ICICIDirect: Gokaldas Exports - Initiating covering (Buy: Rs 236, Target: Rs 315)

Gokaldas Exports (GOKEXP)

Price: Rs 236 Target Price: Rs 315
OUTPERFORMER

Gokaldas Exports Ltd (GEL), India's largest garment exporter, has drawn up
an extensive roadmap for growth. It is expanding capacity by setting up
three new factories and diversifying its client and product mix. Big global
retailers are consolidating their vendor base and the company will be
optimally positioned to capitalize on the opportunity with its expanded
capacities. We initiate coverage on the stock with an OUTPERFORMER rating.

Capacity boost to aid volume growth: GEL is expanding garmenting capacity
from 24 million pieces per annum to 36 million pieces by FY09E. This will
aid volume growth and translate into revenue growth. We expect revenues to
grow at a CAGR of 15% over FY06-09E.

Diversifying into niche categories: The company is diversifying its product
mix by entering into new categories like structured suits, industrial and
work wear, innerwear and sleepwear. This foray would enable the company
improve realizations.

Strong relationship with global retailers: Renowned brands like GAP, Nike,
Sears, Marks and Spencer, and Tommy Hilfiger among others, are consolidating
their vendor base and increasing purchases from suppliers with large
integrated capacities like GEL.

Favourable policy initiatives: The company is likely to be a key beneficiary
of policy initiatives for the textiles sector like extension of Technology
Upgradation Fund Scheme (TUFS), labour law changes and setting up of
integrated textile parks.

Valuations: At the current price of Rs 236, the stock discounts its FY08E
EPS of Rs 24.99 by 9.4x and FY09E EPS of Rs 31.46 by 7.5x. On an EV/EBITDA
basis, it trades at 8.0x for FY08E and 6.7x for FY09E. Peers like Bombay
Rayon Fashions and Kewal Kiran Clothing trade at a P/E multiples of 9.6x and
9.7x their FY08E earnings. We believe the current valuations do not capture
the premium discounting that the stock deserves owing to its leadership
position and significantly higher realizations. Liquidity in the scrip has
improved after a stock split from a face value of Rs 10 to Rs 5. We value
the stock at 10x its FY09E EPS of Rs 31.46, giving us a 12-15 month price
target of Rs 315, an upside of 33% from current levels.

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