Rajesh Exports Registers Good Results in Revenues

(Report by Evaluate Research) Bengaluru: Rajesh Exports reported flattish results, both in terms of revenues as well as profits, for the fiscal first quarter (ended in June, 2022), which is perhaps a decent outcome given global economic uncertainties.  Revenue decreased fractionally by 2.8% YoY to Rs.495 bn vs. Rs.509 bn in Q1 FY2022. The stability in the price of gold in the international market has however led to better gross and operating margins for the gold refining business of the company in the first quarter of FY 2022-23. The company’s gross profit margin was at 0.78% in Q1 FY2023 as compared to 0.73% in Q1 FY2022 due to higher margins from the gold refining business. The operating profit margin was up to 0.6% in Q1 FY2023 as compared to 0.5% in Q1 FY2022 indicating marginal improvement in the operational performance. Rajesh Exports’ export business from India will continue to recover in the coming quarters.

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.  While the results are slightly below our expectations, we are maintaining our full year estimates.

Net profit for the fiscal first quarter (ended June) came in at Rs.2,717 mn, down 2.4% on a YoY. The marginal reduction in net profit was due to a slight increase in expenses in the first quarter. We believe that the company is on track to show sustained recovery in the net profit in FY03/2023 (ending September) and beyond. As the company operates at a low-level of absolute gross and operating profit margins, a relatively small increase in margins will contribute to a sharp accretion in EPS in the upcoming quarters, as business conditions continue to normalize.

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 FY03/2023 and beyond.

Our conversations with the senior management and CEO 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. 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 business recovery going forward, as supply seems to be back on track running at full scale as the situation continues to stabilize globally. 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 first quarter.

Our FY03/2023 earnings forecast of Rs. 53.36 per share implies a growth of 56% over the FY03/2022 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. 1100; 82% Upside

We maintain our price target of Rs.1,100 on account of a likely recovery in revenues and net profit since Q3FY21 implying a P/E multiple of 20.6x on our FY03/2023 EPS estimate of Rs.53.36, and a P/E of 13.5x on our forward FY03/2024 estimate of Rs.81.19. 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.

We maintain our FY03/2023 earnings estimates at Rs.53.36 per share on account of an expected rise in profitability as the global pandemic situation returns to normalcy in FY03/2023. We maintain our previously upward revised price target of Rs.1,100 on the stock and expect business conditions to achieve a robust growth in FY2023.  Our price target represents an upside of approximately 82% 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.

Currently, the stock is trading at a P/E multiple of 17.6x on FY03/2022 EPS, and a P/E of 11.3x 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 21x and a forward 18x estimated P/E levels.

Also, the stock is trading at a Price/Sales ratio of just 0.07x on FY03/2022 revenue and a P/S of 0.06x 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 of Rs.486 bn at the end of Q1FY23

At the end of the first quarter ended June, the order book was reported at Rs.486 bn. Growth in the order book should accelerate in the coming quarters as the global economic 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.