Despite a 10% fall last week, why Emkay is bullish on Senco Gold?

Senco Gold stock has corrected by over 10 percent over last week after more than doubling from its IPO price. The correction is likely led by broader correction plus expectations of lower growth for Senco in the September quarter, said brokerage house Emkay, in a recent note.

"Lower growth expectations are largely on account of a high base amid shift of the festive season from Q2 to Q3. We believe the festive postponement to Q3 should completely offset the Q2 impact. Long-term levers in terms of product differentiation, penetration and non-east expansion remain in place. Senco currently trades at a 38 percent valuation discount vs. Kalyan, which should narrow as Senco delivers on our expectations of a 20 percent earnings CAGR over FY23-26E," it noted.

Despite the recent fall, the brokerage has retained its buy call on the stock with a target price of ₹800, this indicates an upside potential of over 20 percent.

Senco Gold made a strong debut on the bourses on July 14, 2023, listing at ₹430, a premium of 35.65 percent versus its IPO price of ₹317.

In just a little over 3 months, the stock has more than doubled investor wealth, surging 109 percent from its issue price. The stock jumped over 51 percent in September and has advanced almost 8 percent in October till now.

The stock hit its record high of ₹721.65, earlier this month on October 20, but after last week's decline, it is now 8.5 percent away from peak. However, it is still over 84 percent higher than its 52-week low of ₹358.25, hit on July 21, 2023.

However, despite the extraordinary returns since listing, 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," it rationaled.

Quarterly business update

In its september quarter update, the company informed that it has achieved 19 percent Revenue CAGR since FY20.

"The Q2 growth has also been very satisfactory despite no festive season and in line with past trends. The Q2 growth again had a secular trend across all zones and channels. We achieved 26 percent YoY Revenue growth in Q2 leading to overall 28 percent YoY growth in H1, while we had achieved 29.5 percent YoY growth in Q1. Similarly, the Same Store Sales Growth (SSSG) which was 21 percent in Ql, was range bound in Q2 and at H1 level S55G was 19 percent. The tailwind for the growth came from higher footfall based on enhanced customer engagement, higher wedding sales, relaunch of Raiwada wedding collection, new collection launches ( Mariposa, Spectra and Tria), Sales improvement upon showroom maturity and higher old gold exchange," it said.

It also announced that the firm has achieved volume

growth consistently in Q2, leading to H1 level YoY volume growth in Gold (11 percent) and Diamond (33 percent), in line with volume growth achieved in Ql. The Gross Margin % is likely to be rangebound in Q2 (based on Product mix, Channel Mix, offers and schemes) in line with Ql and H1 last year, it added.

About the IPO

Its ₹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'.

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.