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 third quarter [ended December]. The performance continues to beat expectations as growth in the previous quarter was also solid. Revenue increased significantly by 45% YoY to a record high level of Rs.945 bn vs. Rs.652 bn in Q3 FY2022. The demand for gold was propelled by hefty central bankbuying and persistently strong retail investment. This increased the demand for gold refining business of the company in the third quarter of FY 2022-23. The World Gold Council’s latest Gold Demand Trends report reveals that annual gold demand (excluding OTC) in 2022 increased by 18% year-on-year, hitting 4,741 tons which is the highest annual total since 2011.
Net profit for the fiscal third quarter [ended December] came in at a record high level of Rs.4,216 mn, up 40% on a YoY and 13% on a QoQ basis. The sharp jump in net profit was due to 45% growth in revenues in the third quarter as compared to same period last year. We believe that the company can grow its revenues and profit in higher double digits in the last quarter of FY03/2023 [ending March].
Our conversations with the senior management and CEO Rajesh Mehta suggest that the business will post sustained growth YoY in revenue and net profit due to increased volumes in the gold refining business of the company. 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 global central bank buying amidst economic uncertainty. The jewelry business of the company, which has higher margins but relatively lower volumes in comparison to the gold refining business, continues to show significant recovery in the third quarter as well.
We expect operating efficiency to improve as revenue growth maintains similar momentum in the current March quarter. Rajesh Exports’ export business from India will continue to show similar robust revenue growth in the coming quarters, especially as the festival season continues in India in FY2022-23. The growth is expected to be strong going forward given the demand for gold in the international market.
While the results are ahead of our expectations, we are maintaining our full year estimates.
Our FY03/2023 earnings forecast of Rs. 53 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.
Increased Gold Demand from Global Central Banks:
During a period of rising inflation and higher interest rates, currencies such as the US Dollar depreciate in purchasing-power value, leading to surging demand for gold as a stable and more tangible “store of value”. The Fed will need to continue to raise interest rates in order to get them to a level high enough to bring inflation back down to the central bank’s target rate according to Fed Governor Michelle Bowman.
According to the World Gold Council, annual central bank demand for gold has more than doubled to 1,136 tons in 2022, a new 55-year record high, up from 450 tons during the prior year. Purchases in Q42022 alone reached 417 tons, bringing the total for the second half of 2022 to more than 800 tons.
Investment demand (excluding OTC) in 2022 was up 10% on the previous year. The increase was the result of two factors: a notable slowdown in ETF outflows and strong gold bar and coin demand. Gold bars and coins continued to hold favor with investors in several countries around the world, which helped to offset weakness in China. Total European gold bar and coin investment for 2022 surpassed 300 tons, aided by persistently robust German demand. There was also significant growth in the Middle East, where annual demand increased by 42% year-on-year. Total annual supply of gold in 2022 continued its upward trajectory, up by 2% YoY to 4,755 tons, remaining above pre-pandemic levels. Mining production increased to 3,612 tons which is at a four year high.
Global jewelry demand softened slightly in 2022, down 3% at 2,086 tons. This weakness was largely driven by the marked drop in Chinese annual jewelry demand, down 15% as consumer activity was curtailed by ongoing COVID-19 lockdowns for most of the year. The gold price rally in Q4 also contributed to the annual decline in jewelry demand.
Maintain Price Target to Rs. 1100; 41% Upside
We maintain our price target of Rs.1,100 on account of continued growth momentum in revenues and net profit since Q3FY21 implying a P/E multiple of 20.6x on our FY03/2023 EPS estimate of Rs.53, 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. 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 41% 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 10x on our forward FY03/2024 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 0.09x on FY03/2022 revenue and a P/S of 0.08x 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.
Order Book of Rs.784 bn at the end of Q3 FY 23:
The order book position of the company stood at Rs.784 bn at the end of Q3FY2023, with a growth of 10% on a sequential QoQ basis. The order book had grown by a strong 48% in the previous quarter on a sequential basis. Growth in the order book has continued to accelerate in the third quarter as the global economic situation gradually returns to normalcy along with a slight increase in the price of gold. 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. 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 recovery in profitability in FY03/2023 and beyond.
Q3 Operational Details
Rajesh Exports remains a zero-debt company. The company’s gross profit margin was at 0.58% in Q3 FY2023 as compared to 0.62% in Q3 FY2022 due to lower margins from the gold refining business. The operating profit margin was flat at 0.4% in Q3 FY2023 as compared to 0.5% in Q3 FY2022 indicating stability in operational performance. We believe gross and operating margins have already bottomed out and will only recover going forward as revenue from sale of high margin products is expected to show renewed growth. The recovery has already started in the third quarter of last year, with higher growth in the second and third quarter this year. So, we believe both gross and operating margins, should gradually continue to increase from today’s level in FY03/2024 and beyond.
Gold Demand Continues to Recover in India as well:
Demand for gold jewelry in India is estimated to grow at around 11% during the financial year 2022-23, almost 40% higher than the pre-COVID-19 levels seen in FY20, according to a research report published by ICRA. The jewelry retail sector is estimated to have grown at a robust 26% in FY22, driven by the strong demand recovery witnessed post the adverse impact of the second wave faced in the first quarter of the fiscal year.
Within the jewelry retail industry, revenues of organized retailers are likely to grow at a higher pace by around 14%, aided by their aggressive store expansion plans and a gradual shift from the unorganized segment towards the organized one, the report says.
India is the largest importer of gold, which mainly caters to the demand of jewelry industry. In volume terms, the country imports 800-900 tons of gold annually. The country’s gold imports have a bearing on the country’s current account deficit, which is the difference between inflow and outflow of foreign exchange.
Urban consumers were the engine of Indian demand in Q4 of 2022, encouraged by a return to pre-COVID levels of economic activity. Jewelry consumption continued to rebound and is now back to pre-pandemic levels, reaching 523 tons which is 10% higher compared to Q3 2021. Much of this growth was spearheaded by India’s urban consumers who drove up the demand by 17% YoY to 146 tons. Similarly impressive growth was also seen in much of the Middle East, with Saudi Arabian jewelry consumption up 20% since Q3 2021, and United Arab Emirates up 30% for the same period.
