This article provides a fundamental analysis of Tirupati Sarjan Ltd, a real estate player focusing on Ahmedabad.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Tirupati Sarjan Ltd Research Report by Reader
Q: Sir, Tirupati Sarjan Ltd a Gujarat-based micro-cap construction company, has 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.
Dr Vijay Malik’s Response
Thanks for writing to me!
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 the 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 the company is continuing with its pricing strategy over the years.
Also read: How to do Business Analysis of Real Estate Companies
Operating Efficiency Analysis of Tirupati Sarjan Ltd:
Tirupati Sarjan Ltd is not doing very well on the 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 that money getting stuck in inventory is the reason that the company is not able to convert its growing profits into 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 detail.
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. The 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. The same thing has happened in the 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 to meet its interest & principal repayment requirements. Such a situation might force the company to get stuck in a debt trap.
Therefore, the ability to improve 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 the company as BB+, which depicts a high probability of default. A 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 the debt levels of Tirupati Sarjan Ltd. Moreover, any negative surprise from the Uganda subsidiary of the company might also have an impact on its business.
Read: 3 Simple Ways to assess the Margin of Safety in a Stock
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 continued in future might lead to the company falling into 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 making 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!
Regards,
P.S.
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Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
