Ongoing Expansion And Global Sourcing Shift Set To Boost Production Capacity By FY '26

Key Takeaways

• Strategic expansion and investments in new facilities will boost production capacity, fulfilling more orders and driving revenue growth.
  
• Benefiting from global sourcing shifts and backward integration efforts, the company expects enhanced efficiency and long-term growth.
  
• Expansion efforts and regional dependence pose short-term risks to margins and revenue stability amidst geopolitical and operational challenges.

Catalysts

Designs, manufactures, and sells a range of garments in India.

• Gokaldas Exports is expanding its production capacity with ongoing investments in three facilities, which are expected to commence operations in FY '26. This expansion should drive revenue growth as it allows the company to fulfill more orders and serve a growing clientele.
  
• The company is benefiting from a shift in global sourcing away from China, Vietnam, and Bangladesh, driven by factors such as geopolitical tensions and cost advantages in India. This trend is expected to enhance revenue and support long-term growth.
  
• There is a strong order book for fall/winter and early indications for spring/summer collections. This robust demand is likely to contribute to stable revenue growth and potential improvement in earnings in the near term.
  
• The company is working on improving margins through better pricing and stronger operations management, which could positively impact net margins.
  
• Gokaldas Exports' strategy includes backward integration with the acquisition of Bombay Rayon, which, once fully operational, is expected to enhance efficiency and potentially reduce reliance on imported materials, supporting both revenue and earnings growth.

Gokaldas Exports Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gokaldas Exports's revenue will grow by 15.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 8.1% in 3 years time.
• Analysts expect earnings to reach ₹4.6 billion (and earnings per share of ₹66.98) by about March 2028, up from ₹1.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.0x on those 2028 earnings, down from 40.9x today. This future PE is greater than the current PE for the IN Luxury industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.95%, as per the Simply Wall St company report.

Gokaldas Exports Future Earnings Per Share Growth

Risks

• The recent expansion efforts, such as the new facility in Madhya Pradesh and additional units in Karnataka and Ranchi, could temporarily strain margins due to upfront costs and the extended period required for new capacities to reach optimal productivity. This could affect net margins in the short term.
  
• The company’s reliance on regions like the United States, which accounts for over 75% of exports, may pose a risk if geopolitical tensions or new trade tariffs emerge, potentially impacting revenue stability.
  
• The apparel industry is subject to fluctuations in material costs, and while current indications show a downward pressure on cotton prices, any volatility could squeeze margins if not entirely passed through to customers.
  
• With significant expansions underway, the challenge of sourcing trained manpower and the necessity for intensive training might impact operational efficiency, thus affecting EBITDA margins during ramp-up phases.
  
• The acquisition of entities like Atraco posed initial margin pressures due to integration challenges, currency fluctuations, and geopolitical risks within regions they operate, which could hinder the predictability of earnings until fully stabilized.

Valuation

• The analysts have a consensus price target of ₹1224.0 for Gokaldas Exports based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1371.0, and the most bearish reporting a price target of just ₹1140.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹56.7 billion, earnings will come to ₹4.6 billion, and it would be trading on a PE ratio of 35.0x, assuming you use a discount rate of 15.0%.
• Given the current share price of ₹857.4, the analyst price target of ₹1224.0 is 30.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.