(By Evaluate Research) Bengluru: Rajesh Exports reported results for the second quarter ended September which were in-line with our estimates. Revenue for the quarter came in at Rs.533.8 bn, increasing by 2.4% on a YoY basis.
Similarly, EPS grew by 5.5% to Rs.10.66 in 2Q2019 from Rs.10.10 in the corresponding period last year. Over the last 18 months, the company has been strategically focusing on changing its product mix to higher margin value added products. This strategy has been the main driver of the company’s margin and earnings growth. In FY2018, Rajesh Exports reported gross profit margins of 1.21% vs. 0.85% in FY2017. For
2Q2019, the gross profit margins further grew to 1.62%.
The company’s strategy has shown good results and we expect the company to continue to expand their margins in the coming years as value added products become an increasingly larger proportion of their overall sales. In August, Rajesh Exports secured a new export order worth Rs 8.9 bn from the Middle East. 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.
Bangalore Refinery to Start in 3-6 months:
Management mentioned to us that the company is currently in the final stages of setting up its gold refining facility in Bangalore and that the facility should be operational in the next 3 to 6 months. The products developed at this facility will be used for the company’s export business as well as for its domestic business in India. The refinery will help the company to further integrate its refining, manufacturing and export & retail operations. At the end of the second quarter, the company’s order book stood at Rs.449.8 bn. The company continues to operate 81 retail jewelry stores in Karnataka under its brand name SHUBH. During our conversation with Senior Management, they noted that the company plans to open a few new stores in Karnataka in the second half of the fiscal year. The company currently is the largest gold refiner in the world, refining over 35% of the world’s gold at its facilities located in India and Switzerland. It has a capacity to refine 2,400 tons of gold per annum.
Maintain Estimates & PT; 58% Upside:
We maintain our FY03/2019 earnings estimates at Rs.52.50 per share and our one-year price target of Rs.900 on the stock. Our price target represents an upside of approximately 58% 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.1,066 which assumes 13% WACC and 3% terminal growth rate. Our price target implies a P/E multiple of 14.5x on our FY03/2020 EPS estimate of Rs.61.90. 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 9.2x on our FY03/2020 EPS estimate which is at a significant discount to its 5-year average P/E of 14.2x.
