Management Meeting with Gokaldas Export

1. China Export Market is $165 bn and India’s Export is $16-17 bn which has been stagnant.
One of the reason for stagnant was GST introduction.
2. If 3-4% of $165 bn comes to India i.e. about $5 bn it will be substantial growth opportunity for
India.
3. Earlier fabric was not taxable in India.
4. India’s challenges – WC is blocked because of GST, earlier credit was received in 30-45 days.
Earlier, exporter used to get duty drawback 7.7% and RoSL (remission of state levies) of 3.3%
totaling to 11%. Currently, exporters claim that there are various taxes embedded in GST export
price and demand that the duty drawback + RoSL should be raised from current 3.3% to 11%.
5. Also, in FY17 rupee appreciated by INR 4 which was loss to India.

Link on Duty Drawback

Reference: https://www.financialexpress.com/industry/garment-exports-no-extra-relief-for-
embedded-taxes/1255777/

Reasons:

1. Wages has substantially increased from $300 pm to $525 (INR 34,125) pm i.e., $6000
pa.Correspondingly in India, wages are $100-150 pm.
2. Because of the above reasons, Trump administration wants to reduce exposure to China.

Other developing markets:

1. Vietnam – far superior + better tech, but population restriction. Size = $30 bn
2. Bangladesh -> Size = $34 bn, imports raw materials and does not manufacture of its own hence,
there is a significant lead time in import and export. Hence, Bangladesh is not competitive in
timely deliveries. Eg) Zara usually wants deliveries in very short duration. Advantage- Import
duties are exempted. Currently, Bangladesh enjoys zero import duties vs 9.6% of India.

Sector:

1. This sector is very fragmented with small players accounting for INR 60-70 mn. Shahi garments
which has a topline of INR 5800 crores accounts for less than 5% of the market.
2. Other players are Orient Kraft (which is into special embroidery – high margin business).
3. GEL is mainly into Knit wears, woven and textile integration.
4. There has been a huge consolidation in the sector with many companies in the range 400-600
crores shutting down shops. Also, there has been a drop from overall exports in the garments
sector by 10% ($15.8 bn). This has also created removal of jobs in the sector adding to the Govt.
woes.
GEL as a company: (Talked with Mr. Sathymurthy A.- CFO of GEL)

1. Earlier, three Hinduja Bros ran the show. Everything was in their hands from sourcing, logistics
to operation. This company operated in the quota regime hence they benefitted.
2. Company’s focus was Kids wear, Men’s wear, tops and bottoms
3. Since Hinduja commanded prices in the market, Blackstone (exited in 2017) got interested in the
business.
4. Blackstone professionals did not have business acumen and left orders which let to poor
performance over the period.
5. After Blackstone exit, Mr. Matthew entered the business in 2017 taking substantial stake. He
brought in Mr. Shiva Ganpathi (IIM – B) in Oct 2017 who was working with Kumar Mangalam in
Idea Cellular for past 21 years.
6. Mr. Shiva went to BoD with a definite plan for raising money via QIP for expansion.

Top Customers Revenue (INR)

GAP 320 crores
H&M 200 crores
Columbia 75 crores
Carhartt 35-50 crores (140 crores in FY18-19)
Decathlon 200 crores (lost order – synthetic wear to be
imported from China)
Nike, Puma, Marks & Spencer, Abercrombie & Comparatively small
Fitch
The company doesn’t have any long-term contracts with any of the customers.

7. This business is low capital and high OPEX. This company is not outsourcing any material.
8. ROC calculation:
 Per line investment (net of capital subsidy) = 1.1 crore
 Topline generated from this investment = 7-8 crore
 EBITDA Margin is 8% = 56-64 lakhs
 Interest Subvention is 7% = 7 lakhs
 PBT = 56-7 = 49 lakhs
 PAT = 34.3 lakhs
 ROC = 32-35% in the business.
9. State-wise subsidy for labour: (5 years confirmed)
a. Jharkhand = 5000/month (men), 6000/month (women), 7000/month (SC,ST)
b. MP = 5000/month
c. Gujarat = 3200/month (men), 4200 for women
d. Orissa = 1500/month
e. AP = 2500/month
10. Making of shirts take 18-24 min. The company have increased their efficiency by 300-400 to 500
pieces per day. Their capacity is 2.5 million pieces per year. (??, not sure of this point)
11. No. of SKUs -> S/M/L/XL/XXL; color shades, these are bifurcated based on country and labels.
12. Current capacity utilization 40%. Company aims to grow to 45%.
13. Shahi Garments is operating at 48%.
 14. Currently, the company is having 16 operating facilities and 6 are Value added services (washing,
dying, embroiding, sampling and insulating.
15. Currently, 55% factories are in Bengaluru.
16. Shahi Garments has setup a factory in Jharkhand taking advantage of labor subsidy by Jharkhand
Govt.
17. Richard Goblet (another competitor) is also planning to open its facility in Jharkhand.
18. The company has raised approx. INR 70 crores in QIPs. Investor includes HSF Mauritius
(managed by Samir Arora) and L&T Mutual Fund at INR 90.94 per share. Refer:
https://economictimes.indiatimes.com/markets/stocks/gokaldas-exports-raises-rs-70-crore-
closes-qip/articleshow/64020886.cms
19. The purpose of QIP was to setup new factories and modernize the existing machinery.
Promoters stake before QIP was 39% and now its 33%.
20. Management’s aim is to make the company INR 2000 crores in next 3-4 years. In next two years
time, the management is targeting to setup 4 factories. Usually it takes 18 months to get the
factory in full swing, but the management is looking at pre-fabrication and pre-construction
models
21. Borrowings of 470 crores is WC, it comprises mainly of bill discounting of export bills and
packing credit. The deposits (more than 3 months) are 140 crores. Refer to AR FY16-17, cash
flow from investing activities.
22. Net debt comes to INR 200 crores.
23. Largest banker is Canara Bank.

Particulars FY19E FY20E

Total revenue 1200 1500
EBITDA 72 (6% of topline) 120 (8% of topline)
PBT 15-20 Cr 25-30 Cr
To be confirmed

24. The company is having 4 assets worth INR 90 crores (2 prop in Bengaluru, 1 in Mysore, 1 in
Hyderabad). Currently, the company do not have any plans to monetize these assets.

With Mr. Shiva Ganapathi (MD of GEL):

1. He has streamlined the factories from 6 SBUs to 2 SBUs and brought in 14% efficiency in the
company.
2. He has done Brownfield expansion by sweating the factory assets more and put pressure on
marketing team to load the time thereby increasing capacity utilization.
3. Earlier only 55% of the total orders were meeting planning requirements which have been
optimized significantly.
4. Currently, 1.8 garments/100 garments are being rejected at machine level which was earlier 4.3.
This delta will add significantly to the bottom-line.
5. If there is 1% wastage reduction, it contributes INR 10 crores to the bottom-line.
6. If there is 10% efficiency improvement it contributes 80 lakhs to the bottom-line.
7. WIP in the factory, data is available at real time now as the company has migrated to single ERP
platform.
8. The company is exploring options to open factory in Jharkhand where subsidy is 5000 pm which
in turn will benefit 75 lakhs pm (considering 1500 employee). As per FY17, employee benefit
expense is 303 crores on topline of 936 crore which translates into 31%. The company will save
approx. 16% if they explore options to setup in Jharkhand and Gujarat.
9. Company is now planning to export more to USA (60% export) and market is much more stable
compared to Europe. Currently, India pays 9.6% import duty for export to Europe whereas
Bangladesh and Pakistan have 0% import duty for export to Europe.
10. The company is observing like Arvind and Raymond which has setup factories in Ethiopia where
import duty is zero percent for export to USA.
11. Currently, the company is having effective tax rate NIL as there are loss in the subsidiaries and
the carry forward depreciation is adjusted against the MAT. From FY21 onwards the company
will be under regular MET.
12. The company is currently importing its fabric from Vardhaman Mills, JCP and denims from
Arvind mills. In south, they are taking from KG denim, Erode and Bombay Rayon.
 M.Cap -
GOKALDAS EXPORTS LTD. cr 357.71
CMP 83.65

Consolidated
₹ crores 2016 2017 2018 2019 2020

Revenue from Operations 1,144 936 1,032 1,153 1453

Other Income 32 42 47 47 47

Total Revenue 1,176 978 1,079 1,200 1500

Less: Operating Expenses 1,107 968 1,056 1,081 1333

EBITDA Margins 3.3% -3.4% -2% 6% 8%

EBITDA 37 (32) (23) 72 120

Less: Depreciation 22 18 16 17 21

EBIT 15 (50) (40) 55 99

Less: Interest 40 36 37 39 45
Earnings before exceptional
item - - 0 0 0
Exceptional & Extraordinary
Item -Add 46 - 0 0 0

PBT 53 (45) (30) 15 54

Less: Tax (8) 2 1 - -

PAT 61 (47) (31) 15 54

Equity FV ₹5 17 17 17 17 17

EPS 18 (14) -9 4 15

PE Ratio 4 (5) -8 19 5

Promoter holding - % 33
Promoter holding pledged -
₹Cr -