Gokaldas Exports - A Compelling Strategic Acquisition: Systematix

Systematix Research Report

Gokaldas Exports Ltd. has announced that it would acquire UAE-based Atraco Group for $55 million, to be funded through a mix of equity and debt. The company is looking to fund the equity investment of $15 million through internal accruals and expects to raise $40 million debt through bank borrowings, which are already in place.

This translates into a debt/equity of ~0.35 times at the close of deal. Gokaldas Exports expects to drive synergies across geographies, customers and products through its manufacturing prowess and an experienced management team.

Management has guided 150-200 basis points margin improvement over the next two-three years. While we expect the deal to be earnings accretive from FY24E, we have not considered any synergy benefits for that year.

We estimate Atraco to generate 8% compound annual growth rate in revenue over FY23-25E, forecasting its Ebitda margin to improve by 200 basis points over FY23-25E.

Our estimates factor in synergies from raw material sourcing, customer crosspollination, and operating leverage. Consolidation of Atraco’s P&L with that of Gokaldas Exports throws up a 36%/35% increase in our consolidated revenue and 30%/35% increase in our Ebitda FY24/FY25 estimates, respectively.

Our FY24E/FY25E EPS shows 25%/36% increase, as higher depreciation and interest expenses are partly offset by lower tax rate. Post a muted H1 FY24, management expects volumes to pick up H2 FY24 onwards.

Atraco currently operates at 88-89% capacity, which management expects to expand by CY25, likely generating incremental revenue of $20 million.

Gokaldas Exports expects margins to improve on stable raw material, lower logistics and freight costs, better product mix and superior productivity.

Our revised target price of Rs 892 (Rs 592 earlier) is based on 21 times FY25 price/earning (earlier 19 times P/E). Retain 'Buy'.

Key risk:

1. recovery in demand may take longer than expected,

2. inflationary and recessionary pressures may persist in the near term,

3. duty benefits for Kenya for U.S. market is due to renewal by December 2025.

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