(By Evaluate Research) Bangalore: Rajesh Exports reported results for the third quarter ended December 2018 which were slightly below our estimates. Revenue for the quarter came in at Rs.440.1 bn, increasing by 6.5% on a YoY basis.
Similarly, EPS grew by 4.7% to Rs.10.70 in 3Q2019 from Rs.10.21 in the corresponding period last year. Gross profit margin for the period was 1.28% vs. 1.26% during the corresponding quarter last year. By focusing on improving the sales of higher margin products, the company continues to expand its gross profit margin which has increased from 0.85% in FY03/2017 to 1.21% in FY03/2018.
For the first 9 months of FY03/2019, the GPM stood at 1.27%. During our conversations with management, they mentioned to us that the company is seeing strong demand for its higher margin value-added products. With such strong demand and additional refining capacity being added at Bangalore later this year, we expect the GPM to increase further in the coming years.
In January 2019, Rajesh Exports secured a new export order worth
Rs. 9.3 bn from the Middle East. The order is expected to be executed by
the month of March 2019. The company mentioned that the order has its
special significance for the acceptance of the new range of jewelry
introduced by the company in the global markets. The company expects
to receive further significant orders for this range of jewelry from
international markets.
Bangalore Refinery to Start in 6 months:
During our conversation with management, they mentioned to us that
the company is currently in the final stages of setting up its gold refining
facility in Bangalore and that the facility should be operational in the next 6 months. 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 third
quarter, the company’s order book stood at Rs.421.5 bn. The company
continues to operate 81 retail jewelry stores in Karnataka under its
brand name SHUBH. The company currently is the largest gold refiner in
the world, refining over 35% of the world’s gold at its facilities located in
India and Switzerland. It has a capacity to refine 2,400 tons of gold per annum.
Import Duty Reduction Can Trigger Higher Demand:
Value of India’s gold imports declined by 24.3% to US$2.56 bn in
December 2018 as against US$3.39 bn in the same month of 2017, while in terms of tonnage it declined 13% in 2018 to 762 tons from 876 tons the
previous year. Similarly India’s gems and jewelry exports contracted by
6.8% to US$20.7 bn in April-November this fiscal, mainly on account of
demand slowdown in major developed markets. According to the Gems and Jewellery Export Promotion Council [GJEPC] data, exports stood at
US$22.2 bn in April-November period of 2017-18.
The gems and jewelry sector, which is still reeling under the impacts of
demonetization and GST implementation, has sought a reduction in gold
import duty to 4% [10% currently]. Any progress towards the reduction of import duty on gold due to improvement in the current account deficit of India would be beneficial for jewelry manufacturers and gold refiners.
Maintain PT; 50% Upside We forecast revenue of Rs.2,100 bn and earnings EPS of Rs.54.90 per share for FY03/2020. We maintain our one-year price target of Rs.900 per share on the stock. Our price target represents an upside of approximately 50% 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.990 which assumes 13% WACC and 3%
terminal growth rate. Our price target implies a P/E multiple of 16.4x on our FY03/2020 EPS estimate of Rs.54.90. We continue to remain positive on the margin growth story based on the company’s strong execution seen over the last 2 years. 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 11.0x on our
FY03/2020 EPS estimate which is at a significant discount to its 5-year average P/E of 15.9x.
