Buy Gokaldas Exports; target of Rs 258: Citigroup

Citigroup is bullish on Gokaldas Exports and has recommended a buy rating on the stock with a target price of Rs 258.

Citigroup Research report on Gokaldas Exports:

Strong operating performance, but lower earnings growth:

Revenues grew 16% driving a higher EBITDA of 33%. Earnings growth of 20% was lower than estimates, but for higher interest and depreciation cost due to new expansions growth would be stronger. While production is ramping up on back of growing export order book, recent rupee appreciation could moderate near-term growth.

EBITDA expansion, ahead of expectations:

EBITDA expansion of 180bps YoY to 13.3%, ahead of estimates (12%) – due to incentives (Rs.31m) under target plus scheme excluding which gains were still healthy at 60bps. Focus on value addition, coupled with volume growth and relatively stable pricing is driving this.

Key triggers:

1) Growing order book of Rs 2.5 billion for 1QFY08 with diversifying customer base, despite competitive environment; 2) Enriching product mix with entry into suits, innerwear, work-wear; 3) Production ramp-up encouraging; and4) Exploring opportunities as a vendor to large domestic branded retailers.

Lowering estimates, factoring in forex and interest pressures:

Building in pressures from rupee appreciation on margins and higher interest, depreciation costs given that expansions are operational, we reduce our earnings estimates by 14-18% over FY07-09E; despite this we see healthy growth at 14% CAGR.

Maintain Buy (1million) with lower TP of Rs 285:

With steady earnings CAGR of 14% over 07-10E, superior ROCEs (15%) vs. sector's 9% and stock trading at attractive valuations of 8.4x FY08E on par with sector; we maintain our Buy (1million) rating with lower TP of Rs 285 on 12x FY08E P/E, at premium to sector.

Valuation:

We are lowering our target price from Rs 400 to Rs 285. Our revised target price is based on 12x FY08E P/E. We have lowered our target from the 15x a scribed earlier given its leadership in garments, to factor in pressures on appreciating rupee and moderating earnings growth post 2009, when quotas on China are phased out. However, our target multiple still places the stock at premium to our India textile universe valuations of 8.4x FY08E P/E. Our premium valuation is a function of Gokaldas’ leadership in garment exports from India, largest garment capacities, rich product mix and preferred vendor status with a spectrum of global brands. In our opinion P/E captures the earnings growth potential and hence is our primary valuation tool. The stock is trading at 8.4x FY08E PE, on par with sector and below the historical P/E band (10-15x). With steady earnings growth visibility and the company's superior capital efficiency, we see upside potential to current valuations.