Bengaluru: By Evaluate Research: Rajesh Exports reported resilient growth in revenues, ahead of our expectations, on a YoY basis despite a global economic slowdown and a higher gold price. Revenues for the fiscal first quarter [ended June] came in at Rs.461 bn, up 14% on a YoY basis. The rising price of gold in the international market was the primary reason for an increase in revenues in the first 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 growth in the longer term. The surging order book also indicates that the company will show sustained growth in revenues and profitability after FY03/2021 [ending September 2020] and beyond.
For the first quarter, EPS decreased by 50% to Rs.5.15 vs. Rs.10.23 in Q1 FY2020, while net profit also decreased by 50% from Rs.3 bn in Q1 FY2020 to Rs.1.52 bn in Q1 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 first quarter of the current financial year.
Our conversations with the senior management and CEO Mr. Rajesh Mehta suggest that the business will post sustained growth YoY and QoQ in both revenue and EPS once the global situation normalizes on account of higher contribution from the gold refining business. The CEO also mentioned that the company’s business witnessed a golden period in the first 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 first 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 first quarter showing absolute resilience amidst a severe crisis situation. The economic situation despite being far from normal, revenue growth has not been affected for Rajesh Exports. Since the bulk of the business of the company comes from refining of gold, we expect revenue and profitability 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 second quarter.
Our FY03/2022 earnings forecast of Rs. 40.24 per share implies a growth of 20% 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.
Maintain Estimates and Price Target Rs. 800; 76% Upside
We maintain our FY2022 earnings estimates of Rs.40.24 per share on account of an expected fall in revenues and profitability due to the ongoing global pandemic situation which would return 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 2020. Our price target represents an upside of approximately 76% 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 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 jewelry 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 19.9x on our FY03/2022 EPS estimate of Rs.40.24, and a P/E of 17.6x on our forward FY03/2023 estimate of Rs.45.5. 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 11.1x on FY03/2020 EPS, and a P/E of 11.3x 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 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.656 bn.
At the end of the first quarter ended June, the order book was maintained at Rs.656 bn. The maintenance in the orderbook 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 jewelry 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.
