Safari Industries is a relatively well known name in the space of Luggage, travel bags and accessories.
The company is listed on the exchanges (NSE – SAFARI) and has been quite a wealth creator over the last 6 years appreciating from 60-65 odd levels in Jan’14 to around current levels of 600-630 in Jan’20. That’s around 45% CAGR.
Recently, we came across the company while running through one of the screens and the first thing that struck us was that the stock is trading expensive at more than 50 times trailing earnings. These days it is quite common for some of the stocks to trade at such hefty valuations and we therefore expected both consistent growth in sales and profitability and reasonably good quality of earnings.
While the numbers don’t disappoint on the growth front; we believe the quality of numbers is not good. Rather, based on cursory glance on numbers (as produced below), we believe the quality is rather bad as the company is finding it extremely hard to convert profits to operating cash flows and supporting the so called good looking growth through infusion of debt and equity.
Below, we have produced screenshots of P/L, B/S and Cash flows for your reference:
So, if we look at P/L alone, the numbers look good with strong growth in sales and profitability. However, as with any fundamental research, P/L doesn’t tell much unless combined with analysis of B/S and Cash flows.
So, as we were saying above, we have doubts about the quality of earnings. Firstly, in the last 6 years, the company has generated positive cash flows from operations only once and the impact of the same is visible in the balance sheet. It raised equity in FY 15 which helped it reduce debt to some extent; however since then it has been consistently raising debt as obviously the cash flows have been negative.
So where is the money getting stuck? As the numbers suggest, the money is getting stuck at both the inventory and the receivables level. Since FY 14, the receivable days have increased from 70 odd levels to around 90 and the inventory days have increased from 85 to 98.
Consistently increasing cash conversion cycle is never a good sign and at times also a precursor to impending problems at the company level.
Looking at the numbers, we believe one should analyze the reported growth in more detail as there have been several instances in the past wherein the companies with strong growth but consistently negative cash flows have defaulted.
Disclosure: I don’t have any investment in the stock.
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