Rajesh Exports: Performance Beats Expectations

(By Evaluate Research) Bangalore: Rajesh Exports reported stellar results, ahead of our expectations, both in terms of revenues as well as profits, for the fiscal first quarter [ended June]. The performance continues to beat expectations as growth in the previous quarter was also solid on a year-on-year basis. Revenue increased significantly by 73% YoY to Rs.857 bn as compared to Q1 FY 03/2023. 

Revenue Growth up +73% for the fiscal Q1 [ended June]

Central Bank Buying Gold Props up Demand for the Quarter

Net Profit Growth of 14% Year on Year; Expect Sharp Recovery in Net Profit Margin from Current Levels

Expected EPS Growth of 83% to Rs.88.60 for FY 03/2024

Price Target Rs.1,100 suggests 111% Upside Potential

According to the World Gold Council (WGC), the calendar year second quarter central bank demand for gold was down YoY to 103 tons, primarily driven by net sales in Turkey due to country-specific political and economic circumstances. However, central banks bought a first half record amount of 387 tons, and quarterly demand is in line with the longer-term positive trend – indicating that official sector buying should remain strong throughout the year. Jewelry consumption remained resilient in the face of high prices, showing a 3% YoY increase in Q2 and an H1 total of 951 tons. A rebound in Chinese demand and remarkably strong consumer buying in Turkey bolstered second quarter consumption. 

Net profit for the fiscal first quarter [ended June] came in at Rs.3,094 mn, up 14% on a YoY basis. The net profit and the revenue declined by 16% and 26% respectively on a sequential QoQ basis due to inherent seasonality/cyclicality during the first quarter of FY2023-24. We believe that the revenue growth will continue, albeit at a slower pace, while the net profit margin is expected to improve sharply in FY03/2024. 

Our conversations with the senior management and CEO Rajesh Mehta suggest that the business will post flat to positive growth YoY in revenues while the net profit margin will improve sharply. The net profit margin is expected to improve sharply due to a rise in contribution from the high margin jewelry business of the company. Also, the company expects to improve their operational efficiency in FY2023-24 which will further aid in net profit margin improvement.

While the results are ahead of our expectations, we are maintaining our full year estimates. Our FY03/2024 earnings forecast of Rs.88.60 per share implies a growth of 83% over the FY03/2023 earnings. The USA end market continues to be holding up with still resilient consumer spending expected on healthy employment levels, although inflation and an economic slowdown are areas of concern.

Maintain Price Target to Rs. 1,100; 111% Upside:

We maintain our price target of Rs.1,100 on account of sharp improvement in net profit implying a P/E multiple of 12.4x on our FY03/2024 EPS estimate of Rs.88.60, and a P/E of 9.4x on our forward FY03/2025 estimate of Rs.117. We continue to remain positive on the margin growth story based on the company’s strong execution history. As the company operates at a low absolute level of operating margins, a relatively small increase in margins will lead to a significant accretion to EPS. 

Our price target represents an upside of approximately 111% from the current levels. Our 12-month price target on the stock is based on DCF methodology and backed by traditional P/E multiples as well. Please see detailed earnings and valuation model attached.

Rajesh Exports is the world’s largest refiner of gold and largest exporter of gold jewelry with a 40% market share in India. With over 30 years of operating history, the company is a low-cost manufacturer due to economies of scale, and it derives 90% of its revenues from exports. The company hopes to eventually expand its retail stores in India as well, with 82 stores presently. The company is a prime beneficiary of secular growth in Indian and Asian gold and jewelry demand.

Currently, the stock is trading at a P/E of 4.4x on our forward FY03/2025 EPS estimate, which is at a discount to its 5-year average P/E of 20x, as well as the overall Indian stock market where the benchmark NIFTY Index is trading at approximately a trailing 22x and a forward 19x estimated P/E levels.  Also, the stock is trading at a Price/Sales ratio of just 0.05x on FY03/2023 revenue and a P/S of 0.05x on our forward FY03/2024 estimate, which is at a significant discount to the trailing P/S ratio of 2.0x for the NIFTY Index.