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The Interesting story of Gold:
Gold is known to mankind for more than six thousand years. Gold is known as a noble metal. The appeal of Gold is universal across humankind. Wars have been fought and empires have been toppled for Gold. Gold is a global currency. Gold has formed the backbone of global economic activities as a reserve currency over the last several centuries. Gold is the most liquid asset known to mankind and is en-cashable in any form, at anytime, anywhere in the world.
Gold is found both above and below the ground. Initially gold was discovered on riverbeds as nuggets. Currently major production of gold is achieved by underground mining and also through open cast mining. Gold is mined as an ore either in open cast mines or deep underground mines. Finding gold deposits and mining gold is a complex process. Gold is valued primarily for its rare availability. As a thumb rule, to get one part of gold about three hundred thousand parts of gold ore has to be collected and processed. The mined gold is melted to form dorey gold which is usually between 70% to 90% purity. The dorey gold is further refined into fine gold which is minted or casted in to tradable gold bullion bars of different denominations. Gold purity is denominated in carats and the absolute purity of gold is measured as 24carats.
In the history of human kind about 1,50,000 tons of gold has been mined. Apart from investment and adornment gold is also used in various industries like dentistry, medicine, electronics, satellites, space crafts etc. Major gold producing countries in the world are China, Australia, U.S.A, South Africa, Ghana, Russia, Peru and Indonesia. Currently about 2900 tons of gold is globally mined per annum. The major gold consuming countries are India, China, U.S.A, Countries in the Middle East, Turkey, Italy and U.K. Gold is utilized by most of the countries across the world.
As Gold is embedded in the Culture of the Indians, India remains the world’s largest consumer of Gold. India and Gold are inseparable and today we are going to see an Interesting company that has a strong presence across the entire Gold Value Chain.
About the Company:
Rajesh Exports was established on May 29, 1990 as a partnership firm by Mr. Rajesh Mehta and Mr. Prashant Mehta. The firm was later reconstituted as a joint stock company on 25th January 1995 in the name of Rajesh Exports Limited. REL imports raw gold and gold bullion and converts these into gold jewellery, medallions and other products. It also exports these products across the world apart from selling in the wholesale market and through own retail stores.
The Moat analysis of Rajesh Exports:
Presence across Entire Gold Value Chain
The company is present across the entire Value chain which gives them a competitive edge and enables them to operate with Higher Margins.
The first process in the value chain is Mining or extracting the Gold from the Ores and the company has a Minor presence in the mining process and they have several contracts with various leading Gold mining companies for supplying of raw Gold and after procuring the raw gold, the next process is ‘Refining’ and Rajesh Exports is the world’s largest Gold refiner with a refining capacity of 900 tons of Gold per Annum. Then after refining the gold, they have moulded and Manufactured into Bullion which is technically known as ‘’Bullion Manufacturing’’ and the company manufactures bullions under the brand ‘’Valcambi’ which is supplied to leading Bullion Banks and Central Bank across the world. Then the company involves in Gold products manufacturing and is one of the manufacturers of gold jewellery & gold products
Wholesale & Retail Business:
Wholesale presence in India and the Middle East - supplies gold jewellery directly to showrooms Supplies jewellery to more than 5,000 showrooms in India and the Middle East. (Sold 38 tons in FY20)
Retail presence under own brand name “SHUBHJewellers” In less than 3 years SHUBH Jewellers have become a Well known & respected brand in Karnataka ▪ Unique associate policy/franchise model – forge relationships with the existing jeweller for readymade space and established customer base 83 showrooms in India (Sold 7 tons in FY20)
Revenue Breakup:
Presently, the company's bullion business accounts for 75% of revenues, followed by export & wholesale business (24%) & the rest 1% of revenues are contributed by its retail operations.
It plans to expand its retail operations so they account for about 20% of total revenues in the next 6 years and unlike the Bullion business, the retail business is a segment with a High operating profit Margins. Despite retail operations covering only 1% of revenues, It contributes 20% towards the EBITDA of the company due to higher margins than wholesale & bullion operations.
Diversified presence across the Globe: Europe accounts for the majority of revenues at 29%, followed by India (19%), North America (18%), Middle East (14%), Far East (13%) & China (7%).
Manufacturing & Refining Capacities
The company has 2 refining capacities located in Balerna (Switzerland) & Uttarakhand (India) which possess a combined refining capacity of 2400 TPA of gold.
It owns 3 manufacturing facilities in Bangalore, Cochin & Dubai with a combined capacity of 350 TPA. These facilities produce a wide range of handmade, semi-machine & complete automated gold jewellery & gold products.
The company has R&D units located at Bangalore (India) and Balerna (Switzerland) and the R&D team is engaged in developing new designs, new processes and technology for refining and gold jewellery manufacturing and is Instrumental in creating efficiencies and improving productivity in manufacturing and gold jewellery design.
How Rajesh Exports became the World’s largest Gold Refiner?
In 2015, the company acquired the world’s largest refining company – Valcambi a Switzerland-based refiner for 400 Million Dollars. The company employed over 200 employees with a Total refining capacity – 2,000 tons of precious metals. It was a Debt-free, consistent profitable growth & dividend paying since inception and had Contracted with leading mining companies in the world for gold dore bars (raw gold). It Refines gold dore bars – produces 9999, 999 or 995 fineness gold bars of various denominations – 1 gm to 12.5 kilos.
Concerns around the Management of the company:
Litigation regarding Gold Smuggling from Company
In 2013, The company's MD Prashant J. Mehta was involved in a gold smuggling case from their past owned facility in Cochin Special Economic Zone (CSEZ).
The claim was that the company had allegedly diverted the imported gold for sale in the domestic market when one of its employees was caught carrying 900 gm of gold illegally at cochin railway station. A Non-Bailable warrant was issued against the MD Prashant who filed a revision petition to set aside NBW which was challenged by the Directorate of Revenue Intelligence (DRI) who was the head of the case.
New Opportunities Ahead for the company:
Venturing into E-Commerce:
The company plans to set up an E-commerce platform – offers 999 Fineness Valcambi brand gold bars of 1-100 gms to retails consumers. It will launch it first in India & Singapore and then expand operations to other Asian countries before complete global presence, the working on two delivery models – one direct delivery to consumer and other through branches of leading global banks via gold vending machines – in talks with some of leading global bank to create delivery points for gold bars.
Setting up Duty free shops:
Many Asian & European countries levy customs duty making gold bars and jewelry expensive compared to the international price of gold and the company plans to set up gold bar vending machines at Airport duty-free areas and set up Vending machines to dispense 999 Fineness Valcambi brand gold bars of 1-100 gms. The Price competitiveness to drive volumes and sales.
A look into the financial performance of the company:
The Financial performance of the company of the company is mixed, the compounded sales growth of the company is at 15% for the past 5 years, however, the Compounded profit growth has been negative and this is majorly due to the low margin on the refining business and as we have seen earlier, the company intends to focus more on the Retail business which will increase its Operating profit margin the future and The EPS has been constantly improving every year expect for FY21, where there is degrowth in the EPS and the company isn’t paying much of the profits as dividend. The company has negligible debt and the Reserves stood at 11,200 Crs as of Mar 2021.
The Golden Road Ahead:
Rajesh Exports growth story has been surreal and their business model is scalable and they have an inherent advantage as they have a presence across the entire value chain and one should focus on how the company is implementing its Retail chain shops and compete with the likes of Tanishq, Kalyan Jewellers and other established players in the market and in the long run, the company is well-positioned with no red flags and is available at a fair valuation and its prudent to keep an eye on this stock and monitor the price movements with an Intention to be a part of the growth ahead.
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