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The curious case of Suumaya Industries: why cash flows matter more

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The curious case of Suumaya Industries: why cash flows matter more

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Being in the investment industry, analysts will surely be surrounded by friends and family thirsty for their opinion on the general market scenario or even on any particular stock. When one particularly enthusiastic friend with a strong business mind asked about our opinion of Suumaya Industries, stating that the company had reported a wonderful performance in both revenue and results, we were curious.

A quick Google search opened our eyes to a multi-bagger!

Suumaya Industries is up 180.9 percent in six months, up 848.6 percent in the past year, and since the past five years, the stock has delivered a whopping 2,690 percent return for its investors. Now, that reached our peak of interest!

We immediately head to Screener; a simple but powerful online picking tool for analyzing India stocks, to take a quick look at Suumaya Industries.

The staggering numbers reported by the company could really amaze not just us, but each and every investor. In the year ending March 2021, the company reported a whopping 1,062 percent year-on-year increase in sales, suggesting that revenue was up 11 times. Profits exploded further, almost 45 times increased from Rs 8 crore in March 2020 to Rs 358 crore in just one year! Thanks to the company’s operating leverage!

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As analysts, no one but ourselves could truly appreciate the beauty of the deep J-curve of Return on Capital Employed (ROCE)! It started from 1 percent in 2015 and continued to rise in the following years to 2 percent, 3 percent, 9 percent, 15 percent, 22 percent, and finally, in the 2020-21 financial year, ROCE was stood at an exceptional level of 151 percent. What is even more fascinating was how close ROCE and return on equity are (ROE = 150 percent), implying that there is hardly any debt. A few more points for the company!

The cash conversion cycle (CCC) was as short as 5.4 days, suggesting that money invested in the business today can be converted to cash in six days. Wow! But the icing on the cake (in the eyes of the retail investor, of course) was that at today’s price, Suumaya Industries’ stock is trading at just 2.9 times its earnings, much lower than the industry’s price-to-earnings ratio (P / E) standing in 45.5 times.

Now keep in mind that with the stock price, the P / E can also change every day, but the difference between the two may not disappear at least overnight.

Undeniably, prima facie, Suumaya Industries seems like an excellent company running an exceptional business. But we decided to take the financial analysis of the company a little higher by turning to the cash flow statement, the largest provider of clues to how a company is balancing its accounts receivable and payable, paying for its growth and generally managing its cash flow.

However, to our disappointment, the cash flow from operating activities or, as it is popularly known, CFO was -10 crore, indicating that compared to operating profit (EBITDA), the company certainly did not you are converting your reported earnings to cash at all. ! Did this undesirable negative cash from operations also make us question the previously visited cash conversion cycle? The short cash conversion cycle meant that it would only take 5.4 days for the company to convert its investments in inventory and other resources into cash flows, so how was it possible that the company could not convert any sales to cash?

The answer was simple, CREDIT! Back and forth, we note that the company managed to keep its cash conversion cycle low, but at the cost of huge accounts receivable and payable. Both days payable and days receivable were in the 300-315 range, shortening the cash conversion!

In short, a company has to manage the “credit” of both the supplier and the distributor; the ability to buy something now and pay for it later. Sales to distributors or direct customers could essentially “go on your invoice” rather than collect cash. This ‘put on the invoice’ amount called trade receivables also works on the vendor side. Trade accounts payable are money ‘to’ pay or withhold from suppliers, vendors, etc. of the business and the ‘days payable / accounts receivable’ is simply the number of days it takes the business to make or receive this payment ‘on invoice’ in cash.

In the case of Suumaya Industries, looking at the big picture while analyzing the cash conversion cycle, days payable and accounts receivable together; There seems to be money stuck in accounts receivable, which may be the reason why the company is also unable to pay its suppliers. In fact, when we scratched the surface a bit, we found that the number of trade accounts receivable was nearly half of the company’s reported total revenue, hinting at significant credit sales!

Now we are not saying that the company is a bad action or a bad investment in any case. But what puzzles us are the numbers, since it seems that we do not give them a perfect sense. What we found only raised red flags, at least for us. Contrary to popular opinion, red flags do not necessarily mean scams or fraudulent activities. Red flags only make us more cautious and all we try to do with every action is play devil’s advocate!

And okay, we haven’t read a single page of the company’s annual report yet or delved into its future growth prospects, but for us, the story ends here!

—The authors are Koushik Mohan, Moat PMS fund manager, and Salonee Desai, senior equity research analyst at Moat PMS. The opinions expressed in this article are my own.

(Edited by : Dipti sharma)

First published: IST

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The curious case of Suumaya Industries: why cash flows matter more

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