Bangalore (By Evaluate Research): Rajesh Exports reported stellar growth in revenues on a QoQ and YoY basis despite a global economic slowdown and a higher gold price. Revenues for the fiscal fourth quarter [ended March] came in at Rs.476 bn, up 38% and 17% on a YoY and QoQ basis, respectively. The strategy to focus on the sale of high margin products by the company accelerated revenue growth for the company in the fourth quarter of FY03/2020. The rising price of gold in the international market also added to the increase in revenues, especially in the fourth quarter. The surging order book also indicates that the company will show sustained growth in revenues and profitability after FY03/2021 from FY03/2022 and beyond.
For the fourth quarter, EPS increased by 3.5% to Rs.9.20 vs. Rs.8.89 in Q4 FY2019, while net profit also increased by 3.5% from Rs.2.62 bn in Q4 FY2019 to Rs.2.71 bn in Q4 FY2020. The net profit growth was lower as compared to the significant rise in revenues on account of an increase in raw material costs as a percentage of sales leading to a reduction in gross margins on a YoY basis.
Our conversations with the senior management and CEO Rajesh Mehta suggest that the business will post sustained growth YoY and QoQ in both revenue and EPS once the global situation normalizes on account of higher contribution from the gold refining business. The CEO also mentioned that the company’s business witnessed a golden period in the fourth quarter of FY03/2020 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 first quarter of FY03/2021 is expected to be impacted severely in terms of revenue and profitability on account of the lockdown in most of the countries due to the global pandemic situation. Once the economic situation comes back to normal, globally growth would gradually revive for Rajesh Exports. Since the bulk of the business of the company comes from refining of gold, we expect revenue and profitability to witness minimal impact as supply should begin to resume to ultimately reach full scale after the situation stabilizes completely. 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 year. The jewelry business of the company which has higher margins but relatively lower volumes in comparison to the gold refining business would get impacted to a significant extent not only for the company but for the entire industry only to begin gradual recovery later.
Our FY03/2022 earnings forecast of Rs. 40.80 per share implies a growth of 13% over the FY03/2021 earnings. Barring the current situation, the USA end market remains robust with strong consumer spending expected once employment comes back to pre-covid levels. Europe has also shown an uptick as evidenced by the export orders executed by the company in Q3 and Q4 FY2020.
Reduce Estimates and Price Target Rs. 800; 70% Upside
We reduce our FY2022 earnings estimates of Rs.50.64 per share to Rs.40.80 per share on account of an expected fall in revenues and profitability due to the ongoing global pandemic situation which would return to normalcy in FY03/2022. We revise our price target from Rs.900 to Rs.800 on the stock and expect business conditions to come back to pre-pandemic levels at the end of 2020. Our price target represents an upside of approximately 70% 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.800 price target implies a P/E multiple of 19.6x on our FY03/2022 EPS estimate of Rs.40.80, and a P/E of 17.5x on our forward FY03/2023 estimate of Rs.45.72. We continue to remain positive on the margin growth story based on the company’s strong execution seen over the last 18 months. 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 11.5x on FY03/2020 EPS, and a P/E of 11.5x 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 a trailing 26x P/E level.
Also, the stock is trading at a Price/Sales ratio of just 0.07x on FY03/2020 revenue and a P/S of 0.07x 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 Swells by 5% QoQ to Rs.656 bb
At the end of the fourth quarter ended March, the order book surged by Rs.32 bn to Rs.656 bn from Rs. 624 bn at the end of the third quarter ended December. The rise in the order book by 5% on a QoQ basis 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 expects further significant orders for this range of jewelry from the international markets.
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.
