Ambika Cotton Mills – A Good Company in Specialty Yarn

thumbnail
Reading Time: 7 minutes

Source link | Follow Umang Shah on Twitter | Read Umang’s Blog Here

While looking at KPR Mills, I had come to the conclusion that a textile mill making yarn was a very risky business considering cotton prices, government policies, and the commodity nature of the business.

I looked at multiple listed cotton mills in India, and although things are more or less corroborated, Ambika Cotton Mills was a happy exception.

Overview of Ambika Cotton Mills

Ambika Cotton Mills is a premium shirting yarn manufacturer based out of Coimbatore, Tamil Nadu.

It imports high priced / quality SUPIMA cotton and Egyptian cotton and blends it with locally available Shankar 6 cotton to make shirting yarn, 70% of which is exported outside India.

global-value-chain
Source: Niti Ayog

Below are the company’s fundamentals –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues 327 389 398 475 495 492 526 580 656 620
increase by   19% 2% 19% 4% -1% 7% 10% 13% -5%
                     
EBITDA 30% 20% 22% 22% 20% 19% 20% 19% 19% 17%
EBIT 23% 13% 15% 15% 14% 13% 14% 14% 15% 12%
PBT 18% 8% 10% 12% 13% 12% 14% 14% 13% 11%
Tax rate 29% 26% 24% 20% 20% 25% 23% 23% 27% 25%
PAT 13% 6% 8% 10% 10% 9% 11% 11% 10% 8%
                     
EPS 72 41 53 82 87 76 97 107 110 91
increase by   -44% 30% 55% 6% -13% 29% 10% 3% -17%
                     
Asset Turns  0.6  0.9  0.9  1.0  1.1  1.2  1.1  1.0  1.1  1.0
Total Assets / NW  3.1  2.2  1.9  1.7  1.5  1.3  1.3  1.3  1.3  1.2
                     
RoNW 24% 12% 14% 19% 17% 13% 15% 14% 13% 10%
RoCE 12% 11% 15% 16% 16% 14% 15% 14% 13% 10%
Ambika Cotton Mills Financials | Source: Screener

 

Few Observations

Observation 1:

Also Read on FinMedium:  The Role of Luck in Investing

Although the company’s revenues have been volatile, its margins have been stable over the years (except 2011).

The revenues depend on the price of cotton, on which the companies apply their processing margin and then sell in the market, and thus EBITDA per kg (excluding waste cotton) would be more consistent –

Particulars 2013 2014 2015 2016 2017 2018 2019 2020
Yarn Sales 363 436 438 440 467 421 363 335
Fabric Sales     4     4   22   16   18   99 231 222
Expenses 280 337 360 363 382 411 469 453
EBITDA* 87 103 100 93 103 109 124 104
EBITDA Margin 24% 24% 23% 21% 22% 26% 34% 31%
                 
Yarn Volume (MT) 125 134 164 173 183 203 216 200
Fabric Volume (MT) 1 2 10 8 9 49 87 80
Realization / kg 296 329 281 264 266 256 275 278
EBITDA per kg 70 76 57 52 54 43 41 37
*- this EBITDA margin is excluding the sale of waste cotton and thus does not match overall EBITDA margins since waste cotton is sold at cost.

Ambika Cotton Mills only works with higher count (extra fine) cotton yarn, due to which it has industry high realizations per kg, as can be observed from above.

Also Read on FinMedium:  The Biryani Eater | Portfolio Yoga

Also, due to its niche offering, it has not made any losses since 1999, although 2002-04 was terrible.

Realizations and EBITDA per kg have gone down slightly on account increase in the composition of the fabric.

value-chain-textile-industry-ambika-cotton-mills
Source: Apparel Resources

The fabric made by Ambika Cotton Mills has a lower blend of imported cotton but has good margins and high volumes, so the company has taken a call to make the same.

The supply chain of premium shirting is global with yarn exported from India to Bangladesh / Cambodia for weaving.

It is then exported to Turkey for garments and is then sold in EU markets. In all, yarn forms only 5% of the finals shirts cost, and thus a shirting customer like Raymond has less incentive to change the yarn.

Although the company declined to comment on customers, it has customer relationships more than 15 years old.

Observation 2:

Whenever it has any excess cash, it adds to the cotton inventory, the procurement season of which lasts from Oct to March.

Further, due to the quality of the yarn it supplies, it has the lowest debtor days in the industry despite all its sales being B2B.

Further, Ambika Cotton Mills has made a conscious choice of paying the cotton suppliers early in order to get discounts as well as best quality cotton, and thus its Cash Conversion Cycle is as follows –

Also Read on FinMedium:  Industries Beating Cost of Capital
Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Debtor Days 24 10   6   4   4 14 28   9   7 11
Inventory Days 241 97 108 130 133 114 131 186 187 214
Payable days 69   6   8 32 21 17 39 47   5   7
Cash Conversion Cycle 196 100 107 103 117 110 120 147 189 218
Inventory days have increased in last 3 years on account of higher stockpile of raw cotton. High inventories in 2020 are also on account of the lockdown, which limited transit.

Observation 3:

Despite the availability of low-interest loans under TUFS, the company has relied on internal accruals for CAPEX, and has no long term borrowings since 2016 –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
D/E 1.5 0.8 0.4 0.4 0.2 0.1 0.0 0.1 0.2 0.1
OCF/Interest 4.7 6.7 4.5 2.9 6.0 11.4 15.1 2.9 1.1 5.3
OCF / Interest declined on account of an increase in inventories, but the company has enough liquidity.

Installation of Windmills – Due to the rampant power shortage in Tamil Nadu till 2015, the company lost out on optimum production due to frequent loss of power, along with high power costs too.

In order to reduce dependence on the state grid, the company put its own windmills in 2012, along with a dedicated 110kv power line to evacuate this power, and today, 100% of its power requirements are met through windmills.

Expansion – While a lot of textile mills like Vardhaman Textiles, KPR Mills, Nitin Spinners have been expanding their capacities by availing loans under TUFS, Ambika Cotton Mills has resisted over expanding its capacity and focuses strongly on execution and final quality of yarn.

Due to this, its cumulative depreciation over last year is higher at 284 crores as compared to its CAPEX at 269 crores (including CAPEX for windmills also).

The company has been looking to add 30,000 spindles at a CAPEX of 60-70 crores for 2-3 years now but has been unable to get any clearance in its existing plant due to the company’s insistence on following legal processes and not resorting bribes to local officials.

The company received all clearances at the end of FY20 and will be adding this capacity in FY21.

 

Also Watch: Ambika Cotton Mills Stock Analysis

 

Risks Associated with Ambika Cotton Mills

  1. Succession: Company’s fortunes are significantly determined by the execution capabilities of Promoter PV.Chandran who is currently 70+ years old. Although he has brought in his daughter and son in law to manage operations, it’ll be hard to determine whether they can continue maintaining the quality and the client relationships that Chandran has cultivated.
  2. Plateaued Realizations: Despite 70% of the company’s yarn being exported, its realizations per kg have not increased significantly –
Realization per kg (INR) 2013 2014 2015 2016 2017 2018 2019 2020
Cotton Yarn 283 319 278 261 264 265 273 269
Knitted Fabrics 250 247 218 211 195 205 267 277
Waste Cotton   64   72   59   54   65   78   78   82
The above plateauing of realizations could be on account of cotton prices not moving significantly.

3. Lack of information on competitors: Due to the finer counts made by Ambika Cotton, its difficult to ascertain its non-Indian competitors in high quality, since none of the Indian competitors supply specialty yarn exclusively –

Yarn / kg 2017 2018 2019 2020
Ambika Mills 264  265  273  269
KPR Mills  188  203  208  224
Vardhman Textiles      193  177
Vardhman and KPR Mills are one of the largest export-oriented yarn companies.

Further, EBIT margin comparison across industry players has Ambika with best margins –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Avg.
Ambika 23% 13% 15% 15% 14% 13% 14% 14% 15% 12% 15%
KPR 11% 6% 14% 11% 11% 12% 15% 14% 14% 14% 12%
Vardhaman 19% 7% 14% 18% 9% 14% 14% 11% 14% 9% 13%
Nahar Spinning 16% -4% 12% 12% 4% 6% 4% 0% 7% -1% 6%
Bannari Amman     14% 12% 7% 8% 6% 6% 7% 6% 8%
Sutlej Textiles 11% 5% 7% 10% 9% 9% 9% 6% 5% 3% 7%

Valuation:

Ultimately, Ambika Cotton Mills is a good company in a bad industry due to decent execution and a niche in specialty yarn.

Thus, although the growth prospects and earnings are moderate, it’s available at a good value –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 LTP
P/E 2.8 3.6 3.5 3.5 9.0 10.6 13.4 12.1 10.2 5.8 9.2
P/B 0.7 0.4 0.5 0.6 1.5 1.4 2.0 1.7 1.4 0.6 0.8
LTP is INR 700. Year-end closing prices are considered.

Although historically the stock has traded at lower multiples than the current 9.2x times, this 9.2x is calculated on the washout Q1 with low profitability and thus can be considered low.

Further, its no-growth value at 14% capitalization rate is INR 730 per share, while the stock price around 700, due to which, as per me, its downside is limited. Thus, I have invested in this company.

If you have any comments or need any of the data in excel (I have analyzed data since 1999), feel free to get in touch. Happy investing and spread the love.


Source link | Follow Umang Shah on Twitter | Read Umang’s Blog Here

Every Wednesday and Saturday, we send Info-Graphic and FinMedium Weekly Digest newsletters to our 25000+ Subscribers.

Join Them Now!

Please Share :)
Umang Shah
Through his writing, Umang shares his perspectives on how he thinks of investing, decision making, books and life in general.
Back To Top