(By Evaluate Research) Bengaluru: Rajesh Exports reported increased profitability for the financial year ended March 2019. For the full year, EPS increased by 2.1% to Rs.43.77 vs. Rs.42.87 in FY03/2018, while net profit also increased by 2.1% from Rs.12.6 bn in FY2018 to Rs.12.9 bn in FY03/2019. Reduction in finance costs by 18% to Rs.4.4 bn in FY2019 as compared to Rs.5.4 bn in FY2018 was the primary reason for increase in profitability of the company. A decrease in the income tax expenses by 30% was the secondary reason for the increase in profitability. The effective income tax rate for FY2019 was at 4% as compared to 5.7% in FY2018. The company did well to curtail costs such as employee wages, which grew only 3% YoY, which suggests wage growth was much less than inflation and typical annual salary hikes in India. Although profit growth was modest, management pointed out that Rajesh Exports was one of the few gold related firms globally to post positive profit growth for fiscal 2019. While not directly comparable, especially as it relates to jewelry production, but firms like Barrick Gold, Newmont Goldcorp, Kinross Gold, etc all reported sharply lower profits in 2018.
Revenue for the year came in at Rs.1757.6 bn, down 6.4% YoY due to slowdown in demand for gold in developed and emerging market economies, which impacted the company’s sizable export business. With oil prices crashing to US$50 levels in December 2018, demand has been lackluster in key Middle East markets. Within Rajesh Export’s home market in India, while reported official GDP growth has been robust [albeit slowing] at around 7%, unemployment remains at high levels, and the demand for luxury goods in particular, such as cars [both mass-market as well as high-end], apartments and real estate, and gold/jewelry has all been subdued. Many of these markets haven’t really recovered from the Indian government’s demonetization and GST implementation a couple years back. With a positive election outcome, there are tentative signs that demand may pickup in India going forward. During our conversations with management, they mentioned to us that the company is seeing strong demand for its higher margin value-added products and expects a recovery in sales growth going forward. Management observed that the current June-ending quarter, of which 2 months are almost complete, is already witnessing a recovery compared to the March-ended quarter trends.
The company’s gross profit margin expanded by 5% during the year from 1.21% in FY2018 to 1.27% in FY2019 while the operating profit margin remained flat in FY2019. The company continues to focus on sales of higher margin products which are expected to enhance profitability for the company going forward. In view of the increasing margins, we revise our FY2020 earnings forecast to Rs. 49.88 per share, a growth of 14% over the FY2019 earnings. With increasing crude oil prices we believe that demand from the Middle-East could grow at a higher rate and provide further boost to the company’s earnings. The USA end market remains robust with strong consumer spending accompanying record low unemployment, but Europe remains lackluster. The company has declared a nominal dividend of Rs.1 per share for the year.
Revised Estimates; Maintain PT Rs. 900; 36% Upside:
We revise our FY2020 earnings estimates by 5% from Rs.47.78 per share to Rs.49.88 per share on account of expected recovery in revenues and increase in profitability. We maintain our one-year price target of Rs. 900 on the stock. Our price target represents an upside of approximately 36% 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 in retail stores 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 DCF-based price is Rs.887 which assumes 13% WACC and 3% terminal growth rate. Our price target implies a P/E multiple of 13x on our FY2020 EPS estimate of Rs.49.88. We continue to remain positive on the margin growth story based on the company’s strong execution seen over the last 18 months. 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 13x on our FY2020 EPS estimate which is at a significant discount to its 5-year average P/E of 16x, as well as the overall Indian stock market where the benchmark NIFTY Index is trading at a trailing 26x P/E level.
Seasonally Subdued Quarter:
For the fiscal fourth quarter ended March, EPS declined by 17% to Rs.8.89 in 4Q2019 from Rs.12.51 in the corresponding period last year. Revenue for the quarter came in at Rs.344.4 bn, decreasing by 21.4% on a YoY basis. The fourth quarter sales are seasonally weak for the companies in the retail segment, following the December-end quarter which benefits from Diwali and Christmas festivities, weddings and year-end bonus spending. Subdued sales growth especially after a seasonally strong December quarter had a significant impact on the demand for gold in the January to March quarter which was reflected in the drop in revenues for the company. Gross profit margin for the period was 1.28% vs. 1.48% during the corresponding quarter last year. 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.
Bangalore Refinery Starting in 6 months:
During our conversations 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 is expected to contribute an additional 5% to 8% of the existing revenues when it reaches full production. It is expected to reach 100% capacity utlization after one year from the start of commercial production. The refinery will help the company to further integrate its refining, manufacturing and export and retail operations. At the end of the fourth quarter, the company’s order book stood at Rs.471.7 bn. The company continues to operate 82 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.
