Bengaluru (By Evaluate Research): Rajesh Exports has reported robust growth in net profit, much ahead of our expectations, on a sequential QoQ basis, despite a global economic slowdown and a higher gold price, indicating business performance is surely recovering.
Net profit for the fiscal third quarter [ended December] came in at Rs.2276 mn, up 32% on a sequential QoQ basis. The rising gross margin was the primary reason for an increase in the net profit in the third quarter due to sustenance in the gold refining business. The increase in the price of gold in the international market continues to make the gold refining business more lucrative, to ultimately show an 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 sustenance in order book also indicates that the company will continue to show gradual recovery in profitability in the remaining quarter of FY03/2021 and beyond. For the third quarter, revenue increased by 12.3% to Rs.456 bn vs. Rs.461 bn in Q3 FY2020.
As international air freight and shipping services have resumed operations and recovering back to normal levels, Rajesh Exports is also expected to witness robust growth in revenues and profitability. 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 robust going forward.
Our conversations with the senior management and CEO Rajesh Mehta suggest that the business will post sustained growth YoY in revenue with a minimal impact on EPS as the global situation normalizes coupled with higher contribution from the gold refining business. The CEO also mentioned that the company’s net income witnessed a robust growth in the third quarter of FY03/2021 as prices of gold have continued to remain strong making refining even more lucrative for its Switzerland-based subsidiary Valcambi, which is the largest refiner of gold in the world.
The third quarter of FY03/2021 was expected to be impacted in terms of revenue and profitability on account of the lockdown in most of the countries due to the global pandemic. However, Rajesh Exports has delivered a double digit growth in net profit for the third quarter on a sequential QoQ 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 will however remain muted 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, did get impacted to a significant extent not only for the company but for the entire industry, only to begin gradual recovery in the fourth quarter.
Our FY03/2022 earnings forecast of Rs. 72.92 per share implies a growth of 129% 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.
Revise Estimates and Price Target Rs. 900; 89% Upside
We revise upwards our FY2022 earnings estimates from the earlier Rs.45.50 to Rs.72.92 per share on account of an expected rise in profitability once the global pandemic situation returns to normalcy in FY03/2022. We revise our price target from the earlier Rs.800 to Rs.900 on the stock and expect business conditions to come back to pre-pandemic levels at the end of FY2021 to achieve a robust growth in FY2022. Our price target represents an upside of approximately 89% 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. Over the last five years, the company has recorded a CAGR of 29% in EPS and 44% in revenues.
Our Rs.900 price target implies a P/E multiple of 12.3x on our FY03/2022 EPS estimate of Rs.72.92, and a P/E of 8.2x on our forward FY03/2023 estimate of Rs.109.95. 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 can be highly accretive to the EPS.
Currently, the stock is trading at a P/E multiple of just 11.6x on FY03/2020 EPS, and a P/E of 6.5x on our forward FY03/2022 estimate, which is at a significant 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 0.07x on FY03/2020 revenue and a P/S of 0.05x on our forward FY03/2022 estimate, which is at a significant discount to the trailing P/S ratio of 2.0x for the NIFTY Index.
Order Book Maintained at Rs.325 bn
At the end of the third quarter ended December, the order book was reported at Rs.325 bn. The maintenance in the order book indicates growth in revenues will sustain in the coming quarters once the global pandemic situation comes back to normal. 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.
