Rajesh Exports' Revenue Nearly Doubles

Bengaluru: (By Evaluate Research): Rajesh Exports reported stellar results, ahead of our expectations, both in terms of revenues as well as profits, for the fiscal second quarter [ended September]. The performance indicates a sharp comeback given flattish growth in the previous quarter.  Revenue increased significantly by 95% YoY to Rs.803 bn vs. Rs.413 bn in Q2 FY2022. The correction in the price of gold in the international market has led to an increased demand for the gold refining business of the company in the second quarter of FY 2022-23. The LBMA gold price (US$/oz) fell by 8% during the third quarter of 2022. The decline was largely a response to the US dollar strength as the Fed hiked interest rates to combat high inflation. The average gold price in Q3 of 2022 was only 3% lower YoY, more closely aligning with the relative performance of demand and supply during the quarter. The international gold price declined by 2.3% in September to US$1,673/oz, impacted by higher yields and dollar strength.

Net profit for the fiscal second quarter [ended September] came in at Rs.3,730 mn, up 28% on a YoY and 37% on a QoQ basis. The sharp jump in net profit was due to near doubling of revenues in the second quarter as compared to same period last year. We believe that the company can grow its revenues and profit in higher double digits in the remaining of FY03/2023 [ending March].

The company’s gross profit margin was at 0.63% in Q2 FY2023 as compared to 0.94% in Q2 FY2022 due to slightly lower margins from the gold refining business. The operating profit margin remained flat at 0.5% in Q2 FY2023 as compared to 0.6% in Q2 FY2022 indicating stability in the operational performance. We expect operating efficiency to improve as revenue growth maintains similar momentum in remaining 2nd half of FY 2022-23. Rajesh Exports’ export business from India will continue to show similar robust revenue growth in the coming quarters, especially as the festival season has already started in India in FY2022-23. The growth is expected to be strong going forward given the demand for gold in the international market amidst correction in price.  While the results are ahead of our expectations, we are maintaining our full year estimates.

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 growth in order book also indicates that the company will continue to show recovery in profitability in FY03/2023 and beyond.

Our conversations with the senior management and CEO Rajesh Mehta suggest that the business will post sustained growth YoY in revenue and net profit as the correction in the price of gold has led to increased volumes in gold refining business of the company. Internationally markets continue to open up and the logistics are also back to normalcy.  The company is geared up to increase its global market share and also expand in the domestic market. 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 business recovery going forward, as supply seems to be back on track running at full scale as the situation continues to stabilize globally. The jewelry business of the company, which has higher margins but relatively lower volumes in comparison to the gold refining business, continues to show significant recovery in the second quarter.

Our FY03/2023 earnings forecast of Rs. 53.36 per share implies a growth of 56% over the FY03/2022 earnings. The USA end market continues to be holding up with still resilient consumer spending expected on healthy employment levels, although inflation and an economic slowdown are areas of concern.

Maintain Price Target to Rs. 1100; 48% Upside: 

We maintain our price target of Rs.1,100 on account of a likely recovery in revenues and net profit since Q3FY21 implying a P/E multiple of 20.6x on our FY03/2023 EPS estimate of Rs.53.36, and a P/E of 13.5x on our forward FY03/2024 estimate of Rs.81.19. 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 is seen to be highly accretive to the EPS.

We maintain our FY03/2023 earnings estimates at Rs.53.36 per share on account of an expected rise in profitability as the global pandemic situation returns to normalcy in FY03/2023. We maintain our price target of Rs.1,100 on the stock and expect business conditions to achieve a robust growth in FY2023.  Our price target represents an upside of approximately 48% 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.

Currently, the stock is trading at a P/E of 8.9x on our forward FY03/2024 EPS estimate, which is at a 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 22x and a forward 19x estimated P/E levels.

Also, the stock is trading at a Price/Sales ratio of just 0.09x on FY03/2022 revenue and a P/S of 0.08x on our forward FY03/2023 estimate, which is at a significant discount to the trailing P/S ratio of 2.0x for the NIFTY Index.

Gold Demand Recovery Rebounds:

Demand for gold jewelry in India is estimated to grow at around 11% during the financial year 2022-23, almost 40% higher than the pre-COVID-19 levels seen in FY20, according to a research report published by ICRA. The jewelry retail sector is estimated to have grown at a robust 26% in FY22, driven by the strong demand recovery witnessed post the adverse impact of the second wave faced in the first quarter of the fiscal.

Within the jewelry retail industry, revenues of organized retailers are likely to grow at a higher pace by around 14%, aided by their aggressive store expansion plans and a gradual shift from the unorganized segment towards the organized one, the report says.

India is the largest importer of gold, which mainly caters to the demand of jewelry industry. In volume terms, the country imports 800-900 tons of gold annually. The country’s gold imports have a bearing on the country’s current account deficit, which is the difference between inflow and outflow of foreign exchange. Urban consumers were the engine of Indian demand in Q3, encouraged by a return to pre-COVID levels of economic activity. Jewelry consumption continued to rebound and is now back to pre-pandemic levels, reaching 523 tons which is 10% higher compared to Q3 2021. Much of this growth was spearheaded by India’s urban consumers who drove up the demand by 17% YoY to 146 tons. Similarly impressive growth was also seen in much of the Middle East, with Saudi Arabian jewelry consumption up 20% since Q3 2021, and United Arab Emirates up 30% for the same period.

The World Gold Council’s latest Gold Demand Trends report reveals that gold demand (excluding OTC) in the third quarter of 2022 hit 1,181 tons, up 28% year-on-year bolstered by consumers and central banks. Strong demand pushed the year-to-date total to its pre-COVID levels.