The recent buy-out of Gokaldas Exports by Blackstone comes close on the heels of the $38 million recent buy-out effected by Bombay Rayon Fashions for the garment business of Leela Scottish Lace.

This will perhaps be one of the of important deals in India’s garment industry. Although the size of the deal (Rs 682.1 crore assuming the entire 20% open offer goes through) is not large, it is a watershed event nonetheless.

So, is the industry readying for a wave of consolidation? Scale is clearly one factor.

“We believe the industry has enormous potential. Close to $50 billion of orders would flow in from high-cost centres to low cost centres like India and China and we believe that players like Gokaldas Exports are well-positioned,” says Akhil Gupta, CMD of Blackstone Advisory India.

The industry also it appears to be veering round this view. “For our scale of exports ($8.2 billion) there has to be consolidation, we have one too many companies,” says an analyst.

Global competition is another factor. Take the case of Bangladesh which has export earnings of about $6 billion and seen to give India a run for market-share. At last count there are over 50 companies, though majority of these have revenues anywhere between Rs 50-100 crore and don’t have the scale or size to be globally competitive.

There is bound to be another wave of consolidation with small players expected to sell out. Analysts say that buyers in US and Europe are looking at dealing with a handful of players.

The garment exports to US has dropped by 10% over the 12 months in value terms and the Indian industry has not made much headway into Europe. Further, with the rupee appreciating and businesses operating on single digit margins, the industry is facing very challenging times.

On the other hand, the Indian garment industry also did not really scale up their operations and even a large player like Gokaldas Exports did not venture too far. Further, the industry were stymied a bit by the tight labour laws and were seeking certain amount of reforms. Analysts also say that with the opening of the economy newer opportunities are available seeing the possible migration of “investments” into these sectors.

“If sell-out happens it could also indicate that current promoters may not be too willing to commit more investments,” says a Mumbai-based exporter. That the industry would have to face the winds of competition got well established when the world moved into a “quota-free” world effective January 1, 2005.

Although China was always considered to be looming over India, thanks to export restriction, Indian firms like Gokaldas Exports came into the limelight.

But the ride has become bumpy what with the rupee suddenly appreciating over 9% during the first quarter (Q1) ended June 30, 2007 with Gokaldas Exports itself reporting a 22.13% year on year drop in net profit.

But the industry has a word of praise for the Hinduja brothers - clearly the pioneers in the “outsourcing” business, something about which India is extremely proud of.

“All of us have been entrepreneurs and have built these enterprises. The apparel exports business is the creation of our hard-work, effort and vision,” says Mr Sudhir Dhingra, CMD of Delhi-based Orient Craft.

Mr. Neeraj Sharma

Neeraj Electronics

CEO, Neeraj Electronics
Jorhat, India

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