Being in the investment industry, analysts are bound to be surrounded by friends and family thirsting over their opinion about the overall market scenario or even any stock in particular. When one such particular eager friend with a heavy trading mindset enquired about our view on Suumaya Industries, claiming the company has reported marvelous top-line as well as bottom-line performance, we became curious.

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

Suumaya Industries was up 180.9 percent in six months, 848.6 percent in the past one year and since the last five years, the stock earned a whopping 2,690 percent returns for its investors. Now, that absolutely peaked our interest!

We immediately turned to Screener; a simple, yet powerful online screening tool to analyse Indian stocks, for a quick glance at Suumaya Industries.

The company’s mind-boggling reported numbers really could stupefy not just us but each and every investor out there. In the year ended March 2021, the company reported a stupendous 1,062 percent Year-On-Year (YoY) increase in sales, suggesting revenue was up 11 times. Profits exploded even more, almost 45 times increase from Rs 8 crore in March 2020 to Rs 358 crores in just a year! Thanks to the company’s operating leverage!

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As analysts, no one more than us could truly appreciate the beauty of the Return on Capital Employed’s (ROCE) deep J-curve! It started from 1 percent in 2015 and kept moving up in the following years to 2 percent, 3 percent, 9 percent, 15 percent, 22 percent and finally in the financial year 2020-21 ROCE stood at an exceptional level of 151 percent. What’s all the more fascinating was how close the ROCE and Return on Equity (ROE = 150 percent) are, implying there’s barely any debt! Some more brownie points for the company!

The cash conversion cycle (CCC) was as short as 5.4 days, suggesting money invested in the business today can be converted into cash within six days. Wow! But the cherry on the cake (in the eyes of the retail investor of course) was that at the current price, the shares of Suumaya Industries trades at only 2.9 times its earnings, much lower than the industry Price-to-Earnings ratio (P/E) standing at 45.5 times.

Now bear in mind that with the stock price, P/E may too change every day, but the difference between the two may most certainly not vanish overnight at least.

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Unarguably, prima facie, Suumaya Industries looks like an excellent company running an exceptional business. But we decided to take the company’s financial analysis just a notch higher by turning to the Cash Flow statement — the biggest clue provider as to how a company is balancing its receivables and payables, paying for its growth, and overall managing its flow of funds.

However, to our disappointment, the cash flow from operating activities or as popularly known CFO was Rs -10 crore, indicating that when compared to the operating profit (EBITDA), the company certainly isn’t converting its reported profits into any cash at all! This undesirable negative cash from operations made us question the earlier visited cash conversion cycle as well? The short cash conversion cycle implied that it would only take 5.4 days for the company to convert its investments in inventory and other resources into cash flows, then how was it possible for the company to be unable to convert any sales into cash?

The answer was simple, CREDIT! Going back and forth, we noticed that the company did manage to keep its cash conversion cycle low, but at the cost of humongous trade receivables and payables. Both the days payables as well as days receivables stood in the range of 300-315, shortening the cash conversion!

Simply put, a business has to manage 'credit' from both the supplier and the distributors’ side; the ability to buy something now and pay for it later. Sales to distributors or direct customers could be essentially 'put on their bill' rather than collecting cash. This 'put on the bill’ amount termed as trade receivables also works on the suppliers' side. Trade payables is money 'to be' paid or held back from the business’ suppliers, vendors, etc. and 'days payable/receivables' is simply the number of days the company takes to make or receive this 'on the bill’ payment in cash.

In Suumaya Industries' case, looking at the bigger picture while analysing the cash conversion cycle, days payable and receivables altogether; there seems to be money stuck with receivables which may just be the reason why the company is further unable to pay up to its suppliers as well. In fact, when we scratched the surface just a little, we spotted the trade receivables number to be almost half the company’s reported total revenues, hinting at major credit sales!

Now we aren’t saying that the company is a bad stock or a bad investment in any case. But what baffles us, are the numbers, as we don’t seem to make perfect sense out of them. What we came across just raise red flags, for us at least. Unlike popular opinion, red flags necessarily do not mean scams or fraudulent activities. Red flags just make us more cautious and all we try to do with every stock is play the devil’s advocate!

And agreed, we haven’t yet read a single page of the company’s annual report neither have we dug deeper into its future growth prospects, but for us, the story ends here!

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

(Edited by : Dipti Sharma)

First Published:Oct 19, 2021 4:54 PM IST