Rajesh Exports Ltd. BUY

Rajesh Exports Ltd. BUY

Price Rs 90 Target Price Rs 155

After bulk, its retail

Rajesh Exports (REL) is the world’s largest manufacturer and exporter of gold jewellery. REL’s competitive cost structure supported by significant economies of scale have helped it gain volumes and garner ~3% market share of the global gold jewellery market. After achieving success in the high volume-low margin bulk exports of gold jewellery, REL is leveraging its existing manufacturing facility and global distribution network to tap opportunities in exports of high margin (15-20%) diamond studded jewellery and white label jewellery. It has also entered the branded gold jewellery market in India, which is growing at 35-40% pa and commands margins of 8-12%. Its foray into the retail gold jewellery market is mainly through 2 formats- Shubh (to target value conscious customer) and Laabh (fashion conscious customers). We expect REL’s focus on the high margin retail business to boost its PAT margins from 1.5% in FY07 to 3.6% by FY10E. We expect moderate revenue growth in FY07-10E at a CAGR of 11.8% and significant PAT growth at 50.2%. We initiate coverage on the stock with a price target of Rs 155 and recommend BUY.

World’s largest manufacturer and exporter of gold jewellery

REL is the world’s largest manufacturer and exporter of gold jewellery based in India. It processes approximately 3% of the world’s gold jewellery consumption of 2,366 mt and accounts for approximately 25% of gold jewellery exports from India. Its fully backward integrated model, strong bargaining power with raw material suppliers and effective working capital management creates cost competencies, leading to significant economies of scale.

New business verticals in exports to expand margins

To leverage its existing worldwide distribution network and its large jewellery manufacturing facility, REL has entered into manufacturing and exports of diamond jewellery and white label jewellery for leading global retailers. Margins in this business are higher at 15-20% as against 2-3% in traditional gold jewellery exports. We expect EBITDA contribution from these new verticals to increase from 15.7% in FY08E to 27.5% by FY10E.

Tapping opportunities in growing branded retail jewellery

REL has recently entered the branded retail jewellery segment in India. This segment has been growing at 35-40% annually and commands margins of 8-12%. It has launched Shubh and Laabh stores to tap value and fashion conscious customers respectively. It has aggressive plans to increase the number of stores (Shubh + Laabh) from 38 at present to 160 by FY10E. EBITDA contribution from retail business is expected to increase from 2.8% in 9MFY08 to 25.2% by FY10E.

Initiate coverage with a BUY, price target of Rs 155

We are positive on REL’s strategy of improving its bottomline by focusing on the high margin retail jewellery segment and tapping the lucrative diamond and white label jewellery in exports. We expect this shift in focus to boost REL’s PAT margins from 1.5% in FY07 to 3.6% by FY10E. We expect revenues to grow at a CAGR of 11.8% (FY07-10E) to Rs 96.4 bn and PAT to grow at a CAGR of 50.2% to Rs 3.4 bn by FY10E. We initiate coverage on the stock with a BUY rating and a SoTP based price target of Rs 155.

MK, 30 April, 2008