Senco Gold up 54% from its IPO price; should you buy now?

After a stellar listing, shares of jewellery retailer Senco Gold have given robust returns to its investors. Currently, trading at ₹487.25, the stock has already rallied around 54 percent from its issue price of ₹317. It has gained 19 percent in September so far.

The stock made a strong debut on the bourses on July 14, 2023, listing at ₹430, a premium of 35.65 percent versus its IPO price.

Domestic brokerage Emkay, in a recent report, initiated coverage on the stock with a target price of ₹630, implying an over 29 percent upside from current levels. Senco is trading at a major discount to peer valuations, offering scope for rerating, said the brokerage.

"Senco Gold boasts of being one of the top-2 as regards revenue share in the ₹80,000 crore eastern market, abetted by strongest brand accessibility vs peers, in terms of product, price & penetration. Growth headroom is huge, as its market

share is still at a mid-single-digit in the East, and focused efforts are afoot to capitalize on non-East prospects. Better access to capital, upbeat franchisee interest and shift to organized should drive a strong revenue-led EPS CAGR of over 20 percent for Senco in FY23-26E. Growth would be backed by near-equal input from new stores and SSG (same-store growth). Senco follows hygiene practices for sourcing/hedging gold (50 percent stated policy), thus reducing the commodity’s volatility risk. Unit metrics are better than/in line with peers’ (except Titan) and should further improve with rise in franchisee mix," further explained the brokerage.

About the IPO

The ₹405 crore initial public offering (IPO) was open for subscription from July 4 to July 6 with a price band of ₹301-317. This was the first IPO for the month of July and the second half of the current calendar year. The offer comprised a fresh issuance of shares worth ₹270 crore and an offer-for-sale (OFS) of ₹135 crore by investor SAIF Partners India IV.

The issue received a robust response from all kinds of investors and was subscribed to 77.25 times. It received bids for 69 crore equity shares against 89.43 lakh shares on offer. The qualified institutional buyer's (QIB) quota was subscribed to 190.56 times while the non-institutional investors' (NII) portion was subscribed to 68.44 times. Also, the part reserved for retail investors witnessed 16.28 times subscription.

A day ahead of its IPO, the company raised ₹121.50 crore from 21 anchor investors by allocating 38,32,807 equity shares at ₹317. IIFL Securities, Ambit Capital and SBI Capital Markets were the book-running lead managers to the issue.

About the Firm

Incorporated in 1994, Senco Gold Limited is a pan-India jewellery retail player with a legacy of more than five decades. It is the largest organised jewellery retail player in the eastern region of India based on a number of stores. It has a network of 136 stores as on Mar '23 out of which 75 are company-operated and 61 are franchisee showrooms. The products are sold under its brand name 'Senco Gold & Diamonds'.

Over FY21-23, the company’s revenue, EBITDA, and adj PAT have grown at a CAGR of 23.8 percent, 34.4 percent, and 60.6 percent, respectively. The company witnessed a 200 bps gross margin expansion over FY21-23 to 16.1 percent due to an increase in the share of margin accretive diamond and precious stones to overall revenue (from 5.1 percent to 6.8 percent over FY21-23). EBITDA margin also expanded by 120 bps over FY21-23 to 7.8 percent.

For the financial year FY23, the company posted a net profit at ₹158.48 crore versus ₹129.10 crore in FY22, while its total revenue stood at ₹4,108.54 crore in FY23 as against ₹3,547.41 crore in the previous financial year.

Investment Rationale

Low share in its stronghold East and focused non-East entry offer huge growth runway: Senco is #2 in the East, given its deepest penetration in West Bengal. However, with its East market share still being low at mid-single digit, Senco’s ahead-of-the-curve investments in brand/franchisees are aiding extension into the adjoining states of Bihar, Assam, Orissa and Jharkhand, and the Northeast. Also, Senco’s focus on non-East (mainly Delhi-NCR/UP for now) will supplement its expansion in core eastern areas, said Emkay. It expects the East and non-East to jointly add 60 stores for Senco in FY23-26E, on a base of 136 stores (12 percent store CAGR over FY23-26E vs 8 percent CAGR over FY20-23).

Light-weight strengths ensure the best accessibility: Senco’s basic offering entails a <10gm product in most categories which facilitates it to offer a similar look at lower grammage than peers. Leveraging its multi-decadal liaison with karigars (experts in making lightweight items), Senco offers best-in-class accessibility, which has assisted it to permeate deeper into tier-2/3 cities. Further, Senco is expanding its customer base via the D’Signia and Everlite store formats, targeting affluent/GenZ customers, noted Emkay.

Senco’s return ratios in line with or better than most organised players: While Senco logs 13-14 percent RoE in COCO (company-owned company-operated) stores, returns in FOFO (franchisee-owned franchisee-operated) stores are much higher, on nil inventory investment. Versus peers, Senco’s return is aligned with Kalyan’s/better than most listed jewelry retailers’. Senco’s margin surpasses peers’, albeit rev/store is lesser, on low per-capita in the East; but this gets adjusted, on lower inventory need at stores, informed the brokerage.

Better margins help Senco to still command a better ROCE profile vs. peers (ex-Titan). Titan clearly enjoys the best profitability/return ratios among jewelry retailers, on account of 2-3x margins, helped by a stronger brand and higher studded mix. In addition to the superior margins, Titan’s superior brand strength helps it to enjoy better traction among franchisees and attain deeper penetration with a presence in 251 cities through 423 stores, stated the brokerage.

Estimates

Given the significant consumption thrust towards organised retailers, Senco’s focus remains on revenue growth vs. margin gains or working capital reduction in the near future. Emkay's investment thesis on Senco rests on 20 percent revenue/EBITDA/PAT CAGR in the medium term, enabled by strong SSG, in a high single-digit, and healthy network expansion of 12 percent every year.

“After an initial dip in margin/RoE, on account of aggressive schemes to recruit new customers, the absence of diamond-inventory gains in FY24 (vs. FY23) and equity-led expansion, we expect margins/RoE to continue on an improving trend thereafter, aided by operating leverage and utilization of balance-sheet cash. With majority expansion through capital-intensive COCO stores ( ₹20 crore/store) over FY23-26E, free-cash-flow-to-equity (FCFE) is expected to remain negative over this period, post which there should be a significant improvement in cash flows,” it said.

Valuations

Despite similar growth prospects, Senco trades at 40 percent discount to Kalyan. While Kalyan has relatively better brand strength for faster Pan-India expansion, Emkay believes such a steep discount is unwarranted and provides scope for re-rating, as Senco delivers on its expectations going ahead.

"Given the recent listing and higher revenue concentration from eastern markets currently, we are conservatively valuing the company at 20x Sep-25E EPS and recommend BUY on the stock, with Sep-24E TP of Rs630/share," it said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.