 "Apparel industry")
Shares of Gokaldas Exports spiralled 9.5 per cent lower to Rs 790.5 apiece on the BSE in Thursday's intraday trade, after surging over 40 per cent in two days.
At 11:05 AM, the shares were down 8.9 per cent to Rs 795.8 per share as against 0.13 per cent dip in the benchmark S&P BSE Sensex. The shares have rallied 42.4 per cent over the past two days after the company said it has entered into an agreement through its wholly-owned subsidiaries to acquire UAE-based Atraco Group.
On Tuesday, the readymade garment manufacturer and exporter entered into an agreement to acquire Atraco Group for $55 million. The equity value of the transaction is $55 million (around Rs 455 crore) and the same will be funded by a mix of debt and internal accruals, the company said.
Gokaldas Exports currently has cash of Rs 350 crore on-its books. Analysts expect that the acquisition is likely to be earnings accretive by Rs 5-6 per share by FY25.
The transaction will consist of the acquisition of shares and assets and will be subject to customary regulatory approvals. It is expected to be completed by the third quarter of FY24 (October-December 2023), it added.
Atraco's product range includes shorts, pants, shirts, t-shirts, blouses, and dresses catering to varied age groups. Atraco operates with a network of four manufacturing units in Kenya and one in Ethiopia producing about 40 million garments (almost equivalent to existing capacity of Gokaldas Exports).
The acquired company did revenues of $107 million (Rs 843 crore) and net profit of $7.2 million (Rs 57 crore) in CY22. Deal is valued at 0.6x EV/Sales and 7.6x price to earnings ratio, which looks to be attractive, considering the scale of the business and valuation of domestic peers.
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"Acquisition of Atraco improves the long term growth prospects of the company with bigger scale. With newly acquired African business, the company can focus on scaling up its US business while the India business can focus on gradual expansion in UK/EU (especially post FTA signing with UK in the coming months). Expansion in the new facility in Kenya provides incremental revenue benefit of Rs 200-250 crore in FY25. This provides further earnings accretion to the current rough estimates. The stock has already run-up, and is currently trading at 28x/21x its FY24E/25E earnings. In view of large scale benefits and renewed opportunities in key export markets, we maintain our Buy on GKEL with a revised price target of Rs 865," said analysts at Sharekhan.
That said, analysts fear any slowdown in demand would affect sales of key categories, resulting in a moderation of sales volume growth.
Besides, Sivaramakrishnan Ganapathi (CEO and MD) has been largely responsible for turning around the company since his appointment in 2018. Any change in the top management could hurt Gokaldas' operations and plans, they said.
Further, inflationary pressure on raw material prices, amd concentration of the market in the US, which accounts for 85 per cent of the company's sales and is currently witnessing inflationary pressures, renders Gokaldas vulnerable to geographical concentration.
"The stock has moved up by 40 per cent in two days. Investors can consider it as an opportunity to book profits at the current valuation. However, with the industry uptrend and strong market positioning, GEL is on course to deliver better earnings, going ahead. Investors with risk appetite can stay invested for a long term," said analysts at Way2Wealth Securities.
