Motilal Oswal Financial Services reaffirms its “BUY” recommendation for Senco Gold (NSE: SENCO) with an upgraded price target of Rs. 1,400, reflecting a 30% upside from the current market price of Rs. 1,078. Despite some margin misses, Senco Gold continues to exhibit strong revenue growth, backed by strategic expansion and favorable market dynamics in India’s organized jewelry sector. The company’s focus on lightweight and studded jewelry, along with aggressive store expansions, underscores its long-term growth potential.

Summary

Senco Gold’s Q2 FY2025 results highlighted robust revenue growth of 31% YoY, driven by favorable monsoons and festive demand. However, gross margins were weaker than expected, largely due to volatility in gold prices and inventory adjustments. Management has maintained its guidance for an 18% revenue CAGR over FY24–27, supported by store expansions and a stronger focus on the studded jewelry segment. Motilal Oswal reiterates its bullish stance on Senco, citing a strong presence in eastern India, increasing formalization of the jewelry market, and stable growth prospects.

Q2 FY2025 Highlights

1. Revenue Performance:
Senco Gold’s consolidated revenue surged 31% YoY to Rs. 15,005 crore, in line with market expectations. Same-store sales growth (SSSG) rebounded to 20% in Q2 FY25 from 4% in Q1 FY25, driven by recovery in demand after customs duty reductions and favorable monsoon conditions in eastern India.

2. Gross Margin Volatility:
Gross margins expanded by 240 basis points YoY to 14.2% after adjusting for an inventory loss of Rs. 298 million due to gold price volatility. However, margins remained below expectations, highlighting the impact of rising input costs and market fluctuations.

3. EBITDA Growth:
EBITDA grew 107% YoY to Rs. 818 million, reflecting better operating efficiencies. The EBITDA margin expanded by 200 basis points to 5.4%.

4. PAT Growth:
Adjusted profit after tax (PAT) increased by a remarkable 189% YoY to Rs. 346 million, demonstrating the company’s ability to capitalize on festive demand and manage costs effectively.

Strategic Initiatives and Growth Drivers

1. Expansion Across Regions:
Senco plans to open 18–20 new stores in FY25, with 65–70% located in eastern India, reinforcing its market dominance in the region. The company is also expanding its presence in northern India and other regions to capture emerging demand.

2. Studded Jewelry Focus:
The company is capitalizing on the growing preference for studded jewelry, which now accounts for 11.1% of total sales, up from 9.9% in Q1 FY25. This shift towards higher-margin products is expected to boost profitability in the long term.

3. Lightweight Jewelry Strategy:
With increasing demand for mid-ticket items in Tier-3 and Tier-4 cities, Senco’s emphasis on lightweight jewelry aligns well with consumer trends and offers a competitive advantage.

4. Qualified Institutional Placement (QIP):
Senco aims to raise Rs. 5 billion through a QIP to fund its expansion and overcome capital expenditure constraints. This move is expected to provide the financial muscle needed for sustained growth.

Valuation and Target

1. Growth Projections:
Motilal Oswal projects a revenue CAGR of 17% and EBITDA CAGR of 20% over FY24–27. Adjusted PAT is expected to grow at a robust 24% CAGR during the same period.

2. Valuation Metrics:
At the current price, the stock is trading at 28x FY26 estimated earnings, with an ROE of 17.5% and ROIC of 12.8%. The target price of Rs. 1,400 is based on a 35x P/E multiple of FY26 earnings.

3. Investment Recommendation:
The 30% upside potential, combined with Senco’s strong execution capabilities and favorable market dynamics, makes the stock a compelling buy for investors with a medium- to long-term horizon.

Risks to Monitor

1. Margin Pressures:
Volatility in gold prices and rising input costs could impact margins, particularly if inventory hedging strategies prove insufficient.

2. Regulatory Risks:
Changes in government policies, such as alterations to customs duties or taxation on gold, could disrupt the company’s operations and profitability.

3. Market Competition:
Aggressive expansion by competitors in the organized jewelry sector may challenge Senco’s market share in key regions.