Gokaldas hopes to beat the double whammy of rising cotton prices and currency fluctuations to be back in the black in 2011-12.
If economic indicators like employment rate are anything to go by, the US is on its path to recovery. Logically, this should bring cheer to the exporting community, especially garment exporters from India, who had seen their sales plummet in the last one year on account of a decline in demand from the US and Europe.
However, things are not that good and exporters are still struggling to cope with various other dampeners — rise in cotton prices, high labour cost and increasing infrastructure spending to name a few.
In the midst of these, Gokaldas Exports, the largest garment exporter of the country, has been devising ways to protect its operating margin. The company, which has posted losses in the last few quarters, hopes to be back in the black next financial year.
“Though global economy is on its path to recovery, we are facing twin challenges in the form of a rise in cotton prices and currency fluctuations. However, we expect to turn profitable in 2011-12 on the back of our initiatives,” Gokaldas Exports Managing Director Rajendra Hinduja said.
| FIGHTING THE COST PRESSURE Material cost and its impact on profitability | ||
| (in Rs crore) | 2008-09 | 2009-10 |
| Export sale | 991.21 | 929.93 |
| Domestic sale | 72.13 | 70.64 |
| Sale of raw materials | 24.05 | 64.86 |
| Total sales | 1,087.39 | 1,065.43 |
| Material cost | 581.43 | 654.78 |
| Material cost as % of total sales | 53.5 | 61.5 |
| KEY PERFORMANCE INDICATORS | ||
| Particulars | 2008-09 | 2009-10 |
| Gross revenue (Rs lakh) | 1,17,494.20 | 1,15,516.17 |
| Profit before tax (PBT) (Rs lakh) | 345 | 453.23 |
| Ratio of PBT to gross revenue (%) | 0.29% | 0.39% |
| Profit after tax (PAT) (Rs lakh) | 336.47 | 193.23 |
| Ratio of PAT to gross revenue (%) | 0.29% | 0.17% |
| Earnings per share (Rs lakh) | 0.98 | 0.56 |
According to industry estimates, cotton prices have increased 20-25 per cent in the last one month to touch Rs 56,000-60,000 per candy from Rs 48,000 a candy earlier. Similarly, fabric cost has increased more than 50 per cent to touch Rs 130-140 a metre from Rs 85 two months back.
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“In addition to price rise, the government’s decision to allow cotton exports has also added to the problems of the garment industry, affecting operating margin of companies like ours,” Hinduja said. The company has seen a rise in raw material cost not only this financial year but in the previous one too. The raw material cost increased eight per cent in 2009-10, compared to the previous financial year.
The ratio of material cost to total sales, which stood at 53 per cent in 2008-09, rose to 61 per cent in 2009-10. However, the company is working on measures like hedging to rein in this cost. “We try to hedge our raw material cost by buying cotton fabric in bulk when the prices are a little cheap. This is done taking into account our order book for three-four months so that cost can be controlled,” Hinduja says.
The company has also been working to improve efficiency at all its manufacturing units to decrease the overhead cost. “Efficiency improvement at every level is now consciously done by the company. For example, with the help of mechanisation, now 1,000 people are doing the same amount of work that 1,200 people used to do earlier,” he says.
According to industry experts, this step is significant due to the sheer fact that Gokaldas employs more than 40,000 people and the company is set to increase its employees’ pay 12-15 per cent from April, 2011.
Barring the efficiency factor, the company is also spreading its wings to Tier-II and Tier-III cities to meet the labour requirement. “It is becoming difficult to survive in Bangalore due to the unavailability of labour and cost factors. So, we are relocating to smaller towns like Mysore and Hubli,” Hinduja said. Gokaldas, which has 44 manufacturing units in Bangalore, has opened seven units in cities like Hubli and Mysore, among others. “This not only helps reduce cost but also protects us from the high level of attrition seen at Bangalore units,” Hinduja adds.
On the export front, the company is also looking at ways to increase the average unit realisation. “Consumers are looking for more value for their money. Even after the slowdown, they expect to get apparels at rates that prevailed during the slowdown. As a result, although volume of order has increased due to economic recovery, that has not been matched on the pricing front. So, we are taking orders only at reasonable prices and refusing orders with wafer-thin margins,” Hinduja says. The company is also negotiating hard to get right value for its products in the international market, he ads.
However, the company is planning to slowly, but surely, increase its domestic offering, to protect from the vagaries of exporting in the near future. “Domestic market constituted around two per cent of our total business three years back. It now stands at 10 per cent and we plan to increase this ratio to 25 per cent in the coming years,” he says.
“Emerging markets like India are growing faster than the western countries and we want to tap our domestic growth story,” he adds. According to company estimates, profitability in selling products in the domestic market is five to 10 per cent higher than exporting.
The company is also thinking on the lines of starting its own brand apparels in the future. “Launching a new brand costs around Rs 40-50 crore. So, our major focus is on profitability as of now. However, there is a thought on launching a new brand, but anything concrete is yet to evolve,” he said.
Even as these measures are falling in place, Gokaldas is witnessing a significant change in the constitution of its board. Global equity giant Blackstone, which has a majority stake in the company, takes over the management of the company from April 1. Gautam Chakravarti, Blackstone’s nominee and a director on the Gokaldas board, will be the new chief executive officer
Blackstone had bought 68 per cent stake in Gokaldas Exports from the present management in 2007. It is slowly inducting professionals to manage the affairs of the company, in line with the deal.
“The deal has a mandate that professionals will manage the company within three-and-a-half years of the deal period and the family will continue with its supervisory role and provide the required hand holding,” Hinduja said.
Gokaldas jumped nearly 20 per cent, the most in almost a month on the Bombay Stock Exchange intra-day trading, to Rs 112.5 (see chart). The shares have declined 14 per cent so far this year.
However, the success rate of the firm in the future will depend not only on the external environment but also on the active government support on the policy front, Hinduja adds.