Sharekhan Research recommends a BUY on Gokaldas Exports Ltd. (GKEL) with an unchanged price target of Rs. 1,140, implying an upside potential of over 37% from the current market price of Rs. 830. The company reported a strong 28% year-on-year revenue growth on a like-for-like (LFL) basis in Q2 FY2025, driven by improved capacity utilization and robust export demand. Despite short-term challenges like higher costs and lower seasonal demand at newly acquired entities, GKEL is poised for significant margin improvements and sustained growth due to global macro tailwinds, capacity expansions, and favorable market dynamics.

Performance Highlights

Q2 FY2025 Results:

Revenue Growth: LFL revenues rose 28% YoY to Rs. 652 crore, while consolidated revenues (including Atraco and Matrix) surged 85.7% YoY to Rs. 929 crore.
EBITDA Margins: LFL EBITDA margin remained flat at 11%, while consolidated EBITDA margin declined to 7.1% due to seasonal factors and increased costs.
PAT: Adjusted PAT grew 2.3% YoY to Rs. 28 crore, aligning with analyst expectations.
Operational Insights:

The standalone business achieved its fifth consecutive quarter of double-digit volume growth.
Export revenues increased 33% YoY, outperforming India's overall garment export growth of 13.5% during the quarter.

Growth Drivers

Capacity Expansion:

New production facilities in Madhya Pradesh and capacity upgrades at Atraco and Matrix are expected to drive incremental revenues of Rs. 355 crore annually by FY2026.
Bhopal's second unit is under development and will be operational by H2 FY2026.
Global Apparel Demand:

Apparel consumption is rebounding in developed markets like the US and UK, supported by cooling inflation and retailer inventory normalization.
Rising preference for Indian manufacturers, fueled by shifts from China and Bangladesh, enhances GKEL’s long-term export potential.
Strategic Client Diversification:

The top five customers (Gap, Columbia, Puma, JC Penny, and Cohart) account for 65-70% of revenues.
Efforts are underway to diversify the client base and expand into new geographies, reducing dependency on existing customers.

Financial Outlook

Profitability Trends:

Consolidated EBITDA margins are expected to improve by 100-150 basis points in H2 FY2025 due to operational efficiencies and better demand.
Acquired entities’ EBITDA margins will reach 10% by FY2026, contributing positively to consolidated performance.
Revenue and Earnings Projections:

Revenue CAGR of 15% over the medium term, driven by capacity additions and macro tailwinds.
Adjusted PAT is forecasted to grow 61.1% YoY in FY2026, supported by higher volumes and margin recovery.
Valuation Metrics:

At the current price, GKEL trades at 20x FY2026E earnings, making it attractively valued compared to peers.

Sector and Industry Trends

Global Textiles Outlook:

The Indian textile sector benefits from:
China +1 Strategy: Global players diversifying their sourcing base.
Free Trade Agreements: Potential FTAs with the UK and other regions to boost exports.
PLI Scheme: Government incentives fostering capacity expansion in value-added products.
Stabilized Input Costs:

Cotton and crude oil prices have corrected significantly from their peaks, reducing cost pressures across the supply chain.
Geopolitical Dynamics:

Recent disruptions in the Red Sea and rising freight costs pose short-term challenges but are expected to normalize.

Key Risks to Monitor

Client Concentration:

Heavy reliance on top customers could impact revenues if sourcing preferences shift to competitors.
Market Uncertainties:

A global economic slowdown or geopolitical tensions could affect export demand in key markets like the US and Europe.
Cost Pressures:

Any unexpected rise in raw material costs or wage inflation could weigh on margins.

Investment Thesis

Why Buy?

Undervalued Potential: With a price target of Rs. 1,140, GKEL offers significant upside of 37% from current levels.
Capacity-Led Growth: Aggressive expansion and upgrades across facilities are expected to drive consistent double-digit revenue growth.
Robust Fundamentals: Strong operational efficiency and improving global demand trends make GKEL a compelling long-term play.
Recommended Action:

Entry Point: Investors can consider accumulating shares at the current price of Rs. 830 for long-term gains.
Target Levels: Reassess positions as the stock approaches Rs. 1,140, aligning with Sharekhan’s valuation.