Rajesh Exports Reports Mixed 3rd Quarter Results

Bengaluru: (By Evaluate Research) Rajesh Exports [RJEX_IN; Rs.202 billion/US$2.86 billion market cap; US$2.35 million total average daily value traded] reported an increase in revenues and net profit for the first quarter ended June 2019 on a sequential QoQ basis. Revenues for the first quarter came in at Rs.406 bn, down 7.5% YoY but up 18% on a sequential QoQ basis. Even though the revenues decreased on a year on year basis due to a slowdown in demand for gold in developed and emerging market economies, they have shown robust growth on a QoQ basis indicating recovery is well on track for the current financial year. For the first quarter, EPS increased by 15% to Rs.10.23 vs. Rs.8.89 in Q42019, while net profit also increased by 15% from Rs.2.6 bn in Q42019 to Rs.3 bn in Q12020. However, the net profit declined by 24% due to 84% reduction in other income and 7.5% decline in sales on a YoY basis. Our conversations with CEO Rajesh Mehta suggest the company is on track to post both YoY revenue and EPS growth for the current fiscal year ending 03/2020.

The highlight of the first quarter results was an absolute reduction in the finance costs to nil as compared to Rs.1.47 bn in Q12019 and Rs.0.75 bn in Q42019 which was the primary reason for increase in profitability of the company on a QoQ basis. As a reminder, Rajesh Exports remains a zero debt company. The finance costs were reported to be zero on account of an adjustment of the interest cost in the COGS. The company did well to reduce costs such as employee wages by 8% on a QoQ basis. Additionally, a new export order worth Rs.9.42 bn from Germany augurs well from a business perspective in Europe going forward (more details below).

Within Rajesh Export’s home market in India, while reported official GDP growth has been robust [albeit slowing] at around 7%, unemployment remains at high levels, and the demand for luxury goods in particular, such as cars [both mass market as well as high-end], apartments and real estate, and gold/jewelry has all been subdued. Many of these markets haven’t really recovered from the Indian government’s demonetization and GST implementation a few years back.  With a positive election outcome, there is hope that demand may pickup in India going forward, particularly during the upcoming festive and wedding seasons. During our conversations with management, they mentioned to us that the company is seeing strong demand for its higher margin value-added products and expects a recovery in sales growth going forward.

The company’s gross profit margin contracted to 1.07% in Q12020 from 1.28% in Q42019 and 1.53% in Q12019. The operating profit margin also contracted to 0.8% in Q12020 from 0.97% in Q42019 and 1.27% in Q12019. We believe most of this contraction is simply due to short-term working capital related finance costs [the company has no net debt] now being classified as COGS, rather than the prior classification as interest expense. The company continues to focus on sales of higher margin products which are expected to enhance profitability for the company going forward. So we believe both gross and operating margins should gradually increase from today’s level.  We maintain our FY2020 earnings forecast to Rs. 49.82 per share, a growth of 14% over the FY2019 earnings.  The USA end market remains robust with strong consumer spending accompanying record low unemployment, while Europe has shown an uptick because of the new export order for the company.

Maintain Estimates and Price Target Rs. 900; 31% Upside:

We maintain our FY2020 earnings estimates of Rs.49.82 per share on account of an expected recovery in revenues and increase in profitability. We maintain our one-year price target of Rs. 900 on the stock. Our price target represents an upside of approximately 31% 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 in retail stores 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 DCF-based price is Rs.888 which assumes a 13% WACC and 3% terminal growth rate. Our price target implies a P/E multiple of 18x on our FY03/2020 EPS estimate of Rs.49.82. We continue to remain positive on the margin growth story based on the company’s strong execution seen over the last 18 months. The company operates at extremely thin operating margins and even a small increase in margins can be highly accretive to the EPS. Currently, the stock is trading at a P/E multiple of just 14x on our FY03/2020 EPS estimate which is at a significant discount to its 5-year average P/E of 16x, as well as the overall Indian stock market where the benchmark NIFTY Index is trading at a trailing 24x P/E level.

New Export Order Worth Rs.9.42 bn:

In June 2019, Rajesh Exports secured a new export order worth Rs.9.42 bn from Germany. The order is expected to be executed by the end of August 2019. The company mentioned that the order has its special significance for the acceptance of the new range of jewelry introduced by the company in the global markets. The company expects to receive further significant orders for this range of jewelry from international markets.

The Company will be executing the order 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. Company is confident of executing this order well within the time frame on the back of its expertise, skilled craftsmen, artisans & its exceptionally strong backward integrated infrastructure. The company had introduced new designs in the international markets which constitute a new range of jewelry. The special significance of this order is the acceptance of the company’s new range of jewelry in the global markets. The company expects further significant orders for this range of jewelry from the international markets.