Senco Gold (Potential multi bagger?)

Disc: Not a buy or sell recommendation

Here is my analysis and thesis regarding the business.

Thesis

For FY24, H1 growth has been around 27% which is really great, however i want ti be a bit conservative because of the fact that Q3 base is quite large. Hence, The overall growth I have assumed for the year is around 25%, which sounds great but still could be conservative.

Now for the rest of the years, the company wants to increase the store count by around 25 something each year and reach about 250 stores which seems possible. Current store count is 153 and 10 should be added by FY24 so around 163. With an SSG of double digits, and 15%+ growth in number of stores, even 20% growth in revenue seems very conservative.

Regarding EBITDA,

This FY24 there seems to be inventory losses due to Diamonds, and hence i expect the margins to decline a bit, however we can assume this problem to solve and revert back to mean. Even though the studded ratio is increasing, the company mentioned that it will probably get offset by entering into new markets and more competition, as mentioned in Q1 concall. Another point, the margins were on the higher side last year due to diamond prices and hence we shouldn't expect increasing margins, mostly stable or even around 7% because of franchise additions and growth phases of the company. I have opted for 8% but I think( could be wrong so correct me whenever) 7% too is a reasonable assumption 

Interest costs and depreciation

During the H1 balance sheet, lease liabilities increased by around 10% and hence assuming a 10% increase is possible in depreciation and Interest costs. With the own store additions of our 10%. Its safe to assume these two ill increase by the same range.

PBT

I do have a problem with PBT for FY 26-27. The PBT is more than 5% which seems a bit hard to believe because it's difficult to achieve a PBT of 5%+. It's probably possible if operating leverage plays out, which is a thesis pointer. 

Valuations

I would not wanna assign the valuations of Titan and Kalyan, since i haven't studied titan i can't say much about it but Kalyan does look overvalued. Secondly, Senco has a very strong presence in the east but not much in other regions and that becomes a big risk. If anything goes wrong in West Bengal, any financial model we make will go for a toss. So that's why, I think 1.5x PEG makes some sense to me. However, upon talking to other investors, it does make sense to me that consumption businesses get a 50x PE.

Personal opinion

There is a strong shift from unorganized players to Organized players and hence I do believe that there are strong tailwinds in the sector. I think Senco can deeply penetrate areas due to their lower average ticket size and business model, which just gives me a sense of relief that they have a lot of growth possibilities in new geographies. 

However, not a lot of big pan India players have a strong presence in the east and hence it will be interesting to see how Senco tackles the big boys in other regions.