Why Blackstone continues to struggle with Gokaldas Exports

The PE firm has failed to turn around the garment exporter; the value of its investment has shrunk 83 per cent

Blackstone, the private equity (PE) major, continues to struggle with its investment in garment shipper Gokaldas Exports, which it acquired in 2007 from the Hinduja family. The Bangalore-based company continues to underperform, five years after Blackstone bought a 68 per cent stake for $158.7 million, and took control of the company.

The company has stagnated — it reported net sales of Rs 981 crore for 2012-13 against sales of Rs 1,005 crore in 2006-07. Meanwhile, the stock has plummeted. The PE major paid Rs 275 for every share of Gokaldas Exports in 2007; on Wednesday, the scrip closed at Rs 45.60 on the BSE, which best reflects Blackstone’s struggle.

According to industry veterans, Blackstone could not do justice to Gokaldas as the way the textiles business functions is very different from the way a PE investor runs the show. Gokaldas and Blackstone did not reply to emailed questionnaires. Apparel exporters thrive on relationships built over time and that is what the Hinduja brothers did. “In the textile export business, it is very important to sustain these relationships. As Blackstone was new in this business, it started to impact the company,” said an expert.

Blackstone’s takeover of the company also coincided with the economic downturn in 2008-09, which led to loss of orders from the US and Europe. “Blackstone did not realise that textile is a very management-intensive industry and works very differently from the way private equity firms work and this has now had an impact on its growth as well,” said an executive with a PE, who did not want to be identified.

Typically, when PE investors invest in the textile space, they always leave the running of the company in the hands of the promoters as relations have been built over a period and the promoter knows the in and outs of the trade. In this case, Blackstone took over the management. “It is difficult for professionals to run a business operating on the kind of relationship you build with your client over years,” said an expert from the apparel industry.

While Blackstone has struggled with Gokaldas, its peers have outperformed. Arvind Mills' textile division’s revenues grew 88 per cent since 2007 to Rs 3,431.6 crore in 2012-13, while its profits have gone up by 250 per cent in the same period to Rs 435.88 crore. Gokaldas reported a net loss of Rs 109.44 crore in 2012-13 against a net profit of Rs 70.53 crore in 2006-07. While profits have fallen consistently since Blackstone took over, the company’s debt has doubled to Rs 302.71 crore.

Mandhana Industries, another apparel exporter, reported net profits of Rs 65.34 crore in 2012-13, up 236 per cent since 2006-07, while its net sales increased to Rs 1,363.06 crore in 2012-13 from Rs 240.34 crore in 2006-07. A person close to Gokaldas said Blackstone has started changing things at the garment-maker, which will start showing in the company's performance over a period of time.

In the first quarter of the current financial year, Gokaldas Exports recorded a net loss of Rs 16.3 crore; lower than the loss of Rs 23.6 crore it reported in the same period last year. The company has changed its product mix of exports by shifting its focus on outer wear such as jackets and T-shirts. Jackets in FY 2012 were 39 per cent of all exports; it has gone up to 41 per cent. The company also plans to increase its focus on the domestic market.