Mumbai: (By EVALUATE RESEARCH LTD.) Rajesh Exports reported a good set of results for FY03/17 [ended March] which were in-line with our revenue estimate and 3.5% above our EPS estimate. For the full year, revenues were up 46.5% YoY to Rs. 2,421 bn while the net income was up 16.3% YoY to Rs. 12.5 bn [EPS of Rs. 42.20 vs. Rs. 36.27 in FY03/16]. Revenue growth was driven by the refining and retail businesses which did well during the year. It also reflects the full year impact from the acquisition of Valcambi vs. just 8 months of revenue contribution in FY03/16. The company’s operating income increased 2.6% YoY to Rs. 17.3 bn as the revenue growth was significantly offset by a corresponding increase in the operating expenses which were up 47% YoY to Rs. 2,404 bn. As a result, the net income growth mainly came from lower interest costs which came down to Rs. 4.3 bn in the year from Rs. 5.8 bn in FY03/16.
For the fourth quarter, revenues were down -3% YoY to Rs.542 bn while the operating income was down -3.3% YoY to Rs. 4.8 bn. Net income was however very strong and grew 32.2% YoY to Rs. 3.3 bn. EPS came in at Rs. 11.25 vs. Rs. 8.50 in 4Q FY03/16. The strong net income growth was principally driven by a reduction in finance cost from Rs. 2.1 bn in 4Q FY03/16 to Rs. 1.2 bn in the current quarter. Growth initiatives going forward include new initiatives such as sale of Valcambi-branded gold coins and gold bars through an e-commerce platform, vending machines and duty-free shops at airports. The company is also looking to expand its retail presence in India by opening more stores under its “Shubh” brand.
The stock has done well this year and is up 41% year-to-date. We would point out to investors that the stock went down almost 40% from its high of Rs. 723 in Feb last year which we felt was unwarranted. This was principally driven first by a strike from the Jewellers Association in India and then the currency demonetization. While these events had a negligible impact on the company’s primarily export-oriented business, the stock got lumped in with the other domestic jewelry sector stocks which resulted in a steep decline in the company’s stock price. The stock has justifiably bounced back strongly this year and should continue to gravitate towards its fair value over the next 6-12 months in our view.
Our Call with the Management:
Following the Q4FY2017 earnings release, we spoke with the company’s Head of Investor Relations and Corporate Communications, Mr. Siddharth Mehta. Management noted that the revenue decline in the quarter was largely due to a shift in timing for new orders to Q1.
With Valcambi fully assimilated, the company is now working towards shifting a larger portion of their business from gold bullions and gold coins to retail, as the margins earned in the retail business are much higher than those earned in the gold bullion business. The EBITDA margin in the retail business is between 12%-14% as compared to just 0.2%-0.3% earned in the bullion business.
Maintaining Rs. 900 PT:
We maintain our one-year price target of Rs. 900 on the stock. Our price target represents a 38% upside from the current levels. Our 12-month price target on the stock is based on P/E and backed by DCF methodology. Our DCF based price is Rs. 923 which assumes 15.6% WACC and 2% terminal growth rate. We apply a multiple of 19x on our FY03/2018 EPS estimate of Rs. 47.15 which comes to Rs. 900. For FY03/18, we forecast sales of Rs. 2,550 billion.
Currently the stock is trading at a price of Rs. 650 which translates into a P/E of 13.8x based on our FY2018 EPS estimate. The company is continuing expanding its retail footprint and is also starting various new initiatives to further boost its growth. As such, with such strong fundamentals and low valuation, the stock offers an attractive risk/reward opportunity to investors.
