All shine and glitter

Bangalore-based Rajesh Exports posted a 10.4% revenue growth of Rs 2,067.23 crore for the quarter ended December 2007 (Q3) over the same period last year.

The company’s net profit increased by 117.8% to Rs 61.24 crore. Post results, its stock was marginally down by 0.40% on a day when the mid-cap index declined by 3.37%.

Rajesh Exports is a leading manufacturer, exporter and wholesaler of gold jewellery and accounts for 25% of all gold jewellery in India.

Its Q3 operating margins improved to 5.07% from 2.12% in last year’s Q3, which is commendable. This seems to be in line with the company’s intention of expanding its margins after consistently improving revenues in the last few years.

Rajesh exports launched nine international diamond jewellery brands during the quarter. The first phase of its new retail venture, Shubh Jewellers, was also launched in Karnataka. To some extent, expansion in operating margins and improvement in the overall profitability can be attributed to these launches, as they are high margins businesses.

An increase of 226.28% in interest cost, 11% in depreciation expenses and a tax outgo of Rs 3.9 crore translated into a net profit of Rs 61.24 crore. The company’s order book, as on December 2007, stands at Rs 2,132 crore.

Meanwhile, its stock has appreciated by 117.4% since May 2007 and has outperformed the BSE mid-cap index and the broader Sensex during the same period. At Rs 872.25, the stock trades at 14.3 times and 9.4 times its estimated earnings for 2009 and 2010, respectively.

The company is well placed in the industry it operates in. One of the reasons include its hedging strategies. For a specified order of gold, the company settles for gold price on a particular date or hedges through MCX trading.

Similarly, currency fluctuation is hedged for the time gap between receipt and payment. This augurs well for Rajesh Exports as profit margins remain unaffected by volatility.

Further, the company is also planning to develop about 4 million sq ft of land in Bangalore and Kerala. This is likely to unlock value for shareholders. Analysts maintain that Rajesh Exports may also consider entering into property development as a separate business in future.

Going forward, Rajesh Exports is also looking at improving its product mix. It aims to reduce the contribution from the low margin (3-4%) bulk exports business to revenues to 25% over the next five years.

Share of bulk exports in revenues currently stand at 93%. The company plans to gradually increase the share of higher margins businesses in revenues like retail (margins at 14%), private label exports (20%) and diamond jewellery (35%). This is likely to improve the company’s profitability in the long run. The stock is a good bet in the space.

On a sound note
The Indian Seamless group-promoted Taneja Aerospace & Aviation Ltd (TAAL) has entered into maintenance, repairs and over-hauling (MRO) agreement with Air Works Commercial MRO Services Pvt Ltd (AWACS).

TAAL is perhaps the only listed company in the aviation sector with a DGCA-approved airport on its books in one of the most active business cities in the country, Bangalore.

The 230-acre airport which is only 20 minutes away from the software city is ideally placed to tap the business air traffic in the area.

It has a potential to become the alternate airport for executive jets, and also act as a base for a very lucrative segment of MRO. MRO is a labour-intensive $90 billion industry and has huge outsourcing opportunities.

Migration of the industry has already commenced from developed countries to developing ones and TAAL is enviably placed to exploit this opportunity.

MRO business is all set to gain momentum as many overseas companies are looking at opportunities for setting up shops.

An Ernst & Young report has said that MRO can absorb up to $120 billion by 2020. Boeing has already tied up with Air India and is said to invest $185 million in this joint venture. Airbus seems to be on the look out for setting up an MRO facility in India. Kingfisher-Air Deccan and GoAir have also evinced interest in setting up MRO facilities.

The Centre for Asia Pacific Aviation (CAPA) says there are significant investment opportunities in the MRO sector in India. It has estimated that the country has the potential to service a fleet of 1,000 commercial and 500 general aviation aircraft.

This agreement consists of licensing 7 acres of land and up to 5 hanger spaces on a long-term basis.

TAAL would initially license two hanger spaces which would result in a cash inflow of around Rs.7.50 crore per annum. The stock is hovering around Rs 237.10 and is trading at a PE multiple of 194x its FY08 annualised earnings.

Though the stock looks steeply valued the opportunity in the sector over-weighs the valuations.

Pallavi Pengonda (p_pallavi@dnaindia.net) & Sunder Subramaniam