Gokaldas Exports Rs 815
Indian apparel export industry is sitting at an inflection point with global supply chains shifting from China, Bangladesh, Vietnam etc to India, gradually but surely. Any company which can grab this opportunity can reward its investor handsomely. Gokaldas Exports (Gokex), the second largest apparel exporter with around 2400 Cr revenues in FY24 therefore merits attention. It supplies garments to brands such as GAP, Abercombie & Fitch, H&M, Puma etc. These brands have a strong relationship with their vendors which provides a decent moat for existing players from competition. Listed below are a few knowns and unknowns about Gokex for an investor wishing to explore it further.
POSITIVES
1. India and Gokex gaining from China+1, Bangladesh+1, Vietnam+1
As per Gokex management, there is a secular and steady shift by global buyers to India. The relevant comments in Q3FY25 conference call are paraphrased here under:-
‘The longer term outlook is favorable, supported by shift in global sourcing away from China, Vietnam and Bangladesh, a trend towards supplier consolidation amongst efficient, well-capitalized players and ongoing supply side instabilities in various countries’
‘The cost in China, Vietnam are higher than India. If India is at $200 per month wages for workers, the cost in Vietnam is in excess of $300. That is point number one. And most players in Vietnam are people who have moved their operations from China to Vietnam.
So, with rising geopolitical tensions, trade sanctions being threatened etc, there is a fear that it may impact Vietnam also because there is a lot of dependence in Vietnam for fabric from China.’
‘Even if you look at trade balance between US and some to these countries it is – the trade imbalance with Vietnam is also very high…So all of this indicates that there is a little bit of risk building up and some amount of diversification can happen, will happen. So there are options that open up for players like us’
‘As far as Bangladesh is concerned, there has been, of course, political instability there, which is resulting in some supply or some retailers or rather many retailers trying to diversify away from Bangladesh, not a whole lot but at least to reduce dependence or reduce incremental business being placed there and they are seeking other alternative options and India is very much in consideration. So overall, I think from Gokaldas standpoint, we are seeing some tailwind on account of all of these.’
2. Its African subsidiary Atraco has duty free access to the US market
Over 25% of Gokex’s consolidated topline comes from Atraco, whose acquisition was completed in Jan 2024. Atraco with manufacturing capacities in Kenya and Ethiopia enjoys duty free access to the US markets which gives it a competitive advantage over other countries. Management thoughts regarding this issue as per Q3FY25 conference call are as follows:-
‘There is so much news coming from the US that it is hard to keep up. One doesn’t know what exactly are the tariff plans. But the feeling one gets is that Africa may be spared tariffs…So, unless for some strange reason it’s pulled out, which I don’t see any reason and there is no competitive situation between US and African countries, nor do they enjoy trade surplus. So, we don’t believe that will change. And if there is tariff increase from the regular exporting nations, then the tariff delta will widen, which will only make Africa more attractive.’
3. India’s FTA with UK is expected to remove 12% import duty on Indian garment exports, a status that Bangladesh enjoys, thereby benefiting Indian exporters including Gokex
In 2024, Bangladesh garment exports to UK were approx. $4.3 Bn vs $1 Bn by India mainly due to 12% import duty advantage. Whenever the FTA is signed, it will provide major fillip to Indian exporters.
GREY AREA
Over 75% of Gokex’s topline comprises of exports to the US. Trump has repeatedly called out India as ‘Tariff King’ and has set the deadline of Apr 2, 2025 for imposing retaliatory tariffs.
Just in case, Indian textile exports are imposed discriminatory tariffs compared to other major exporters like China, Bangladesh, Vietnam etc, it will affect garment exports negatively.
This is a major unknown as of now and clarity will emerge only in the coming weeks/months.
NEGATIVES
1. Gokex is working at 100% capacity utilization thereby limiting scope for high growth
It is almost a case of ‘water water everywhere, not a drop to drink’. In words of Gokex management – ‘At the moment, all our capacities are fully utilized…in fact, we have enough enquiries and we are turning down demand because we don’t have enough capacity to serve’.
Gokex has to continuously increase capacity, organically or inorganically. This suppresses return on capital in the short to medium term. Ready made garments being a heavily labour dependent industry, is not amenable to quick ramp up of capacities. Easiest way to go this is to go for double shifts but as per the management – ‘We will experiment with the second shift and we will see how the labour market responds to that going forward…but in most of our factories, it is not a possibility’.
At being asked how growth will pan out for the company to utilize the benefit from shift in the global supply chain, so should investors assume 10% to 15% growth rate, management agreed to the stated figure.
2. Managerial remuneration is high and proposal to grant stock options to the MD were struck down by the shareholders
MD’s existing salary is almost 10% of the company’s consolidated profits before tax which is already on the higher side.
Over and above that, the company wanted to reward the MD by granting stock options in excess of 1% of company’s capital to its MD at a discount of up to 20% from the current market price in Jan 2025. Shareholders were advised to vote against the resolution by proxy advisor firm IiAS and eventually the proposals were dropped because approval of 75% shareholders could not be obtained.
3. Valuations seem to be higher compared to the mid teen growth expectations because of capacity constraints
At FY25 estimated EPS of Rs 22, at current price of Rs 815, Gokex is trading at a PE of 37 which appears high relative to present growth and return on capital metrics.
Gokex is one of the leaders in garment exports but is struggling to benefit from the expected shift of the global supply chain. It could become a worthy candidate for investment if it is able to ramp up its capacities faster than it currently plans to.