Low growth, low margin, good business? Understanding Saraswati Saree Depot??

When you're typically investing in a business you want to get behind a sector growing fast, and ideally a business earning healthy margins.

The Indian wholesale saree market is neither. Sarees are a large (50,000cr+) but slow growing market in India, growing at around 4% historically, and likely to grow at a similar rate in the foreseeable future.

Within the saree value chain, the wholesalers are also amongst the lower end in terms of margins.

The operating margins for Saraswati Saree depot have varied in the 4-7% range.

The relatively diverse cultures in India drives a good amount of variety in sarees. Origin - which is also a good indicator of weaver style and expertise is therefore a key selling point in sarees.

Having a strong and diverse weaver network who can provide you with a wide variety of sarees to cater to Indian tastes is therefore critical in the business.

Saraswati Saree Depot maintains a collection of a whopping 300,000+ SKUs in its collection. It procures this sarees from a network of 900+ weavers in the country from a wide variety of origin sources including Surat, Varanasi, Mau, Madurai , Kolkata and Bengaluru.

This combination of a large variety of SKUs needed to run the business well, combined with the relatively low margin nature of the business makes a razor sharp control of working capital critical.

One would expect a relatively small business to have a subpar tech backbone to control working capital, and a relatively loose cash collection cycle. However that is not the case.

Despite its scale the business has a robust ERP system to monitor the end to end process from procurement to sales for every SKU.

Since inventories are the largest item on the balance sheet, the firm's ability to turn inventories close to 6 times a year drives higher asset turns and consequently high returns on capital.

This drives robust return numbers despite extremely thin margins for the business. Infact the business' return numbers are stronger than peers much larger than itself!

The business is currently trading below listing price, and is valued at ~20x FY24 earnings. While it does have risks around a relatively small family owned business 1. Holdings by single promoter family 2. Revenue concentration in one state 3. Product concentration in one clothing category 4. Historically slow growing market 5. New foray into men's fashion untested.

That being said, a bulk of these concerns are likely accounted for at the current price point, while the quality of the efficient working capital machine that the business has built is not very well appreciated. Makes for an interesting business to study!

Disc: This is a purely educational post to help you understand how low margin high turn businesses can be built and is strictly NOT a recommendation to BUY/SELL. Please do your own diligence or consult a SEBI registered RA/RIA for research/advice.

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