The open offer by the Blackstone Group to minority shareholders of Gokaldas Exports Ltd gives them a fair opportunity to exit. The offer price of Rs275 is higher than the target price set by some analysts who have a ‘buy’ rating on the stock. What’s more, the offer provides a decent pre-tax return of 21.2% over Gokaldas’ average price of Rs227 in the past six months.

But, the key question is whether minority shareholders should cash in on or hold on to reap the benefits of the synergy that the Blackstone Group is talking about. The private equity firm has said that it expects companies in its global investment portfolio to outsource to Gokaldas. But even if one buys that logic, it may be a while before the benefits of this synergy materialize. Meanwhile, a number of negative factors working in tandem could jeopardize earnings growth of Indian garment exporters. To start with, there is the sharp appreciation of the rupee, which has impacted both realizations and profitability. Then, there is the cost-push on labour and raw materials which has further squeezed profit margins. And to make things worse, competition from other ‘low-cost’ countries has become stronger.

Gokaldas’ financial performance in the last quarter bears out these pressures. Although revenues grew by a decent 18.2% to Rs262 crore, net profit fell by 22% to Rs10.5 crore. Net profit margin fell from 6% in the year-ago June quarter to just 4% last quarter.

Blackstone’s buyout price values Gokaldas at 14 times trailing earnings, higher than the commodity-like valuations the markets had got used to for textiles and garments exporters.

According to analysts, this is a good valuation to exit at given the near-term pressures. After all, even the company’s promoters have cashed in most of the holding at the same price. Luckily for minority shareholders, at least two out of every three shares tendered will be accepted in the open offer, unlike some other open offers where the acceptance ratio is much lower.

Bhel—new orders

Soon after winning the Rs2,900 crore order from the Jhahjjar Super Thermal power project, Bharat Heavy Electricals Ltd (Bhel)—that has been securing orders for setting up units supplying power to Delhi in time for the Commonwealth games in 2010—announced on Tuesday that it had won another order worth Rs6,500 crore from the Damodar Valley Corp. Earlier this month, Bhel had also won the deal for setting up a 1,600MW project at Obra in Uttar Pradesh. These wins should set at rest concerns that analysts have had about Bhel’s ability to fight competition, stemming from Chinese bids being lower than Bhel’s in the recent past. There had also been a perception that Bhel had more orders than it could handle, a view that gained ground after delays in supplying equipment. There was also an issue whether the state-owned power equipment manufacturer had the required technology to execute projects in the super-critical segment, which has been laid to rest with Bhel’s winning the Jhajjar order after an international bidding process.

The dissipating of these concerns is the reason the stock has outperformed the BSE Capital Goods index over the past month. The government has had a big role to play, by accelerating the award of power projects under the 11th Plan (2007-2012). Unlike in the 10th Plan, when only half the planned capacity addition could be completed, equipment orders for over 65% of the proposed target for the current plan have already been placed. Despite the competition, therefore, there should be enough orders for everybody. Being a state-owned company also helps, as the ministry of heavy industries is keen on ensuring that NTPC’s orders go to Bhel. Analysts say that Alstom, with which Bhel has a technology tie-up, is working closely with the company to bring down costs by manufacturing critical boiler parts in Alstom’s local subsidiary.

Bhel’s order book is now at almost three years’ sales and its capacity expansion plan to cater to those orders is on track. During times of global uncertainty, the recent orders indicate that the domestic infrastructure growth story continues to be strong and Bhel is well placed to profit from it.

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