Gokaldas Exports: Atraco: Strong franchise at attractive valuation

30 Aug 2023 , 11:32 AM

Recommendation: Buy; Target price: Rs 933

Gokaldas Exports’ (GEXP) acquisition of Atraco — a Dubai headquartered apparel manufacturer with manufacturing units in Kenya and Ethiopia — will give it duty-free access to US and EU markets, and a largely non-overlapping customer base. Atraco’s CY22 revenue/PAT was 38%/36% of GEXP’s FY23 numbers. The deal is an all-cash transaction of US$55mn, partly funded through internal accruals and debt. Attractive deal valuation and low tax rate in the UAE mean that the transaction is ~17% EPS-accretive on FY23 financials, as per the company’s estimate. Analysts of IIFL Capital Services estimate that EPS accretion in FY25 could be >25%. While analysts of IIFL Capital Services are yet to build the acquisition in their forecasts, their TP for GEXP, based on 19x proforma 2YF EPS, comes to Rs933. Maintain BUY. 

Atraco gives GEXP access to low-cost markets: 

Atraco has four manufacturing units in Kenya and one in Ethiopia. 95% of Atraco’s revenue is from exports to the US. Key advantages: 1) Zero tariff on exports from Kenya to the US and EU and zero tariff on exports from Ethiopia to EU. 2) Lower labour costs in these countries vs India. Another positive aspect is the mutually exclusive customer relationships for GEXP and Atraco. 

Deal multiple quite attractive: 

In addition to the US$55mn equity value (to be funded through internal accruals and debt), GEXP will also assume Atraco’s US$15mn WC debt. Atraco’s CY22 revenue was US$107mn with PAT margin similar to GEXP’s 7%. At 7.7x CY22 PE, the deal multiple is lower than GEXP and other listed Indian peers. Post the regulatory approvals, GEXP expects consolidation of Atraco financials from November 2023. 

Significant EPS accretion; raise TP to Rs933: 

On the call, management stated: 1) Weak demand and high inventory buildup in the US mean that Atraco may see a slight YoY dip in revenue in CY23; but revenue growth could be 20%+ revenue growth in CY24 if demand revives. 2) GEXP sees 150-200bps Ebitda margin improvement over 2-3 years through efficiency improvements at Atraco. 3) Capacity addition can potentially result in US$20mn incremental revenue in CY25. GEXP has shared a calculation that indicates 17% EPS accretion on a pro-forma basis in FY23, after factoring in interest cost on acquisition debt and low tax rate in the UAE. Analysts of IIFL Capital Services calculations suggest that EPS accretion could be >25%, based on realistic assumptions. On 1YF pro-forma EPS, the stock trades at ~19x.