Weaving trust through diversification…
About the stock: Pearl Global Industries Ltd. (PGIL) is a multi-national apparel manufacturer offering end-to end sustainable solutions across the fashion value chain. It has 25 manufacturing facilities with capacity of 93.2mn pieces across multiple locations such as India, Bangladesh, Vietnam and Indonesia, etc. PGIL has a robust customer profile with top brands such as Zara, Tommy Hilfiger and GAP.
Investment Rationale
Diversified business model; helps de-risking global uncertainties: PGIL’s diversified production base, customer and product profile positions it strongly amid ongoing trade wars and geopolitical uncertainties. US government recent stance of reducing the tariff rate to 18% vs earlier rate of 50% (including 25% penal tariff) provides edge to India textile companies over developing Asian countries. Further, India-EU and India-Uk trade deal provides an opportunity to explore more export opportunities across geographies. With expanding customer base across global locations, PGIL has reduced US revenue dependence to ~50% from ~86% in FY21. It has India: Non-India production mix of 26:74 by expanding capacities in countries such as Bangladesh, Vietnam and Indonesia. This diversified structure enhances agility, strengthens its relation with global customers resulting in consistent revenue inflows and consistent improvement in the profitability. Profitability gains are visible, with Bangladesh and Vietnam delivering double-digit EBITDA margins, India margins are expected to improve as new facilities mature, resulting in 100– 120bps annual expansion in EBITDA margins in the coming years.
Transformed into professionally managed entity: PGIL transformed itself into a professionally managed company following promoter handing over day to day operations in the hands of experience leadership to bring in more professionalism and efficiency in the operations. In this transformation journey several steps were undertaken including 1) hiring of global talent, 2) improved corporate governance practices and brought in more transparency in the operations 3) Change in the auditors 4) entering into asset-light partnership model and 5) introduction of consistent dividend policy (with dividend payout of 20%+). This led to strong improvement in the operating performance with revenues, operating profit and PAT growing at CAGR of 22%, 43% and 58% over FY20-25.
Scaling up capacities through capital investment and asset light partnership model: PGIL aims to double its capacity to 130mn pieces by FY28E from 66mn pieces in FY17 (12% CAGR) through sustained investment in greenfield facilities along with expansion of capacities through asset-light partnership model. It is plans to do capex of ~Rs.700crore over the next three years (including Rs250cr in FY26) to expand capacities across various location to cater to the growing clientele. Alongside this, the company is accelerating its asset-light partnership model which comprises of 9 units accounting for 26% of production to drive capital efficiency, faster capacity ramp-up, and flexibility across key global markets. This integrated approach supports sustained volume growth, improved profitability, strengthened balance sheet and improved return profile in the medium to long run.
Rating and Target Price
PGIL’s diversified business model brings in more resilience in the performance with revenues and PAT expected to grow at CAGR of 12% and 23% respectively over FY25-28E. It is trading at a valuation of 21x and 17x its FY27E and FY28E EPS. We recommend BUY on the stock with a price target of Rs2,255 (valuing at 23x FY28E EPS of Rs.94)
