Rajesh Exports has reported outstanding results for the fiscal fourth quarter. The revenue has increased by 35% YoY to a record high level of Rs.1154 bn as compared to Q4 FY2022. This growth in revenue has beaten expectations for the second consecutive quarter. The demand for gold has been the driving force behind this increase, with Central Bank-buying adding 228 tons to global reserves, a Q1 2023 record high. The World Gold Council’s latest Gold Demand Trends report shows that gold demand (excluding OTC) was 13% lower year-on-year. However, the recovery in the OTC market propped up total gold demand to 1,174 tons, a slight 1% increase compared to Q1 2022. This increased the demand for gold refining business of the company in the fourth quarter of FY 2022-23.
In the fiscal fourth quarter, net profit reached Rs.3,770 mn, up 141% on a QoQ basis. However, there was an 11% decline in net profit on a YoY basis due to reduced gross margins. For FY2022-23, net profit saw a sharp recovery of 42% YoY. Experts believe that revenue growth will persist, albeit at a slower rate, while net profit margin is expected to improve significantly in FY03/2024.
The business is expected to show flat to positive growth YoY in revenues, according to senior management and CEO Rajesh Mehta. There is also expected to be a sharp improvement in net profit margin, thanks to increased contribution from the high margin jewelry business. Furthermore, the company plans to improve operational efficiency in FY2023-24, which will aid in further net profit margin improvement.
The results exceed expectations, but full year estimates remain unchanged. FY03/2024 earnings forecast of Rs.88.60 per share suggests an 83% growth over FY03/2023 earnings. The USA end market remains strong with consumer spending expected to remain resilient due to healthy employment levels. However, inflation and economic slowdown are causes for concern.
Our price target of Rs.1,100 remains unchanged due to a significant improvement in net profit, resulting in a P/E multiple of 12.4x on our FY03/2024 EPS estimate of Rs.88.60. Furthermore, a P/E of 9.4x on our forward FY03/2025 estimate of Rs.117 reinforces our positive outlook. The company’s strong execution history supports our optimism on margin growth. Even a minor increase in margins can result in a substantial accretion to EPS, given the company’s low absolute level of operating margins.
The price target is set to increase by 100% from current levels. The 12-month price target is based on DCF methodology and traditional P/E multiples. A detailed earnings and valuation model is attached for reference.
Rajesh Exports holds the title of being the world’s biggest gold refiner and exporter of gold jewelry, with a 40% market share in India. The company has been in operation for over 30 years and is a low-cost manufacturer thanks to economies of scale. A whopping 90% of its revenues come from exports. Presently, the company has 82 retail stores in India and hopes to expand them in the future. Rajesh Exports is at the forefront of the growing demand for gold and jewelry in India and Asia, making it a prime beneficiary of this trend.
The stock is presently trading at a P/E of 4.7x on our forward FY03/2025 EPS estimate. This is less than its 5-year average P/E of 20x, as well as the overall Indian stock market. The benchmark NIFTY Index is trading at around a trailing 22x and a forward 19x estimated P/E levels.
The stock is currently trading at a Price/Sales ratio of 0.05x on FY03/2023 revenue. It’s also trading at a P/S of 0.05x on our forward FY03/2024 estimate. This is a significant discount compared to the trailing P/S ratio of 2.0x for the NIFTY Index.