Pros and Cons of Investing in Rajesh Exports

Investors in Rajesh Exports have been extremely disappointed with the company's management.

And with good reason. The Rajesh Exports share price is down about 80% since February 2023. It's safe to say that it has been among the worst performing stocks in the Indian market.

Even on a longer term basis the stock's performance has been a disaster.

After the covid crash in 2020, the Sensex and the Nifty have more than tripled. In fact, even after the he recent correction, the benchmark indices have delivered excellent long-term returns.

The opposite is true for the stock of Rajesh Exports. Just look at the 5-year chart below.

Rajesh Exports Share Price Vs Sensex and Nifty

Over the last five years, the Sensex/Nifty are up about 2.8 times.

However, the stock of Rajesh Exports is down 67%. That's an incredible decline of 20% CAGR.

Imagine that. Investors look for stocks that deliver gains of 20% CAGR. This stock has done the opposite, falling by 20% CAGR over the last 5 years.

In fact, the stock was trading even lower last month. Over the last 2 weeks or so it has risen about 30%.

So, what explains this massive decline?

In this editorial, we will look at the pros and cons of investing in Rajesh Exports.

Pros

In past editorials regarding the pros and cons of various companies, we would cover a few points each as pros and as cons.

However, in this case, we cannot reasonably find a 'pro' for this company.

There are only a few positives to cover.

The company is profitable (barely) and debt free.

The promoters hold more than 50% stake and there is no share pledging as of September 2024.

The management has big diversification plans. The company is expected to invest heavily in the EV and semiconductor sectors over the next few years.

The company is participating in the PLI scheme for batteries (Advanced Cell Chemistry). To that end, it has planned a 5 GWh lithium-ion cell plant in Karnataka.

Also, under the Semicon India scheme, the company, via its subsidiary - Elest - is setting up an AMOLED display fab in Telangana.

However, there aren't many recent updates on the progress made on these fronts.

In fact, the positives end here.

As far as the battery plant is concerned, there has been a media report in Businessline stating that the company could face a penalty of Rs 1.25 billion (bn) for falling to meet deadlines of the PLI scheme.

As per an exchange filing, on 1^st January this year, the company reduced its stake in its battery subsidiary, ACC Energy Storage Pvt. Ltd., from 100% to 51.05% by issuing shares at a premium to a company which was not named in the filing.

Cons

#1 Poor Performance of the Gold Business

The company's core business is gold - be it refining, production, marketing, and retailing.

In fact, it's the only company in the world with a solid presence across the entire value chain of gold, excluding gold mining.

The company has a massive design portfolio of 29,000 active jewellery designs, selling through wholesale and retail chains.

It manages this portfolio through its refining facilities in Switzerland and India, with a combined annual refining capacity of 2,800 tonnes of precious metals.

It also has a gold jewellery retail chain called Shubh which it plans to expand by opening more showrooms and establishing an ecommerce platform.

However, the performance of the core business has been unsatisfactory to say the least. This is evident in the company's financials.

From Rs 1,154.5 bn revenue in the last quarter of FY23, the topline has fallen sharply. In the first quarter of FY25, the revenue came in at Rs 603.5 bn, nearly half of the level just 5 quarters previously.

The net profit fell so much that the company booked a loss in the last quarter of FY24. Although the company returned to profitability in the next quarter, it's quarterly profit is about 90% below the peak levels seen in FY23.

The company operates with negligible operating and net margins.

The return ratios - low single digits in FY24 - are nothing to write home about.

All this would be enough to explain the sharp decline in the share price...but there is another equally serious reason.

#2 Corporate Governance Concerns

There is no doubt that the stock has been in the news for the wrong reasons over the years.

The company has, in the past, either missed filing or filed documents with errors to the exchanges.

These relate to auditor's report, cash flow statement, secretarial compliance report, shareholding pattern, e-voting results, and board meetings.

The company has also delayed the its AGM beyond 30 September.

Companies will be declaring their annual results soon. But in the case of Rajesh Exports, even the last quarter's shareholding pattern and results, i.e., December 2024 (3QFY25), have not been declared yet.

The diversification into EV batteries and display fabs has also raised concerns in the market about the company investing in completely unrelated businesses.

Conclusion

Due to the points highlighted above, Dalal Street is clearly overwhelmingly negative on the stock.

Unless the company's financials and corporate governance both improve in a significant way, this situation is unlikely to change.

We believe Rajesh Exports is a good example why investors should always do their due diligence regarding corporate governance and the financials beyond just the headline numbers.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...