The Hindu Business Line : Rajesh Exports: Buy

The company's planned retail foray by end-FY-06 and the recent entry into branded jewellery, including diamonds — all high-margin businesses — could be the key drivers of growth.

The company's mass production capacity for gold jewellery offers it the flexibility to price its products better, as economies of scale give it an edge in setting the cost-structure.

Acquiring muscle

Rajesh Exports' strategy to acquire small jewellery shops for its retail foray could place it at an advantage in accessing customers. This would also cut down the lead-time for customer acquisition and give it a head-start in its retail operations.

The company would be in a much better position to compete with local established jewellers compared to most other manufacturers entering the retail segment recently. A retail foray could also improve the valuation levels of the stock over the long term.

Competitive costs

The advantage of economies of scale gives Rajesh Exports the pricing power. A mechanised and mass manufacturing capacity keeps its cost-structure tight and gives it better pricing flexibility in the retail market. About 50 per cent of its products are mass produced and the rest hand-made. In the former, the wastage component is low, giving it a higher utilisation ratio.

A new casting technology introduced for manufacturing certain types of jewellery is expected to further reduce costs and increase efficiency.

Margins to expand

Rajesh's foray into high-margin businesses such as diamond jewellery and branded products is already paying off.

The operating margins have expanded to 2.3 per cent in the nine months ended December 2005 from 1.15 per cent in the corresponding previous period. Branded jewellery accounts for 7 per cent of the company's turnover now.

The company plans to finance its retail foray through debt. With an additional Rs 250-crore term loan that the company proposes to take, the long-term debt-equity ratio will swell to 1.7 times the shareholder funds from 0.2 times in 2005. The retail foray would add to the working-capital requirement, as stocks have to be maintained at stores. This could prompt the company to borrow more.

For FY-05, the total debt-equity is high at 4.3 times. Any additional debt would add an element of risk, as higher interest costs could give little cushion if the company's growth plans do not match expectations. Now, interest costs at one-third the operating profits is comfortable. On the other hand, if the growth expectations fructify, it could improve shareholder value substantially.

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