Company has closed in massive QIP of Rs 300 crores which is roughly 1/3rd of the pre-money market cap.
Marquee names of Mutual Funds among the allottees.
So far Clear Wealth seem to have done a good job of turning around the operations of the Company with notable improvements in number of metrics such as product quality parameters, increase in % business from top clients and ofcourse operating margins.
With the infusion of funds hopefully retiring a lot of the heavy debt and planned capex of more efficient factories - there is scope for profit expansion in next few years - as long as execution remains on track.
The Q2 results clearly demonstrate that the company will be at least 2x its size in another 18 to 24 moths with further improvements in margins
Company delivered another strong quarter and is clearly gaining market share in US exports over competitors.
Another good news is post QIP - Company has reduced Gross debt in half and in fact is now Net Debt free at least for now - before the next phase of capex kicks in.
Company is now operating at 10-12% operating margins - aided by increase in volume - to which Clear Wealth management deserves credit as they have delivered what they had promised in con calls. Interesting thing is to note that it is still a far way behind the likes of KPR and Kitex operating at 20% + margins, although they are backward integrated better than Gokex.
At the current run rate of Rs 30 crores PAT per quarter (120 crores per year) - Company still trades at 20x PE. With plans for expansion and possible margin improvement ahead - it can still re-rate to higher levels.
In hind sight it was a rare low hanging fruit available post Q4 FY21 results.
Disc - invested, biased.
What is also important is that the company continues to invest heavily in expanding capacity and adding value. Capex in last 9 months is 52 Crores. Its new capacities coming up in FY23 will further accelerate growth
Suddenly, there is tremendous institutional interest in this stock. SBI MF has acquired as much as 9.5% stake in this company
Another very good result with good growth in volumes and surprisingly strong margins.
Company is a key beneficiary of increasing online apparel purchases in the US.
Interesting charts in the investor presentation.
Market seems to be finally recognizing the good work done by the Company in last few quarters.
Q4 Concall Notes:
Marked share increased. We look at market share per customer: for eg: What is my market share with GAP, with Walmart etc.
Our market share is tiny – there is immense potential.
Export revenue growth of 58% for FY 22
US – market showed most recovery
EU – market yet to reach pre-pandemic level
In past we had more revenue from US.
In EU – we compete with Bangladesh which has no duty whereas we have 10-11% duty in EU – hence it becomes low margin
US – Post covid US experienced strong rebound. In near term headwinds may be there due to high inflation , lower disposable income with people.
Going forward we could see trend reversing (higher growth from EU) – based on FTA expected with UK and possible FTA with EU.
Anticipate higher growth in non top-5 accounts
Woven products can gain more traction with opening up of economies
- Volume growth is not so much but Revenue has grown
Company focussing more on high value garments
Realisation growth is 17% in Q4 - YoY
Outer wear is 41% of total turnover – is a more complex garment. Can be equal to 10 regular garments in terms of value.
Hence no of pieces – YoY comparison may not be apple to apple comparison
- Growth visibility
Going ahead – Quarterly run rate will increase.
Revenue growth in FY 23 ‘is assured’.
In Q4 we were at full capacity utilization (except 3 new plants).
MP will start contributing revenue from Q3 of FY 23 – will ramp up gradually.
TN Knit Fabrics unit – will get commissioned by end of FY 23 – will contribute from FY 24 onwards.
We can have operations in Bangladesh
We are also looking at further new capacities (will announce in due course).
Typically revenue can be 4-4.5 times capex at full utilization.
We have good visibility for H1 – order book is good. (Fairly full capacity is booked). Normally Q3 and Q4 are better months (since we produce for Spring Summer in foreign countries)
On Competitive Advantage
Company benefits from covid related shutdowns in China and South Vietnam. Longer time – we can benefit from cost increases in China and Vietnam. However India still doesn’t have a Fabric Ecosystem as good as these countries. Apparel manufacturing is labour intensive - In India labour cost is 160 USD per month, in China it would be 350-370 USD per month. In Vietnam it would be 250 USD per month. Also trade actions against China (for eg: Banning of cotton, increased taxes against them etc) favours us.
Not directly benefitting from disruptions from Sri Lanka and Pakistan as they are more into knit garments.
Not withstanding short term issues like inflation in US, war in Europe ( which can affect for 1 year or so) – In the Longer term – we would like to keep growth momentum.
Challenge is not getting business – challenge is in executing – getting capacity, adapting to newer products (keep changing) and executing on time.
Cotton prices are up
But Yarn prices are not up that much
We only buy fabric (not cotton)
Cotton is 60% is total fibre mix.
Linen and Viscose is another 10-12%
Rest will be MMF (Polyester, Nylon etc)
Woven fabrics – price increases are in the range of 10% YoY – as cotton content is that much
Have long term contracts with suppliers
Have the ability to pass on cost increase to customers
- Labour – Once a year – we give wage increase
April 2021 – Wage was increased by 4.5%
April 2022 – Wage increased by another 4.5%
We typically offset this by productivity growth – It has been 3.5% p.a. over last 5 years
- Margin - Other points
Weakening rupee partially helps in margin improvement
Gross margins fluctuates based on products
In Outer wear – RM content is higher
Q4 sales had higher proportion of Outer wear
On absolute basis – costs are lower QoQ
Employee cost -
Employee strength is now 32,000 +
In Q1-Q3 – we made higher employee terminal benefit provision
Provision was party reversed in Q4
Margin in Q4 is overstated by 1% due to above
Guided for employee cost of 30% of sales going forward
Margin Guidance - Cost pressures are there going forward. For eg: Wage increase – but can be offset by productivity gains.
Overall for FY23 – should be at par with FY 22 levels
(Not factoring additional ESOP costs – issued recently – vesting period is 3 years – can be approx. 5 crores per quarter – i.e. 1% of sales.)
When sales order is accepted – we do costing and lock material prices with suppliers – so to that extent RM costs are passed on to customers. (around 25 min mark). Prices are locked for ~ 2 months with suppliers.
A Lot of our RM suppliers are nominated suppliers – We get into 3 way discussion with Customer, Company and RM suppliers.
All these safeguards allow us to price the products as per our requirements.
Working Capital Days
Debtors days to be 25-28 days going ahead
(Reset from ~ 50 days previously due to early payment programme initiated by the Company)
Also got better terms with suppliers – have increased payable days.
In FY 22 – Inventory days was not optimal due to logistical disruptions – Can improve going forward.
We applied for PLI – under MMF category
Factory is under construction in MP
Will take atleast 1 year before Factory commences operations.
Target revenue for HS codes covered in PLI is Rs 200 crores.
Govt will give 11% P.L. Incentive in Year 1. In Year 2 – Govt expects 25% growth over Year 1 – Total revenue – Rs 250 crores and for incremental revenue they will give 9%.
For 5 years – it becomes 11%, 9%, 7%, 5% so on sequentially – Incremental 25%
By the time the benefits are realized – it will be FY 25.
Further investments beyond 100 Crores – not required to realise PLI benefits.
Will encash all FDs in FY 23
3 New Units in Karnataka and TN – Ramping up well – Contribution from all 3 new plants in Q4 was 40 crores. Utilization level for these plants was 50-60%. Annual run rate can be 220 crores per year when fully utilized. In these plants – capex is lower (asset turns of ~ 10 times) as some of it is leased – proportionately opex would be higher.
Initiated work for Greenfield capex in MP – should be completed by end of June or July post which it will be under trial productions. Full ramp up expected in 9 months.
FY 22 – for new plants we invested 22 crores. In existing plants (capacity expansion and modernization) – invested 18 crores. Also invested 30 crores in New projects not yet operationalized – MP and TN Knit Unit.
FY 23 – total investment plan is 160 crores. Normal capex in existing plants – 20 crores (for productivity improvements, modernization) . New projects (MP etc) – 70 crores. Another 70 crores in TN Processing Fabric unit.
Contemplating whether to buy or lease manufacturing unit in Bangladesh
Based on management commentary in Q4 concall - Next 2 years projections by ICICI Direct in research report. (Report in public domain)
I feel topline can be higher in FY 24 based on below back of the envelope calculation - as long as utilization remains at current levels (close to full)
Existing Revenue for Q4 FY22 annualized = 585*4 = ~ Rs 2300 crores
Add: Incremental revenue from 3 new units in KA and TN = Rs 80 crores
Add: Revenue from new Greenfield unit in MP = 400 crores
Total - approx Rs 2780 crores.
This does not include revenues from unit in Bangladesh and New Capex for Knit fabrics in TN (management had indicated in Q3 concall that some of knit fabrics production would be captively consumed but overall RoE on that capex will be 20%)
PLI benefits on new unit in MP - directly adds to margins.
Mr Sivaramakrishnan Ganapathi has so far walked the talk and in fact delivered better than promised. Near term challenges in end user demand will remain but Company seems to be well poised to cater to demands of global chains like GAP, HM, Walmart etc by delivering quality garments, within given timelines and most importantly with the operational efficiency that is flowing down to its bottomline.
Management explained the business dynamics in an extremely clear manner in Q4 concall.
(link - Gokaldas Exports Ltd Q4 FY22 Earnings Concall - YouTube)
Disc - Invested from lower levels and biased.
The latest Q1 FY23 call provides great insights into the company’s plans. It’s firing on all cylinders. With expansion in Karnataka, TN and MP on schedule, and the possibility of the Bangladesh plant in FY24, Gokaldas has the potential to be the leader in Garment Exports. It has so far kept all promises. The MD has a tremendous understanding of the industry and is on the top of things. Barring reasons such as logistics challenges, it should see a topline and bottom line growth of over 20% CAGR for the next five years