Published on 25/05/2019 9:51:00 AM | Source: Religare Securities Ltd

Buy Rajesh Exports Ltd For The Target Rs.852 - Religare Securities

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Well placed to reap benefits

Incorporated in 1995, Rajesh Exports Ltd (REL) is the world’s largest gold company with presence across value chain from mining to retailing of gold jewellery and products. REL is world’s largest gold refiner with a total capacity of 2400 TPA (facilities in India and Switzerland). Further, its jewellery manufacturing facilities are located at Bangalore, Cochin and Dubai with a total capacity of 350 TPA. REL garners ~82% of its revenue from overseas markets. Further, it retails its products through own retail showrooms under brand name ‘SHUBH Jewellers’.


Investment Rationale

* Demand outlook for gold to improve:

Led by evolving lifestyle, growing disposable income, increasing penetration of organized sector, favourable demographics and government initiatives (gold monetization scheme, steps to boost the rural demand, launch of domestic council for gems and jewellery), the demand for gold in India is likely to grow at a healthy pace. Further, with gold being considered as a safe asset for investment especially during increased political & economic uncertainty and with demand uptick in gold purchases anticipated from global central banks, global gold demand is likely to improve.

* REL is well placed to reap benefits:

Led by organic and inorganic initiatives, REL has delivered impressive performance with revenue and PAT growth of 59% & 37% over FY14-18. Valcambi’s acquisition (in 2015 for $400mn; gold refining capacity of 2000 TPA) was a strategic move, as it helped REL to emerge as the world’s largest gold company. With a total capacity of 2400 TPA, REL is world’s largest gold refiner (processes 35% of world’s gold) and a leading exporter of gold products with strong presence in Europe, North America & Middle East. Further, it is in final stages of setting up a 400 TPA gold refinery in Bangalore. With healthy demand outlook, market leadership and required capacities in place, REL would be able to comfortably meet demand and maintain its healthy growth momentum without major CAPEX over the next 2-3 years.

* Increasing focus on high margin retail business:

REL currently operates 82 showrooms in Karnataka and is making constant efforts to strengthen its retail presence by increasing the number of showrooms (plans to add 2000 more across India and 500 globally in the next few years) and by launching an e-commerce platform for global distribution of its products. Notably, retail business fetches higher gross margins of ~6-8% compared to 1.5-2% in exports. REL targets 20% share from this business over the next 5-6 years and 55% in 9-10 years. This leaves immense scope for overall improvement in margin trajectory. 


Outlook & Valuation:

Led by healthy demand outlook for gold and the company’s continued efforts towards strengthening retail presence, we estimate REL’s net revenue and PAT to grow by 6% & 15% respectively over FY18-21E. After a muted performance over the last two years, we estimate improved volume offtake in the coming years. With improving demand scenario, order inflows are expected to pick up. Further, with higher share from value added retail business and company’s ongoing efforts to increase the proportion of designer jewellery within the export market, we expect a steady improvement in margins over the next two years. Further, market leadership, impressive track record of execution and growth coupled with healthy cash reserves (net cash of Rs 57.5bn in consolidated balance sheet) could provide valuation comfort. Hence, we recommend a Buy on the stock with target price of Rs 852. 


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