equity investor in the industry. It may well signal the leading private equity player’s positive outlook on the long-term prospects of the textile industry.

The trend to source apparel from low-cost destinations such as India is likely to continue. Gokaldas Exports, India’s largest garment exporter, is best placed to capitalise on it, with its focus on niche areas such as sportswear and winter clothing.

However, in the near term, the prospects are dim with competitive pressures mounting. An appreciating rupee renders Indian apparel exports uncompetitive compared to the likes of China, Bangladesh and Sri Lanka, resulting in a loss of potential orders.

Tackling rising rupee

Further, it exerts even more pressure on margins, which are already beaten down due to competitive pricing. Gokaldas Exports, which bills its exports in US dollars, estimates that the 9 per cent rupee appreciation between April and June wiped off 50 per cent from what would have otherwise been a profit of Rs 20 crore in the first quarter of this fiscal.

Gokaldas Exports derives 55 per cent of its revenues from the US and 35 per cent from Europe. It is trying to convert some of its customers to Euro pricing and others to rupee billing. But in a largely buyers market, this strategy is likely to be met with resistance.

Gokaldas has managed to increase prices by about 8 per cent so far, through this strategy. But effecting further hikes may prove difficult.

The company is beginning to turn to the domestic market, which now accounts for about 5 per cent of its Rs 1,000-crore revenue. While the domestic outlook is bright as retailers continue their expansion drive, this segment is unlikely to make a significant contribution in the near-term.

Limited near-term upside

One prospect that could work in its favour in the near-term is if Gokaldas uses Blackstone’s expertise to acquire companies outside India. This will bring in inorganic growth and may help tackle some of the pressures that Indian companies are facing. Gokaldas also hopes to leverage Blackstone’s global network to gain new clients.

Shareholders should also note that the outlook for the stock could quickly change if the direction of the rupee’s movement changes. Tendering shares to the open offer, however, appears an appropriate course of action for the near term.

The promoters will continue to hold 20 per cent after Blackstone’s acquisition. Given the high acceptance ratio (for every three shares tendered two are likely to be accepted,) it is likely that most shareholders will tender their shares to the offer, especially considering the feeble interest in the sector currently. In that event, the stock may not be able to attract sufficient trading volumes.

The offer closes on October 24. The lead manager is Kotak Mahindra Capital.

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