Bengaluru (By Evaluate Research): Rajesh Exports reported a stellar growth in net profit, ahead of our expectations, on a YoY basis, despite a global economic slowdown, indicating that margins are showing sustained improvement. Net profit for the fiscal second quarter [ended September] came in at Rs.2,914 mn, up 69% on a YoY basis. The rise in the gross and operating margins was the primary reason for an increase in the net profit in the second quarter due to sustenance in the Switzerland-based gold refining business. As the company operates at a low-level of absolute gross and operating profit margins, a relatively small increase in margins has contributed to a sharp accretion in EPS in the second quarter, which is expected to sustain in the coming quarters, as business conditions continue to normalize. The stability in the price of gold in the international market continues to make the gold refining business more lucrative, thus leading to the strong increase in net profit.
The company continues to focus on the strategy of sale of high margin products to accelerate revenue and profitability growth in the longer term. The growth in order book also indicates that the company will continue to show gradual recovery in profitability in FY03/2022 and beyond [more details below]. For the second quarter, revenue decreased by 60% to Rs.412 bn vs. Rs.1021 bn in Q2 FY2021. The revenue was down drastically on a year-on-year basis due to the accumulated and pending orders that were delivered in the second quarter of the previous year (high base effect). As international air freight and shipping services operations are recovering back to normal levels, Rajesh Exports’ export business from India will continue to recover. The growth is expected to be strong both on a sequential quarter on quarter and year on year basis, considering the low base of the previous quarters given that demand is expected to be strong going forward.
Our conversations with the senior management and CEO Mr. Rajesh Mehta suggest that the business will post sustained growth YoY in revenue and net profit as the global situation normalizes coupled with higher contribution from the gold refining business. International markets have started to open up and the logistics are also getting back to normalcy. The company is geared up to increase its global market share and also expand in the domestic market.
Rajesh Exports has delivered a double-digit growth in net profit for the second quarter on a YoY basis showing absolute resilience amidst a severe crisis situation. Since the bulk of the business of the company comes from refining of gold, we expect revenue and profitability to show significant growth due to the base effect 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/jewelry is also expected to recover in the current financial year. The jewelry business of the company, which has higher margins but relatively lower volumes in comparison to the gold refining business, has shown a significant recovery in the second quarter.
Our FY03/2023 earnings forecast of Rs. 72.65 per share implies a growth of 153% 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. 900; 22% Upside
We maintain our FY03/2023 earnings estimates at Rs.72.65 per share on account of an expected rise in profitability as the global pandemic situation returns to normalcy in FY03/2022. We maintain our price target at Rs.900 on the stock and expect business conditions to come back to pre-pandemic levels at the end of FY2022 to achieve a robust growth in FY2023. Our price target represents an upside of approximately 22% 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.
Our Rs.900 price target implies a P/E multiple of 12.3x on our FY03/2023 EPS estimate of Rs.72.65, and a P/E of 8.9x on our forward FY03/2024 estimate of Rs.100. We continue to remain positive on the margin growth story based on the company’s strong execution history. While the company operates at a low-level absolute of operating margins, a relatively small increase in margins is seen to be highly accretive to the EPS.
Currently, the stock is trading at a P/E multiple of 25.8x on FY03/2021 EPS, and a P/E of 10.2x on our forward FY03/2023 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 41x and a forward 28x estimated P/E levels.
Also, the stock is trading at a Price/Sales ratio of just 0.08x on FY03/2021 revenue and a P/S of 0.07x on our forward FY03/2023 estimate, which is at a significant discount to the trailing P/S ratio of 2.0x for the NIFTY Index.
Order Book Grows Significantly to Rs.671 bn
At the end of the second quarter ended September, the order book was reported at Rs.671 bn. A growth of 39% in the order book to the tune of Rs.187 bn (Rs.484 bn at the end of previous quarter) indicates that growth in revenues will sustain in the coming quarters as the global pandemic situation gradually returns to normalcy. The company had introduced new designs in the international markets which constitute a new range of jewelry.
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 jewelry 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.
