Buy Senco Gold Ltd for the Target Rs.1,400 by Emkay Global Financial Services Ltd
Senco reported a big beat to our Q1 EBITDA/PAT estimates led by better gross margin (up by ~500bps YoY). The sudden spike in gold price and operating challenges led to a modest retail revenue growth of 11% in Q1, in line with muted trends seen in TTAN. However, a big 900bps duty cut on gold and return of operating normalcy has driven a strong recovery with FY25TD retail growth climbing to ~20%. Senco has retained its FY25 growth outlook of 18-20%. The EBITDA margin beat of ~250bps was led by better franchisee terms, lower discounting/better gold premium, and a low-margin base as hedging remained at ~95% in Q1. While the duty cut significantly improves medium-term prospects, Senco expects a short-term hedging loss of Rs0.5bn, which shall be distributed over the next 2-3 quarters. Margin beat drives a ~12% upward revision to our earnings estimates. Senco is trading at considerable discount to peers despite similar or better operating performance. We increase our TP multiple by 5% and revise TP up to Rs1,400/sh (based on 32x Sep-25E EPS)
Q1 margin performance encouraging despite muted topline growth: Revenue grew 8% in Q1 led by 11% growth in retail sales (4% SSG) and relatively slower growth in exports. The festive period (first 41 days of Q1) witnessed higher traction with 21% YoY growth but demand trends remained muted in the second half of Q1 due to electionrelated challenges, lesser weddings, and heatwaves. However, duty cut and return of operating normalcy has driven a strong pickup with FY25TD retail growth at ~20%. Senco also maintained its guidance of 18-20% growth in FY25 (12-13% SSG). Gold price spike (~20 YoY in Q1) also impacted diamond volumes with studded mix seeing a decline of ~100bps to 10%. However, Senco retained its target to improve stud ratio by 100- 150bps in FY25. Senco opened 6 stores in Q1 with 2/4 stores in FOFO/COCO format. Gross margin was up by ~500bps to 17.3% led by lower discounting, better gold premiums, and favorable changes in franchisee terms. Higher sales in Bangle Utsav/Akshay Tritya also aided in better margin performance. Higher asset base and promotional spends led to lower improvement in EBITDA at ~260 bps to 7.7%.
Earnings call KTAs:
1) Senco maintained its guidance of 18-20 store adds for FY25 with healthy pipeline for both COCO/FOFO formats. International expansion is expected to occur in a calibrated manner; however, the company remains open toward franchiseeled opportunity to accelerate.
2) Senco recognized the encouraging outlook for industry with recent customs duty cut of 9% and is also witnessing increase in footfall/frontloading of wedding-related buying. However, customs duties are already paid for gold metal loans and a 900bps duty cut will impact P&L to the tune of Rs0.5bn that shall be distributed over the next two-three quarters.
3) SSG during 41 days of Q1 (festive period) was ~11-12% but dipped later due to slowdown in sales.
4) Inventory as of Q1- end was ~Rs26bn including ~Rs5bn of diamonds.
5) Share of wedding jewelry is ~40- 45% of sales. 5) Gross/EBITDA margin is expected at ~15%/8% for FY25.
6) SENNES is witnessing good traction but has not reached breakeven yet; sales is expected at ~Rs0.5- 1bn in FY25.
7) The overall gold hedging for Q1 was ~95% in line with its risk management policy. GML/MCX hedge ratio was 55:45.
8) ATV/ASP improved 12-13% to ~Rs74k/Rs49k.
9) Old gold exchange program contributed to ~35% of mix in Q1
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