Stock Review: Gokaldas Exports

Private equity firm Blackstone's decision to take the management control of Gokaldas Exports has restored investor interest back in the stock of the ailing garment exporter. On Thursday, its scrip shot up 20% amidst trading volumes that were 15 times higher than the weekly average.

The Street's euphoria is based on the hope that the new management will be able to bring Gokaldas back on the growth track. Industry trackers feel that though this may be achievable in the long run, the company would continue to suffer in the near term from rising input costs and tough competition from other textile hubs in Asia. Blackstone had acquired a controlling stake in the Bangalore-headquartered company in August 2007 by paying . 660 crore or 275 per share. Since then, its investment has eroded significantly following the garment exporter's sluggish performance.

The stock closed at . 114 on Thursday, at nearly 60% discount to what Blackstone paid a three-and-half-years ago. Gokaldas's performance has deteriorated significantly during the period. In the past four quarters, its operations resulted into a loss of . 4 crore against a profit of . 93 crore in the corresponding period a year ago.

A steeper increase in input costs, including raw materials and wages and emergence of other low cost destinations in South Asia, are Gokaldas's major woes. Over the past year, realisations of Indian garment exporters have failed to keep pace with the more than two-fold increase in cotton prices.

According to the data from the US Office of Textiles and Apparel, India sold 7% more garments to the US in 2010, but earned 2% lower on each unit compared with the previous year. The scenario is likely to continue in the short term, given the expectation of a further jump in raw material prices. What could offer some solace is that outsourcing demand from the US and Europe is gradually recovering.

The new management has some tough decisions to make. It may turn to neighbouring countries to tap their low-cost manufacturing base. Also, the general public holds a little over 5% stake in Gokaldas. This means Blackstone may even delist the company by buying the minority stake.