Atarco acquisition is a win-win deal for Gokaldas Exports. Buy for target price of Rs 884: Nuvama

Atarco acquisition a win-win deal

Gokaldas Exports (GEXP) has announced the complete acquisition of the Atraco Group (Atraco) for USD55mn. Through this deal, it will gain duty free access to the US and European markets (duties on Indian imports range from 11% to 28%). Atraco has five production units: four/ one in Kenya/Ethiopia, with a total capacity of 40mn pieces (GEXP: 36mn units). The acquisition will be funded via internal accruals (USD15mn) and debt (USD40mn).

We view this acquisition as a positive for GEXP as it expands and diversifies its production capabilities and provides duty free access to its key market the US. GEXP has room to further increase Atraco capacities in the medium term (via a brownfield expansion). It has acquired Atraco at a reasonable valuation (7.6x 2022 earnings), which will be EPS accretive (Exhibit 2). The acquisition provides GEXP enough capacities to tap upcoming opportunities in the apparel export market. We maintain ‘BUY’ with a revised TP of INR884, valuing it at 17x FY25E consolidated earnings.

About the Atraco Group

• With five manufacturing units across Kenya and Ethiopia, Atraco is an apparel manufacturing company with operations spanning more than 37 years. It is headquartered in Dubai, UAE.

• It is primarily into woven wear, which constitutes 74% of its product range, with knitwear contributing the rest with a production capacity of 40mn pieces. Its product range includes shorts, pants, shirts, t-shirts, blouses, and dresses.

• The company employs over 13,000 workers and has 7,000 operational machines spread across its manufacturing units. Each manufacturing unit has its own key management personnel and respective heads for production, HR, administration, finance, quality, logistics, and compliance.

• It exports 95% of its products to the US, where it enjoys duty free access through AGOA (African Growth and Opportunities Act). • Atraco sources most of its raw material from China, Indonesia, India, Pakistan, Taiwan, and the UAE.

• It reported a revenue of USD107mn (INR843cr) in 2022, with an EBITDA margin of 9.1% (which included a one-time cost of USD1.4mn for setting up a new facility). Excluding this, EBITDA margin would have been ~10.7%. Capacity utilisation stood ~90% in 2022.

Rationale behind the acquisition Footprint expansion

• With this acquisition, GEXP has diversified its footprint, added new global brands to its customer base, and increased its production capacity in low-cost regions.

• Atraco and GEXP have a separate customer base (with only one mutual customer), resulting in client additions. Moreover, GEXP stands to benefit from acquisition synergies via cross-selling and a greater product portfolio.

Duty free access and tax holidays

• With this acquisition, GEXP will gain duty free access to its key US/EU market through AGOA/EPA. (AGOA is a preferential trade programme that allows countries in subSaharan Africa to export products to the US tariff-free. The Economic Partnership Agreements are trade and development pacts negotiated between the EU and African, Caribbean, and Pacific countries. It fully opens the EU market to these countries).

• Manufacturing facilities in Kenya Export Processing Zone (EPZ) enjoy a corporate-tax holiday for 10 years. Atraco’s four units in Kenya are situated within this EPZ.