How Sivaramakrishnan Ganapathi knit the biggest revival story of India’s apparel export industry
Gokaldas Exports, once a case study on things gone wrong, now appears to have decisively turned a corner.
But this was in some ways worse — now he was on vacation, and yet his mind was preoccupied. After two decades at the Aditya Birla Group, it took a lot of deliberation to quit as chief operating officer at Idea Cellular and move to lead Gokaldas, heeding the call of his friend and IIM-Bangalore classmate Mathew Cyriac, a one-time PE executive who now owned a significant chunk of the publicly traded garment exporter.
Gokaldas was weighed down not just by the structural challenges in India’s apparel export industry — low margins, a fluctuating rupee and competition from countries such as Vietnam, the Philippines, Pakistan and Bangladesh — but also its own chequered past.
The company was among the earliest India targets for Blackstone, one of the world’s largest investment firms, led by the influential American executive Stephen A Schwarzman. By virtue of its scale, Blackstone’s investments and their performance are closely watched for signals about sectors and countries.
In 2007, the bulge bracket investor put in Rs 482.50 crore for a 50.1% stake, which at Rs 275 a share represented a 20% premium to the prevailing share price. It then acquired another 20% through an open
offer. Over the next decade, however, the company stagnated, its dollar revenues halved, and its share price was hammered down to double digits.
Blackstone tried to sell the company, and slowly offloaded its stake. In early 2017, after having spent a decade at Blackstone, Mathew Cyriac quit as co-head of the firm’s private equity business in India to start his own fund. It was when he went to the company’s New York offices to say his goodbyes that the firm offered Gokaldas to Cyriac. When his Florintree Capital bought Blackstone’s stake at Rs 42 a share — through special purpose vehicle Clear Wealth Consultancy Services LLP — the deal represented an 84% write-down on the latter’s original investment.
First order of business was hiring a CEO, and the second, backing them up with necessary capital. “When I looked around, most apparel exports companies were led by their owners. I decided I needed to find a CEO who would think like an owner,” Cyriac says.
Ganapathi’s mandate was to turn around the company, once India’s largest apparel exporter. He visited the company’s Bengaluru factory four times before he signed on. He also held discussions with the company’s chairman, Richard Saldanha, who told him that the company was not in the business of apparel, but in the business of trust.
Companies such as Gokaldas make their money by supplying garments to the world’s leading fashion retailers. Think Gap, Tommy Hilfiger, Zara and so on. These brands are not just paranoid about quality, they need to be able to trust a supplier to not deviate from specifications across tens of thousands of units. Nurturing relationships, calming frayed nerves, offering the flexibility to quickly turn around unscheduled but urgent orders — these are all as much part of the business as producing high-quality garments.
Cyriac says he also felt a “moral obligation” to set the story right, as someone who had been part of Blackstone’s India journey right through. (He was not involved in managing Gokaldas while he worked at the investing firm). There were 25,000 employees who were counting on the company’s turnaround.
Big players such as Arvind Lifestyle were entering the field. Gokaldas had slipped to the seventh position on the export turnover league table. The top player, Shahi Exports, posted seven times as much revenue as Gokaldas, whose top line had stagnated at about Rs 1,000 crore for a decade. Things were not looking good.
Once he was in the driver’s seat, Ganapathi lost no time in donning the battle gear. On the morning of December 29, 2017, he took a break from his Dubai vacation and got into a video-conference, while the rest of the Gokaldas board joined from Bengaluru.
His primary focus was to get approval to raise around Rs 125 crore. That was the easy part. It would take five more months for the company to raise Rs 70 crore through qualified institutional placements. The money came from L&T Mutual Fund and HSF Mauritius, an overseas fund.
With the money in the bag, Ganapathi turned his focus on customers and efficiency. Around a year later, his plan seems to be working. After recording losses of Rs 46 crore in 2016-17 and Rs 28 crore in 2017-18, Gokaldas has recorded a net profit of Rs 25.58 crore for 2018-19. All the four quarters were in the black despite the apparel exports industry facing steady headwinds. The shares of the company closed at Rs 76 at the end of trading on Friday, May 17.
The challenge now is to maintain the gains and take the company higher up in the exports league table. So what did Ganapathi change?
Richard Saldanha, chairman of Gokaldas Exports and a former vice-chairman at Blackstone, says the basic change has been “how the company goes to market” — how it interacts and sells its services to its clients.
Saldanha had joined the Gokaldas Exports board in 2011 after the exit of the erstwhile promoters, the Bengaluru based Hinduja brothers — Madanlal, Rajendra and Dinesh (unrelated to the UK based Hinduja group).
It was unusual for a private equity investor to let the erstwhile promoters run the business for three years after a buyout. After the trio left, the company saw two more CEOs — Gautam Chakraborty and P Ramababu — come and go. But sustainable performance eluded it. Meanwhile, the rupee to dollar rate that was around Rs 39 in 2007-08 was flirting with Rs 70 in 2017.
Earlier, says Saldanha, Gokaldas would go to customers only to take orders. One of the first things Ganapathi did after taking over as CEO was to visit all his major customers across the world — the list includes the likes of Nike, Adidas, GAP and Marks & Spencer.
Ganapathi says: “I met all the customers one by one, explained to them that we are seriously committed to the relationship and we will expand our capacities.” Next, Ganapathi focused on increasing capacity. “The company has been shrinking and giving up on capacity. I thought let me push it.”
He found assembly lines lying idle in warehouses and decided to revive them. This alone led to a 10% increase in capacity. Another move was operational efficiency. He pushed the same assembly line that made 1,000 garments in a given time to make 1,100, he says.
“We tried to engineer the assembly lines better.” Ganapathi says a garment-making assembly line is not a smoothly moving chain. A particular stitch may take 33 seconds while the next one may take 38 seconds, and bottlenecks develop at these points.
“We redeployed the most efficient workers to the parts of the assembly line that took more time.” Automation was brought in to expedite work. “We reduced the time taken to make a shirt from 21 minutes to 19 minutes,” Ganapathi adds.
Margins soon improved and working capital needs dropped from 120 days to 100 days. The last and key part of the turnaround process was to inject funds and invest in new, modernised processes. The fund infusion happened in May 2018. The company invested Rs 36 crore in improving its plants, processes and information systems, and also acquired seven new customers. Ganapathi points out that for over a decade no equity had flowed into the company, as the buyout deals were between promoters.
Cyriac says he sees a “big opportunity” in the industry. “We see a chance to treble the company’s turnover in double quick-time and opportunities to acquire many distressed assets,” says Cyriac. He also sees an opportunity to build an apparel-making platform around Gokaldas Exports.
Independent analysts are not quite as optimistic. “India’s apparel exports are estimated to de-grow by 4-5% in FY2019, following a similar de-growth of 4% in FY2018,” credit rating agency ICRA said in a February report. The report added a bottom was near and it expected a positive movement soon. However, it also pointed out that Indian players have not been able to make anything out of overall growth in the global trade in apparel.
China has been continuously losing market share, which has been pocketed by Bangladesh and Vietnam. The report pointed out the new emerging free-trade agreements such as the 11-nation trans-Pacific partnership and the proposed European Union-Vietnam foreign trade agreement would be detrimental for Indian exporters. These would give exporters from nations with zero or very low tariffs access to the Indian market. There are domestic challenges, too, says Ganapathi.
Despite all the homework he did before joining, he was not ready for the sudden developments — for example, the rupee strengthening in the last few months of 2017, the impact of the goods and services tax regime on exports or the credit squeeze on banks. Other structural changes can help Gokaldas.
Analysts at Prabhudas Lilladher said in a December 2018 report that as global customers set up shop in India, now 20% of Gokaldas’ revenues would come from the domestic market. The report, by Shailee Parekh and Charmi Mehta, said: “We expect Gokaldas Exports to grow revenue at a compounded annual growth rate of 18.3% in 2017-18 to 2020-21, taking the overall turnover to over Rs 1,700 crore in 2020-21.”
It also predicted a sharp growth in its gross margin from 48% now to 53% by 2021. This would be music to the ears of investors such as L&T and HSF Mauritius who invested in Gokaldas last year, and can push the company up to among the top three among Indian apparel exporters. The market capitalisation of Gokaldas Exports has been stagnant at Rs 300-400 crore for over a decade.
By continuing to win the trust of customers, the company might eventually win the trust of the stock markets, too.