Neutral Senco Gold Ltd For Target Rs.400 by Motilal Oswal Financial Services Ltd
Disappointing quarter!
* SENCO delivered consolidated revenue growth of 27% YoY to INR21.0b (in line) in 3QFY25, with an SSSG of 16%. The growth was driven by strong festive demand, and the healthy demand trend continued into Jan’25. However, the last 7-10 days saw a slowdown due to rising gold prices.
* The company opened five stores (+10% YoY) during the quarter, bringing the total count to 171 stores (100 COCO, 70 FOCO, 1 Dubai). It has planned to open 8-10 stores in 4Q, including 5-7 franchisee stores.
* However, there was a significant disappointment on the gross margin front. GM contracted sharply 740bp YoY to 11.3% (est. 17.7), even after adjusting the custom duty-related inventory loss of INR276m. This occurred despite a stable stud ratio YoY at 10.4% (11.1% in 2QFY25, 10.4% in 3QFY24). Hedging-related costs (>INR500m) from rising gold prices further impacted margins. It led to an EBITDA margin (ex-custom duty impact) contraction of 580bp YoY to 5.1% (est. 10.3%, 5.4% in 2QFY25). Adjusted EBITDA was down 41% YoY to INR1.1b.
* Management has maintained its EBITDA margin guidance of 7-8% for 4QFY25 and the coming years. However, the unsatisfactory explanation for the sharp contraction in gross margin in 3Q has undermined our confidence in the margin trajectory going forward. Peers have also reported 3Q results, but we have not seen similar margin volatility driven by gold inflation. While peers also engage in gold hedging, such hedging costs were not observed. Given the uncertainty around operating margins and slower SSSG than peers, we cut our EPS estimates 25-30% for FY25-27. We also downgrade our rating from Buy to Neutral, with a TP of INR400 at 25x Dec’26 EPS.
In-line sales; sharp miss on profitability
* Strong sales growth: SENCO’s consolidated revenue grew 27% YoY to INR21.0b (est. INR20.7b). SSSG was healthy at 16% in 3Q; however, it was slower compared to its peers. The company has opened five stores, bringing the total to 171 stores (100 COCO, 70 FOCO, 1 Dubai). Old gold exchange stood at 38%.
* Sharp contraction in margins: After adjusting the custom duty effect of INR276m on inventory, gross margin contracted 740bp YoY to 11.3% (est. 17.7%, 13.2% in 2QFY25). According to the company, the hedging cost of INR580m from rising gold prices impacted margins. After adjusting for this, the GP margin stood at 14.5%. Employee expenses were up 11% YoY and other expenses were flat YoY. EBITDA margin (ex-custom duty impact) contracted 580bp YoY to 5.1% (est. 10.3%, 5.4% in 2QFY25).
* Decline in profitability: EBITDA declined (ex-custom duty impact) 41% YoY to INR1,076m (est. 2,129m). APAT (ex-custom duty impact) contracted 50% YoY to INR542m (est. INR1,304m). Reported PAT was down 69% YoY to INR335m.
* In 9MFY25, net sales and EBITDA grew 22% and 4%, respectively, while APAT was down 6% YoY.
Key takeaways from the management commentary
* The company experienced strong top-line growth, driven by robust festive demand in 3QFY25. In Jan’25, the company recorded 19% YoY revenue growth. However, revenue growth slowed over the last 7-10 days due to rising gold prices.
* The Gold Metal Loan (GML) interest rate, which was ~3% until Jan’25, is expected to increase to 6-7% due to the impact of U.S. tariff-related changes.
* The GP margin includes a making charge of ~10-11%, with an additional 4-5% revenue contribution from diamonds, platinum, silver, and other jewelry.
* The company maintains its revenue growth guidance of 18-20%. The GP margin guidance is 14-15%, while the EBITDA margin guidance is 7-8%. Owned stores deliver a GP margin of 19-20%, whereas franchisee stores deliver 6-7%.
Valuation and view
* We cut our EPS estimates by 25-30% FY25-FY27 as we cut our operating margin assumption (6.5%-6.7% for FY26 and FY27) and increase interest cost on GML.
* Management has maintained its EBITDA margin guidance of 7-8% for 4QFY25 and the coming years. However, the unsatisfactory explanation for the sharp contraction in gross margin in 3Q has undermined our confidence in the margin trajectory going forward. Peers have also reported 3Q results, but we have not seen similar margin volatility driven by gold inflation. While peers also engage in gold hedging, such hedging costs were not observed. Given the uncertainty around operating margins and slower SSSG than peers, we cut our EPS estimates 25-30% for FY25-27. We also downgrade our rating from Buy to Neutral with a TP of INR400 at 25x Dec’26 EPS.
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