Mumbai (Report by Evaluate Research): Rajesh Exports reported results for the third quarter ended December which were in-line with our estimates reaffirming our confidence in the outlook of the company. 3Q sales came in at Rs. 644.9 billion vs. Rs. 498.2 billion in the corresponding quarter last year, an increase of 29% YoY.
This YoY growth is completely organic as both the quarters included the full effect of the Valcambi integration. EBITDA came in at Rs. 4.8 billion vs. Rs. 3.8 billion in the corresponding quarter last year. EPS for the quarter was Rs 11.32 vs. Rs. 10.25 in 3Q 2016, an increase of 10% YoY. The solid performance was driven by growth in all the four businesses of refining, wholesale, retail and exports. 9MFY17 results include the full year effect of the Valcambi acquisition as compared to 9MFY16, as the acquisition was consolidated since August 2015.
The company continues to focus on growth across all its businesses with a stronger emphasis on the higher margin retail business. In November, the company opened its 81st retail showroom under the Shubh Jewelers brand. This is part of its second phase of retail expansion under which the company plans to launch retail showrooms across the four states of Southern India. The company is also planning to launch new initiatives such as sale of Valcambi-branded gold coins and gold bars through an e-commerce platform, vending machines and duty-free shops at airports. These initiatives, which are expected to come on-board in the next 6-9 months, will further drive the company’s growth.
Our Call with the Management
Following the Q3 earnings release, we spoke with the company's management including the Chairman, Mr. Rajesh Mehta. During our multiple calls, management mentioned that they expect to see strong double-digit growth in both revenue and EPS in the upcoming fiscal year especially during the latter half, driven mainly by the retail business. Management also said that they do not expect any further negative impact from the demonetization drive in India as things are coming back to normal with most people continuing to buy gold as usual. With Valcambi fully assimilated, the company is now working towards shifting a larger portion of its business from gold bullion and gold coins to retail as the margins earned in the retail business are much higher than those earned in the gold bullion business. The EBITDA margin in the retail business is between 12%-14% as compared to just 0.2%-0.3% earned in the bullion business.
Raising Estimates, Maintaining Rs. 900 PT
We maintain our one-year price target of Rs. 900, based on the continued strong numbers reported by the company. Our price target represents 80% upside from the current levels. Our 12-month price target on the stock is based on P/E and backed by DCF methodology. Our DCF based price is Rs. 923 which assumes 15.6% WACC and 2% terminal growth rate. We apply a multiple of 18.5x on our FY03/2018 EPS estimate of Rs. 48.68 which comes to Rs. 900.
We revise our FY2018 revenue forecast upwards by 15% to Rs. 2,738 billion and EPS forecast by 6.5% to Rs. 48.68 on the back of the strong retail and export sales expected by the company as well as the new initiatives announced recently. For FY2017, we forecast sales of Rs. 2,445 billion and EPS of Rs. 41.58.
