Tirupati Sarjan Ltd.

Background: Tirupati Sarjan is a Gujarat based company involved in creating civil infrastructure like construction (government tendering) and real estate (housing and affordable housing) though majority of its revenue come from government contracts. The company was incepted in 1995 and has quickly grown through the ranks. Later in 2006, the company also set up a subsidiary (Tirupati Development Uganda Limited – TDUL). Tirupati has so far completed and delivered over 2000 projects in India consisting of residential estates, commercial shopping complexes, recreational parks and educational, all on time deliveries (as claimed by company). The india entity has been growing relatively fast w.r.t to industry for last so many years especially in last five years despite the fact that the entire industry was struggling. The Uganda subsidiary has so far contributed very less to the company’s consolidated topline but has been generating nearly half of company’s bottomline proving the kind of margins the subsidiary is enjoying. Last year has been a path breaking year for the subsidiary as it bagged quite a few high impact orders and therefore, is expected to change the entire facet of the earnings profile in the coming years.

The company has been bagging contract very consistently and have been executing them in time within budget . In Uganda TDUL has also completed quite a few projects in the last 7-8 yrs and has now become one of the most well-known construction company in Uganda where they focus on government sponsored civil infrastructure and real estate development, both high-end and affordable housing. The company TDUL has a different business model where they focus on “Build and Transfer Ownership” rather than “Build and Rent”. Recently apart from building a hospital, the company signed a MoU with the Government of Uganda, to build business and industrial park in 6 major cities of Uganda. The revenue would start accruing from this year for next three years (the timeline for project execution is given on the TDUL website – the link provided below).This should change the earnings profile of the company and given that its coming at good bottmline, the earnings should get a strong fillip. Furthermore, this should help in understanding TDUL better (http://www.thepromota.co.uk/tirupati-most-successful-property-developer-in-uganda-fosters-a-business-and-home-ownership-mentality/). The company’s consolidated revenue has grown from 44.5 cr in FY 09 to 137cr in FY 14 and profits have grown from 3cr to 8.79cr during the same period. During the present nine months of this FY the company’s standalone revenues have grown 12% from 87cr to 98cr and profits have grown 69% from 2.8cr to 4.74cr. Company present’s consolidated results annually.

Valuations: The company is trading extremely cheap at 4 time FY 14 consolidated PE with market cap to sales ratio of around 0.25 whereas the other companies in the same sector are trading at high double digit PEs and 2-3 times sales to market cap. The company has cash on their books which is nearly 40% of its market cap. Though the company has debt on its standalone balance sheet but has almost equal amount of cash on its books as well. The cash was kept to back the financial bids for their projects and keeping debt also gives them tax benefit. Further, the consolidated balance sheet has higher debt on account of debt taken for different projects and to fund their “Build and Transfer Ownership” model, a glimpse of which has been given in the above mentioned interview link . Though, opaquely the consolidated debt may seem high but the company has interest coverage of 2.5 times (without  even considering the cash balance) Furthermore, given that bottomline we have seen so far in the first nine months of this FY and expected earnings, the present interest coverage of 2.5 times would get even better.. Promoters have almost 49.63 (without any pledge), have allocated themselves 92lac warrants at rs 11 and still buying from the open markets. The company rewarded the shareholders whenever the going has been good. Fy13 was slightly below par (as per company’s standard but way better than industry) and the company had to compromise on margins to bag orders and therefore, cash was retained. Interesting, unlike the industry, the company recovered very smartly in next FY (i.e FY14) and margins and revenue both grew (YoY) though the cash was still retained to beef up the fiscal position of the company which is reflected with cash on books (and also for the reason mentioned above). The company also has a high tax payout, industry leading return ratios, which along with cash on books reflects the quality and sanity of the earnings. A couple of concerns that exists is regarding inventory and contingent liabilities. Inventory is not too much of a concern right now, as its mostly real estate inventory and there are hardly any loans are taken against it. The value of this real-estate should appreciate over time, but investors should keep a tab to see inventory cleanup in the next few FYs. Yes, contingent liabilities is a bit of concern, though company is contesting it, investors should keep a track of it and we’ll have to see that it does not become the norm. But then, at 4 times Trailing PE all these concerns are grossly priced-in. More importantly given the kind of growth that is expected to come in next couple of years, we are getting huge margin of safety at the current prices. Let’s also not forget that promoters are very bullish on the company –warrants + regular open market buying makes us investors believe that the promoters are extremely bullish about the company.

Technicals: Solid. Though the markets are tanking, this stock has refused to give up even an inch and is in fact ending on green even when there is market carnage. Needless to say technically the stock is simply solid at the moment and is also trading above all of its Simple Moving Averages.

The company has one of the best return ratios and margins in the industry, is effectively debt-free and has shown strong growth over the years and the trend is only expected to strengthen moving forward. The company is backed by very smart management and deserves a much higher valuation. At the current price of 15.2 rs this looks to be an interesting bet for the short to medium term.

Please do not rush into this illiquid stock and let the price settle.

http://www.tirupatisarjan.com/index.html

http://www.tirupati-uganda.com/index.html

http://en.wikipedia.org/wiki/Tirupati_Development_Uganda_Limited

Disclaimer: No holding in the stock, but it is safe to assume that I may or may not invest in future. Also, the above stock view is my personal view in individual capacity. For rest, please look at the About page.