Rajesh Exports Reports Robust Growth in Revenues

Bengaluru (By Evaluate Research) : Rajesh Exports reported robust growth in revenues, much ahead of our expectations, on a YoY basis despite a global economic slowdown and a higher gold price. Revenues for the fiscal second quarter [ended September] came in at Rs.1022 bn, up 53% on a YoY basis. The rising price of gold in the international market was the primary reason for an increase in revenues in the second quarter due to sustenance in the gold refining business. The increase in the price of gold in the international market more than made up for a decline in the volume of refined gold to ultimately show an increase in revenues.

The company however continues to focus on the strategy of sale of high margin products to accelerate revenue and profitability growth in the longer term. The sustenance in order book also indicates that the company will show gradual recovery in profitability after FY03/2021 and beyond. For the second quarter, EPS decreased by 45% to Rs.5.86 vs. Rs.10.69 in Q2 FY2020, while net profit also decreased by 45% from Rs.3.1 bn in Q2 FY2020 to Rs.1.73 bn in Q2 FY2021. The net profit declined drastically, but only temporarily, as compared to the significant rise in revenues on account of a severe impact on the high margin jewellery business due to the imposed lockdown in the second quarter of the current financial year.

Our conversations with the senior management and CEO Mr. Rajesh Mehta suggests that the business will post sustained growth YoY in revenue with a minimal impact on EPS as the global situation normalizes coupled with higher contribution from the gold refining business. The CEO also mentioned that the company’s business witnessed a robust growth in the second quarter of FY03/2021 as prices of gold have continued to remain strong making refining even more lucrative for its Switzerland-based subsidiary Valcambi, which is the largest refiner of gold in the world.

The second quarter of FY03/2021 was expected to be impacted severely in terms of revenue and profitability on account of the lockdown in most of the countries due to the global pandemic. However, Rajesh Exports has delivered a double digit growth in revenues for the second quarter on a YoY basis and a triple digit growth on a sequential QoQ basis showing absolute resilience amidst a severe crisis situation. The record revenue number for the second quarter for Rajesh Exports was driven by its gold refining business.

Since the bulk of the business of the company comes from refining of gold, we expect revenue to show sustained growth while profitability is likely to witness minimal impact going forward as supply seems to be back on track running at full scale as the situation continues to stabilize globally. The demand for luxury goods, such as cars [both mass market as well as high-end], apartments and real estate, and gold/jewellery will however remain muted in the current year. The jewellery business of the company, which has higher margins but relatively lower volumes in comparison to the gold refining business, did get impacted to a significant extent not only for the company but for the entire industry, only to begin gradual recovery in the third quarter.

Our FY03/2022 earnings forecast of Rs. 45.5 per share implies a growth of 48% over the FY03/2021 earnings. The USA end market continues to remain robust with strong consumer spending expected as employment has started to recover sharply.

Revise Estimates and Maintain Price Target Rs. 800; 74% Upside:

We revise upwards our FY2022 earnings estimates from Rs.40.24 per share to Rs.45.50 per share on account of an expected rise in profitability once the global pandemic situation returns to normalcy in FY03/2022. We maintain our price target at Rs.800 on the stock and expect business conditions to come back to pre-pandemic levels at the end of FY2021. Our price target represents an upside of approximately 74% 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 jewellery 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 is rapidly expanding 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 jewellery demand.

Over the last five years, the company has recorded a CAGR of 29% in EPS and 44% in revenues. Our Rs. 800 price target implies a P/E multiple of 17.6x on our FY03/2022 EPS estimate of Rs.45.50, and a P/E of 15.6x on our forward FY03/2023 estimate of Rs.51.45. We continue to remain positive on the margin growth story based on the company’s strong execution seen over the last 24 months. While the company operates at a low level absolute of operating margins, a relatively small increase in margins can be highly accretive to the EPS.

Currently, the stock is trading at a P/E multiple of just 11.2x on FY03/2020 EPS, and a P/E of 14.9x on our forward FY03/2022 estimate, which is at a significant 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 26x P/E level.

Also, the stock is trading at a Price/Sales ratio of just 0.07x on FY03/2020 revenue and a P/S of 0.06x on our forward FY03/2022 estimate, which is at a significant discount to the trailing P/S ratio of 2.0x for the NIFTY Index.

Order Book Maintained at Rs.572 bn:

At the end of the second quarter ended September, the order book was reported at Rs.572 bn. The maintenance in the order book indicates growth in revenues will sustain in the coming quarters once the global pandemic situation comes back to normal. The company had introduced new designs in the international markets which constitute a new range of jewellery.

The company will be executing orders from its own manufacturing facility, which is the world’s largest jewellery manufacturing facility. This facility has a processing capacity of 250 tons of jewellery and gold products per annum. The company is confident of executing its orders well within the time frame on the back of its expertise, skilled craftsmen, artisans & its exceptionally strong backward integrated infrastructure but only after the global pandemic situation comes back to normal.