The Remarkable Journey of Gokaldas Exports

Today, we will discuss the success story of Gokaldas Exports, a small-cap company that has been thriving in the textile industry. The textile sector in India has been gaining significant attention lately, thanks to various factors such as the European Free Trade Agreement opportunities, the US-China cotton ban, the Indian government’s focus on creating a favorable ecosystem through PLI schemes, and attractive export incentives. These factors have contributed to the growing potential of textile players based in India.

Introduction

Gokaldas Exports is a prominent apparel exporter in India, catering to major global retailers and boasting an annual capacity of over 25 million garments. While the company primarily operates in Karnataka, it also has operations facilities in neighboring Andhra Pradesh and Tamil Nadu. Let’s take a look at the company’s journey and recent developments.

Gokaldas Exports specializes in the production of intricate garment products and designs, including cutting, sewing, embroidery, quilting, and printing. The company has established strong partnerships with renowned international brands like Puma, banana republic, Adidas, GAP, and H&M, among others.

However, Gokaldas Exports wasn’t always successful. Like many garment manufacturing businesses, it faced challenges due to low-profit margins, inefficiencies, mismanagement, increased wastage, and rising input costs. Several key inefficiencies contributed to the company’s struggles:

The company was divided into six Strategic Business Units (SBUs), with each SBU responsible for the entire process from material procurement to manufacturing. This organizational structure resulted in diseconomies of scale.

Factories were divided based on customers rather than products, leading to two issues: some factories lacked the expertise to produce certain types of garments, and reaching full capacity at one factory prevented further orders from a customer, resulting in both business and financial losses over time.

Instead of seeking ways to improve operational efficiencies and generate profits, the company sold or shut down loss-making factories. Over time, the number of factories decreased from 54 in 2007 to 22 in 2018.

The company even sold its cutting-edge blazer manufacturing unit to Raymond due to financial losses. This decision reduced Gokaldas Exports’ manufacturing capabilities, negatively impacting its operations.

Wastages, including rejected garments, unused fabric specific to particular styles, and trimmed raw materials, were not effectively reused. High input consumption further hindered the company’s profitability.

The Leadership

In 2017, there was a significant turnaround for Gokaldas Exports. Blackstone, a major investor, sold its stake to Clear Wealth Consultancy Services LLP, and Mr. Siva Ganapathi was appointed as the CEO. Mr. Ganapathi, an experienced professional with a successful track record of turning around loss-making businesses, implemented various initiatives to revitalize Gokaldas Exports.

Under the new management, the company achieved a 15 percent compound annual growth rate (CAGR) in revenue between FY18 and FY20. It became profitable since Q4FY18, except for the quarters severely impacted by the COVID-19 lockdown. Gokaldas Exports improved its process efficiencies, expanded capacities effectively, increased its share with existing clients, and acquired new clients.

Mr. Ganapathi conducted data-driven analyses of each factory to identify inefficiencies and waste, taking corrective action promptly. The management implemented an ‘attendance bonus’ program to address employee attrition and absenteeism, resulting in improved attendance and productivity. Initiatives like ‘Hello Sakhi’ aimed to enhance the working environment, with experienced employees mentoring new hires for the initial six months.

To streamline operations, Gokaldas Exports implemented a single enterprise resource planning (ERP) system for raw-material requisition and procurement, reducing mismatches. Improving material-on-time performance became a priority to enhance sewing efficiency and reduce waste, leading to increased overall efficiency.

Financials

Gokaldas Exports reported one of its strongest quarterly results driven by robust demand in the US apparel market. Revenues increased by 30% YoY and 84% QoQ to Rs.443.8 crores, while the profit after tax (PAT) rose by 230% YoY and 1221% QoQ to Rs.28.6 crores. The company achieved one of its highest EBITDA margins of 12.1% due to positive operating leverage and foreign exchange gains. Net debt to equity decreased from 0.72 in Q4FY21 to 0.63 in Q2FY22. Cash generated from operations in H1 FY22 was utilized for purchasing plant and machinery for production units and building up inventory for Q3 production.

Looking ahead, Gokaldas Exports plans to expand its operations by entering the knitted garments segment and establishing manufacturing units in low-cost countries like Bangladesh. With a full order book for the next six months and strong demand from the US apparel market, the company aims to invest Rs.340 crores in CAPEX over the next four years (by FY25E), potentially generating incremental revenues of Rs.1350 crores. The recent QIP fundraise worth Rs.300 crores will further strengthen the company’s liquidity position, supporting accelerated CAPEX, debt repayment, and working capital requirements.

However, like any company, Gokaldas Exports faces certain risks. These include currency risks due to its export-focused business, potential labor unavailability, wage rate increases, and raw material price volatility, which could impact profit margins. Additionally, a demand slowdown resulting from stringent lockdown measures could affect the company’s expectations of favorable returns.

Conclusion

Gokaldas Exports has made remarkable strides in turning its business around under the leadership of Mr. Siva Ganapathi. By implementing strategic initiatives, improving operational efficiencies, and exploring new opportunities, the company has positioned itself for continued growth and success in the textile industry. Investors and industry observers should keep a close eye on Gokaldas Exports as it progresses further. Stay tuned for more updates in our upcoming blogs, as well as our midweek and weekend editions of “Trending Stocks and Stock Insights.” Don’t forget to share this information with your friends and family. Happy investing!

Disclaimer: The views expressed in this blog are for educational purposes only. This is not professional advice. Consult your financial advisor before investing.