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.
Below are the company’s fundamentals –
|Total Assets / NW||3.1||2.2||1.9||1.7||1.5||1.3||1.3||1.3||1.3||1.2|
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 –
|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|
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, 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.
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.
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 –
|Cash Conversion Cycle||196||100||107||103||117||110||120||147||189||218|
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 –
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
- 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.
- 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|
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|
Further, EBIT margin comparison across industry players has Ambika with best margins –
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 –
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.