Resurgent Diamond Sales And Store Openings Will Shape Future Markets

Key Takeaways

• Growth in diamond jewelry sales and strategic store expansion are boosting Senco Gold's revenue and market presence.
  
• Diversification into new products like lab-grown diamonds and leather bags aims to tap new markets and sustain revenue streams.
  
• Competitive pressures and reliance on high gold prices, coupled with execution risks in market expansion, threaten Senco Gold's profitability and investor confidence.

Catalysts

Engages in the manufacture and trading of jewelry and articles made of gold, silver, platinum, and other precious and semi-precious stones in India.

• Senco Gold is experiencing a resurgence in diamond jewelry sales in Q4, expected to positively impact the company's gross margins and contribute to a healthier EBITDA. This growth has been evident since January and is projected to increase as the festive and wedding season progresses.
  
• The company has already opened 14 stores and plans to open an additional 5 to 6 stores by the end of the fiscal year, along with setting a target of 20 new stores for the next financial year. This expansion is expected to bolster revenue growth by increasing the company's market presence.
  
• Senco Gold's adjusted EBITDA margin for the year is projected to normalize between 7% and 8% as quarter-to-quarter variations mitigate over time, a positive indicator for improved earnings.
  
• The company has launched Sennes Fashion as a subsidiary, which aims to expand into lab-grown diamonds, leather bags, and perfumes. This diversification could enhance future revenue streams by tapping into new market segments.
  
• Despite high gold prices, consumer demand remains robust with minimal impact on sales volume. This resilience, paired with the company's strategic marketing and brand-building efforts, is likely to sustain revenue growth and mitigate potential margin pressures.

Senco Gold Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Senco Gold's revenue will grow by 17.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 4.5% in 3 years time.
• Analysts expect earnings to reach ₹4.5 billion (and earnings per share of ₹27.56) by about May 2028, up from ₹1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.7x on those 2028 earnings, down from 42.0x today. This future PE is lower than the current PE for the IN Specialty Retail industry at 34.1x.
• Analysts expect the number of shares outstanding to grow by 1.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.78%, as per the Simply Wall St company report.

Senco Gold Future Earnings Per Share Growth

Risks

• The company's gross margins have been heavily impacted by the customs duty cut and hedging costs, which may continue to affect future quarters, impacting overall profitability and EBITDA margins.
  
• There is increased competitive intensity in the market, leading to potential margin pressure as other jewelry retailers aggressively expand and offer discounts, affecting revenue growth and profitability.
  
• The company's hedging strategy, while meant to stabilize margins, appears to have led to fluctuating gross margins due to the timing effect and accounting practices, potentially impacting investor confidence in earnings stability.
  
• The significant growth reliance on high gold prices, which have recently increased, may lead to customer pushback and lower volume growth if prices continue to rise, negatively influencing revenue and net margins.
  
• The company's focus on opening new stores, particularly in new markets like North India, carries execution risk and could require heavy marketing and promotional expenses, impacting short-term profitability and operating margins.

Valuation

• The analysts have a consensus price target of ₹543.917 for Senco Gold based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹700.5, and the most bearish reporting a price target of just ₹350.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹99.9 billion, earnings will come to ₹4.5 billion, and it would be trading on a PE ratio of 31.7x, assuming you use a discount rate of 15.8%.
  
• Given the current share price of ₹331.35, the analyst price target of ₹543.92 is 39.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.