This article provides fundamental analysis of Tirupati Sarjan Ltd, a real estate player focusing on Ahmedabad.
Tirupati Sarjan Ltd
Q: Sir, Tirupati Sarjan Ltd a Gujarat based micro-cap construction company, having good CAGR but low PE ratio & low sales to market cap ratio, high cash balance with high debts. Please share your views about Tirupati Sarjan Ltd.
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Financial Analysis of Tirupati Sarjan Ltd:
Financials of Tirupati Sarjan Ltd indicate that the company has been growing at a stable rate of 20-25% per annum over last decade 2005-14. The sales growth has been associated with almost stable profitability.
Operating profit margins are stable at 9-10% across the years. Similarly, net profit margins are also sustained at 4-5%. These margins are not high when compared to other opportunities that an investor might come across. However, sustained margins indicate that company is continuing with its pricing strategy across the years.
Operating Efficiency Analysis of Tirupati Sarjan Ltd:
Tirupati Sarjan Ltd is not doing very well on operating efficiency front. Its operations seem very working capital intensive. Inventory turnover of Tirupati Sarjan Ltd has reduced from 4 in FY2011 to 2 in FY2014. The fact of money getting stuck in inventory is the reason that the company is not able to convert its growing profits in to free cash. Tirupati Sarjan Ltd seems to collect money from its customers on time as receivables days have declined from 36 days in FY2011 to 10 days in FY2014. An investor should analyse the working capital cycle of the company in details.
Increasing Debt Levels:
Whenever a company is not able to convert its profits into free cash due to poor operating efficiency, it shows in its cumulative PAT vs. CFO comparison test. Cumulative PAT of the company over 2005-14 is INR 29 cr. whereas cash flow from operations is negative INR 10 cr.
As Tirupati Sarjan Ltd is not getting cash from its operations, it has to rely on other sources of cash to meet its requirements for business growth. Such other cash mostly comes from either equity dilution or debt. Same thing has happened in case of the company.
Tirupati Sarjan Ltd has been incrementally relying on debt to fund its growing operations. Total debt has increased from INR 7 cr. in FY2010 to INR 36 cr. in FY2014. This growing debt has been leading to increasing interest costs. Interest costs have increased from INR 1 cr. in FY2011 to INR 5 cr. in FY2014.
If the company is not able to improve its operating efficiency in future and stop the process of its profits getting stuck in working capital, then it would have to keep relying on refinancing/further debt for meeting its interest & principal repayment requirements. Such situation might force the company to get stuck in a debt trap.
Therefore, ability to improve on its operating efficiency is the key feature, which would influence whether the company can generate sustainable business growth in future.
Poor Credit Rating:
CARE Ltd has rated Tthe company as BB+, which depicts high probability of default. Low credit rating also increases the cost of debt for the company, thereby impacting its profitability. CARE says:
“The ratings are also constrained due to working capital intensive nature of its operations and support extended to its Uganda based subsidiary through corporate guarantee”
We have noticed the impact poor working capital management has had on debt levels of Tirupati Sarjan Ltd. Moreover, any negative surprise from the Uganda subsidiary of the company might also have impact on its business.
Overall, it seems that Tirupati Sarjan Ltd has been growing its sales but the management is not able to keep its working capital management at optimal levels. This seems to have led to increasing debt levels and if continues in future might lead to the company falling in a debt trap.
I believe that there are many other good opportunities, which an investor may find in current markets.
These are my views about Tirupati Sarjan Ltd. However, you should do your own due diligence before taking any investment related decision about the company.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.