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Hike in making charges and lower hedging ratio aid margin

* Senco Gold (SENCO) delivered a consolidated revenue growth of 30% YoY to INR18.2b (in line) in 1QFY26, with SSSG of 20%. Management indicated that despite a surge in gold prices, consumer demand remained elevated, fueled by festivities. The company expects revenue growth of 18-20% in FY26, driven by a strong focus on expansion in East and North India.

* The company opened ten stores (+13% YoY) during the quarter, bringing the total store count to 186 (109 COCO, 76 FOCO, and 1 Dubai). Looking ahead, the company plans to open 8-10 COCO stores and 8-10 franchise outlets annually, with the new stores concentrated in the North and East. Senco will focus more on opening franchise outlets.

* Consolidated GM expanded 180bp YoY to 19.1% (ahead of our est.), largely backed by improved studded mix, lower hedging %, and an increase in making charges. Employee expenses rose 23% YoY, and other expenses were up 32% YoY, while marketing expenses increased 10% YoY. EBITDA margin expanded 230bp YoY to 10.1% (ahead of our est.). Studded jewelry sales jumped 51% YoY in 1Q, and the stud ratio improved from 9.9% to 11.6% YoY, leading to better margins. Management has guided to increase the studded jewelry mix to 15% over the next 2-3 years, indicating a strategic push toward higher-margin products.

* For FY26, the company expects an EBITDA margin of 6.8-7.2% and an APAT margin of 3.7-4.0%. Return ratios (RoE/RoCE) are expected to improve to 17-18% over the next 3-4 years. Given the inconsistency in operating margins and fluctuating hedge ratios adopted by the company, we remain cautious on SENCO’s operating margin performance in the quarters ahead. We reiterate our Neutral rating with a TP of INR385.

Sales in line; a beat on profitability

* In-line sales growth: Consolidated revenue grew 30% YoY to INR18.2b (est. INR17.9b). SSSG was healthy at 19.6% in 1Q. SENCO’s sales growth was largely in line with that of its peers. Titan (jewelry standalone, ex-bullion), Kalyan (standalone), and P N Gadgil (retail) delivered revenue growth of 17%, 31%, and 19%, respectively. The company has opened ten stores, bringing the total count to 186 (109 COCO, 76 FOCO, and 1 Dubai). Old gold exchange stood at 39% of sales.

* Margins expand sharply: Consolidated GM expanded 180bp YoY to 19.1%. (est. 16.8%, 16.8% in 4QFY25). Inconsistency in gross margin remains high on a quarterly basis. Employee expenses jumped 23% YoY, and other expenses were up 32% YoY, while marketing expenses rose 10% YoY. EBITDA margin expanded 230bp YoY to 10.1% (est. 7.6%; 9.2% in 4QFY25), primarily backed by a sharp rise in gross margins.

* Improvement in profitability: EBITDA grew 69% YoY to INR1.8b (est. 1.4b). APAT grew 104% to INR1.05m (est. INR693m).

Key takeaways from the management commentary

* The quarter was marked by continued geopolitical tensions and a tariff war, as well as a spurt in gold prices by 32% YoY and 5% QoQ, despite which consumer demand remained elevated. The strong momentum was significantly fueled by popular festivals such as Akshay Tritiya and Poila Baishakh.

* Given high gold prices and competitive intensity, SENCO resorted to discounting in the quarter. However, an increase in making charges covered up for the same. The company does not expect making charges to reduce significantly despite elevated competitive intensity.

* To mitigate rising GML interest rates, the company has increased making charges, which has protected SENCO’s profitability.

* The hedging ratio in 1QFY26 again reduced to 55-60% from ~75% in the past few quarters. The company’s average inventory is around six months, and going forward, management indicated that the hedging will be in the range of 50-80% depending on the risk perception of the company.

* For FY26, the company maintains its revenue growth guidance of 18-20%. Additionally, it expects to record an EBITDA margin of 6.8-7.2% and an APAT margin of 3.7-4.0%.

* Going forward, the company plans to open 8-10 COCO stores and 8-10 franchise outlets annually, with more focus on opening franchise outlets.

Valuation and view

* Given the outperformance in 1QFY26, we raise our EPS for FY26E and FY27E by 5-8%, with operating margin assumptions remaining unchanged at ~6.7-7.0%.

* Management maintained its EBITDA margin guidance of 6.8-7.2% for the coming years. Return ratios (RoE/RoCE) are expected to improve to 17-18% over the next 3-4 years. Given the inconsistency in operating margins and fluctuating hedge ratios adopted by the company, we remain cautious on the company’s operating performance in the quarters ahead. We reiterate our Neutral rating with a TP of INR385, premised on 20x Jun’27E EPS.

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