Textile stocks like KPR Mills and Gokaldas Exports (GEL) remain value buys for the New Year 2022, experts suggest. In the past year, readymade garment (RMG) exporting companies have witnessed a significant re-rating.

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KPR Mills, as well as Gokaldas Exports, have rallied by over 270 per cent in 2021 so far, compared to 23 per cent upside seen in the Nifty50 in the same period.

What led to the rally? 

There is a material improvement in financial performance for both KPR Mills and Gokaldas Exports. “Return on Capital Employed (RoCE) for KPR Mill improved 440 bps to 24% in FY21, deleveraging of the balance sheet for Gokaldas Exports (D/E for GEL declined from 0.9x to 0.5x) and robust order book for the companies have been key triggers for the re-rating,” Pankaj Pandey, Head – Research at ICICI Securities said in a note.

The brokerage firm continues to like KPR and GEL to play the structural long-term story in the apparel export space owing to their strong business models and long-standing relationships with marquee global clients.

There are robust opportunities for Indian apparel exporters (current market share of 5%) which warrant a re-rating, given strong and sustainable earnings visibility.

“We roll our estimates to FY24E and build in EBITDA CAGR of 21% and 36% in FY21-24E for KPR and GEL, respectively. We maintain our BUY rating on KPR Mill and Gokaldas Exports with a revised target price of Rs 820 and Rs 425, respectively,” highlights Pandey.

The revised target price translates into an upside of 22 per cent, and 24 per cent from 28 December closing price for KPR Mill and Gokaldas Exports respectively.

Long Term Story Intact Supported by Capacity Expansion:

Apparel exporters have witnessed a strong customer interest in the past couple of quarters owing to many large global retailers diversifying their sourcing and reducing dependence on China.

Overall order booking from India has increased rapidly due to the China+1 strategy of global retailers. Indian apparel players are exploring opportunities to expand their garmenting capacities to capitalise on long-term growth opportunities.

“Both KPR and GEL have embarked upon greenfield capacity expansion. We bake in cumulative capex worth Rs 700 crore for both companies (KPR Rs 480 crore, GEL Rs 220 crore) in FY22-24E,” said the note.

Majority of the capex requirements are expected to be funded through internal accruals. With an average asset turnover of 3x, ICICIdirect expects companies to generate incremental revenue worth Rs 2,000 crores.