Rajesh Exports: Record Sales +40% YoY

Rajesh Mehta

Bengaluru: (By Evaluate Research): Rajesh Exports reported stellar results, ahead of our expectations, both in terms of revenues as well as profits, for the fiscal fourth quarter [ended March]. The performance continues to beat expectations as growth in the previous quarter was also solid. Revenue increased significantly by 35% YoY to a record high level of Rs.1154 bn as compared to Q4 FY2022. The demand for gold was propelled by hefty Central Bank-buying by adding 228 tons to global reserves, a Q1 2023 record high. This increased the demand for gold refining business of the company in the fourth quarter of FY 2022-23. The World Gold Council’s latest Gold Demand Trends report reveals that gold demand (excluding OTC) was 13% lower year-on-year. But a recovery in the OTC market propped up total gold demand to 1,174 tons, a slight 1% increase compared to Q1 2022.

Net profit for the fiscal fourth quarter [ended March] came in at Rs.3,770 mn, up 141% on a QoQ basis. The net profit declined by 11% on a YoY basis due to reduction in the gross margins for the company in the fourth quarter of FY2022-23. The net profit for FY2022-23 recovered sharply by 42% on a YoY basis. 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; 100% 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 100% 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 4.7x 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.