Rajesh Exports

A Low Brand Recall, High Debt-Equity Ratio & Steep P/E Make The Stock Unattractive

 

The third quarter results of Rajesh Exports, one of the leading jewellery manufacturers and distributors, seems to have caught the market attention of investors given a more than 8% rise in the stock price in the past three trading sessions. The stock outperformed the broader market as well as ET Retail and ET Consumer Durable index since 2009. It has seen a four-fold increase in the period against an average increase of 65% in Sensex and ET Retail.

   For the quarter ending December 2009, the topline expanded by 65% compared to the same quarter last year. The operating and net profits doubled to Rs 67 and Rs 44 crore respectively, in the latest quarter compared to last year's. Overall stability in the business and persistent jewellery demand form the Asian countries helped the company break out from the sluggish performance of the past six quarters. Profit margins remained in a squeeze from June 2008 to September 2009 quarters even as the revenues grew by an average 45% in the duration.

   Rajesh Exports claims to be present in the entire jewellery value chain, from refining to retailing gold jewellery. The company's owns a manufacturing facility with a built-up area of over half a million square feet, which it claims to be the world's largest. Its product portfolio is divided into Asian, western and diamond jewellery. The company also forayed into the retail business with two chains of retail outlets: Laabh, a high-end niche segment dealing with diamonds, and Shubh, which is gold-centric and caters to the mass to middle markets in the South. Initially, the company had announced plans to open 200 Laabh stores in two years and 100 Shubh stores in the South by December 2008. However, in July 2009, it decided to consolidate its retail brands by converting three Laabh stores into Shubh outlets. The decision was taken as running two brands was proving to be a strain for the company.

   In the past five financial years, the sales have increased by 29% compounded annually, while the net profit grew by a CAGR of 33%. However, cash profit grew by a CAGR of 19% in the period and the net cash from operation turned negative for FY09.

   A high debt-equity ratio is a concern (2.1 for FY09) for the company as loan funds increased by 29% during the period, in line with a CAGR of 23% in the working capital. The company also lacks strong brand positioning which is a key aspect to survive in the industry while the retail business is already in trouble.

   In this backdrop, the stock looks overvalued at the current market price as its P/E stands near 36, three times its average in the past two years and more than triple the same since 2001. The stock is demanding 16x its earnings based on an annualised EPS of 6.8 for FY10, which does not look reasonable.