(By Eveluate Research) Bangalore: Rajesh Exports reported solid earnings for the first quarter ended in June 2018 of Rs.13.52 per share, representing a growth of 34.5% on a YoY basis and 14% above our estimates. Similarly, EBITDA for the quarter came in at Rs.5,780.8 mn, growing by 29.8% YoY. Revenue for the quarter, however, was down by about 13% mainly due to the company’s focus on higher margin products and also due to a decline in gold price by more than 10% during the quarter. Over the last one year, the company has been strategically focusing on changing its product mix to higher margin value added products. This strategy has been the main driver of the company’s margin and earnings growth. In FY2018, Rajesh Exports reported gross profit margins of 1.21% vs. 0.85% in FY2017. The margin further expanded to 1.53% in 1Q [June] 2019. During out conversation with senior management, they mentioned that they will continue to focus on increasing their bottom-line by delivering more value added products to their customers.
Estimate Revision:
Given the strong results delivered in 1Q and the continuous improvement in margins, we revise our FY2019 earnings estimate upwards by approximately 9% from Rs.48.10 per share previously to Rs.52.51 per share, representing a growth of 12.5% over the FY2018 earnings. Over the next 3 years, we expect the company’s earnings to grow at a CAGR of 16% from Rs.42.87 per share in FY2018 to Rs.78.56 per share in FY2022.
Maintain PT; 40% Upside:
We maintain our one-year price target of Rs.900 on the stock. Our price target represents an upside of approximately 40% from the current levels. Our 12- month price target on the stock is based on P/E and backed by DCF methodology. Our DCF-based price is Rs.1066.0 which assumes 13% WACC and 3% terminal growth rate. Our price target implies a P/E multiple of 14.5x on our FY03/2020 EPS estimate of Rs.61.90. We continue to remain positive on the margin growth story based on the company’s strong execution seen over the last 1 year. The company operates at extremely thin operating margins and even a small increase in margins can be highly accretive to the EPS. Currently, the stock is trading at a P/E multiple of just 10.4x on our FY03/2020 EPS estimate which is at a significant discount to its 5-year average P/E of 14.7x.
Gold Price:
Gold price has dropped more than 13% over the last 3 months from a high of approximately $1,360 per ounce in April to $1,180 currently. The strength of the U.S. dollar has been one of the main headwinds for gold as gold prices generally take a hit during periods of strong dollar. A strong US economy, the threat of trade wars looming and the federal reserve raising interest rates have all contributed to the strength of the dollar, as a result the dollar index is up by more than 4.5% YTD.
Bangalore Refinery to Start by Year-End:
The company is currently in the final stages of setting up its gold refining facility in Bangalore and management mentioned to us that the facility should be operational by the end of CY2018. The products developed at this facility will be used for the company’s export business as well as for its domestic business in India. The refinery will help the company to further integrate its refining, manufacturing and export & retail operations. At the end of the first quarter, the company’s order book stood at Rs.446.3 bn. The company continues to operate 81 retail jewelry stores in Karnataka under its brand name SHUBH and plans to open a few new stores in FY2019, which will further add to the company’s profitability and margins. We also expect the company to benefit from the discontinuation, in May 2018, of the 5% value-added tax [VAT] which was imposed by the UAE government on gold, silver and platinum jewelry at the start of the year.
