Target: ₹600
CMP:₹324.85
Senco Gold’s reported Q3 EBITDA missed our estimate by about 500bps. However, most of the miss was led by hedging loss in the current quarter and hedging gain in the base quarter, as the adjusted gross margin (GM) decline was limited to only 100 bps. Q3 revenue growth at 22 per cent (14 per cent SSG) was healthy/in-line. While the sizable GM volatility is underwhelming, Senco attributes the hedging impact to the highly volatile gold-price environment.
Overall, a growth outlook of about 20 per cent and 18-20 annual adds was retained; the adj GM decline is due to a higher mix of low-margin franchisee/exports and a lower studded mix, which the management is hopeful of gradually recouping hereon. We factor in about 100bps lower GM due to high competitive intensity; this results in a 13-16 per cent cut to our PAT.
We also reduced our TP multiple by about 10 per cent on lower profitability/ROCE in the business; this leads to around a 23 per cent cut to our TP. However, we see the 50 per cent correction in Senco (vs 52-week high) as unwarranted, and an assuring explanation for the margin volatility should be the key catalyst for a re-rating.