ValuePickr Forum

Ambika Cotton Mills


good to see good promoter buying last 3 days.
value bought around 88 lakhs.

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@Pragnesh It is on the BSE website. Here ->
https://www.bseindia.com/stock-share-price/disclosures/insider-trading-2015/531978/

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From the latest annual report.

How are these “risks and concerns”

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Ambikka cotton mills AR 19 Notes

Revenue growth of 11 % to 659 cr .

Gross profit growth of 6 % to 115 cr

export turnover constituted 69.05% of the total turnover as against 57.46% in the previous year

during the year Company has further invested Rs. 1599.05 Lakhs in Knitting segment and Rs. 1316.84 Lakhs in Spinning segment .

The Company has made an application under Single Window Clearance, covered under Investment under Global Investors Meet 2019, Organised by State Government of Tamilnadu, in respect of implementation of envisaged expansion of spinning segment.

The proposal is under the advanced stage of all clearances and the MOU will be signed shortly by the Company and steps have been initiated for implementation of the project.

Dividend of 30 per equity share

Cotton yarn contributed 54 % to turnover of the company

Knitted fabrics contributed 36 % to turnover of the company

Rest was waste cotton

Promoter holding constant at 49.997 %

Total managerial remuneration – 33 lakh( extremely low )

The Company, on account of manufacturing specialty cotton yarn, continues to have good demand for its products and has created specific markets for its products. This ensures more sustained profitable operations

The Company has installed windmills for 100% of its captive requirements

Qty of cotton knitted fabrics sold has increased from 48 lakh kg to 86 lakh kg.

Qty of cotton yarn sold has decreased from 154 lakh kg to 129 lakh kg , as more of it has been captively consumed for making knitting fabric

Sale to top 3 customers amount to 251 cr ( 40 % of sales)


Indian operations have seen a drop-in sales considerably, which is understandable given the state of textile industry in India.

Asia has done pretty well on a big base.

North America has done great but on a small base , can be interesting if the company can scale in this geography in the future.

Overall I believe it was a decent year for the company in a tough environment. Company was able to maintain its wonderful margins . With the expansion coming online company might give some growth in the future . Company is available at interesting valuations , P/B of nearly 1 , with P/E of 8 and a divindend yield of 4 %.

Disc - Invested

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It is interesting that the company has already achieved the turnover of ~Rs.231 cr. in FY19 from knitted fabrics. The realization has increased from Rs.204.85 / kg in FY18 to Rs.266.8 / kg. in FY19. This is significant increase of 30% in realization for knitted fabrics.

The company has also increased the knitting facility from 30,000 kgs per day in FY18 to 40,000 kgs per day in FY19. As per last year’s AR, the target was to increase it to 37,000 kgs. per day.

If the company is able to sustain the increased realization in knitting and operate at 90% capacity then the sales from Knitting could be approx. Rs.336 Cr. in FY20.

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Agree, the company has shown resilient performance during tough year. On expansion front, I believe broadly if we assume 30% increase in spindles (roughly 30k on base of 1.1 lac spindles currently), and if capacity is fully utilized in say next 1 year - the marginal increase in bottom-line won’t be much. Reason being depreciation. The new capacity will be at current cost and will start adding to depreciation. This will broadly offset the increase in EBIDTA due to new capex. So, we will definitely see spike in terms of EBIDTA and thereby EV/EBIDTA valuation multiple will improve.

However, PAT might optically look low (though operating cashflows will improve). In eyes of investor therefore it might not be seen as growth implying reduced re-rating probability. Would be good to see how they use this incremental cashflows (incremental capex or buyback would be ideal).

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Free Cash Flow has not been generated for past two years, this will cause the Debt to rise. Probably due to the mill increasing production capacity. If they are serious about growth then they should ease out on the paid dividends.

Share prices are on a downward momentum, and has corrected 40% from the top. Dividends too should reduce.

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another 10k shares bought by P.V.CHANDRAN yesterday.

What I can see is they have repaid huge amount of trade payables (c.51crores extra paid) and are now left with only 7 cores of trade payables, which affected their CF from operations.
This coupled with capex spend (30crores) increased their debt position (88 crores). Debt I think will come down going forward even if they maintain same level of dividend due to enhanced Operating cash flow arising from new capacity and no major upcoming capex

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My concern stems from another set of numbers.

I see the numbers in the quarterlies and they are inline, from whatever little I understand. But, there is another set of data which I want this thread members to look into.

I tend to rely a lot more on what the market thinks about a company more than what I ascertain of it. A few years ago, the same business was given a rating of 4 PE by the market. From, 2007 to 2014, ACM traded below 5 PE. There has not been any dramatic change in the business dynamics since. Then why is it now alright to pay 10 PE which is double as much?

Market knows about the vagaries that come about in the textile industry. There are ups and down, which are even more prominent in Small and MId caps. As investors we ought to take advantage of it. Apparently now we are in the Up. It is wise to wait for the Down.

Finally speaking. This is a good small cap stock, inspite of that I will wait for PE 5 levels. At that point, this will be buy-and-forget kind of a stock. 5PE may happen as EPS increases or price falls. I am counting on the latter.

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Normally when you integrate vertically from yarn to fabric, margins should rise as you are capturing a greater share of the farm-to-fabric value chain. But Ambika’s margins have continued to fall. My guess is that the foray into fabric uses ordinary cotton sourced locally, while the premium yarn business is on a decline. The knitting foray is thus not a forward integration in true sense. Premium cotton is not produced in India and Ambika’s imports have fallen from Rs.352 crore in FY18 to Rs.260 crore in FY19. Premium yarn was Ambika’s moat, and gave it the high margins it commanded at the marketplace. Not any more.

There are other signs as well that the fortress is being breached. After being almost zero debt two years ago, interest costs have begun to rise once again. Most importantly, cash flows have dwindled from Rs.67 crore in FY17 to Rs.16 crore in FY18 and Rs.10 crore in FY19. Even the dividend (Rs.20 crore outgo) will now be paid out of borrowing, leave alone have money for capex. Obviously, the proposed greenfield facility in Dindigul will be debt financed. But in the absence of its traditional moat, what economics the new plant will have is anybody’s guess.

The story is changing, and is no longer what it was when I invested five & half years ago. With great regret, I exited the stock this week.

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That kind of PE levels came after 5 years of bear market following a major major high … with complete pessimism . If at all some day we see good stocks back to same 2013-14 levels … that would only be after a very prolonged bear market. If you have an opinion that 2018 was a decade kind of top we might see good stocks at 2013 levels in 2-3 years from now . The bet that we are playing is that if this current slowdown is going to prolong even more and if you we wait that out.

I think we have already bottomed out and we won’t go much down here. Banks have completed provisioning and liquidity should come back in system… even these prices will become history in a years time.

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Hello Chandragupta,

Could you please point me to the source for this. I checked on screener but the margins seemed stable

Could you point me to the source of this information.

Thanks

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AR 2018-19 mentions this detail.
Regarding margins reducing, I couldn’t find it.

@Chandragupta

I do not see how ACM is losing its Moat.

Debt is expected to rise because there was Fixed Assets investment. The global economy is a bad, and the company is going through a expansion. Debt is still under control. Not a point of worry yet.

Right. The fabric manufactured by ACM may not be the one made from its own yarn. Their AR says that their yarn is exported to USA and Europe which is used for making shirts on advanced technology looms which nobody in India (probably Asia) has.

The fabric ACM manufactures is probably a commoditized business, which may have less margin, but is still a cash-cow. No matter of worry there. It will only add to the profits. Only if one could find out, whether the fabric manufacturing business is running is a negative WC cycle (payable days > receivable days).

The new plant will manufacture more of the premium yarn, which will cause noticeable addition to the profits. That IF (a big IF) all goes well. Only then the stock price will pick up. Till then I see the downward price momentum continue.

The FcF is currently negative, and will be so for next two odd years: Is my guess, due to Capex and bad economy. This will cause the stock price to collapse, but I have faith that the management will overcome it. The first step is to stop the dividends!

DEBT:
Debt has increased but that is expected. In that past the management has taken steps to cut down on it. In fact, in 2017 AR the debt was almost cleared.

LastYears
finance Cost/Before Finance Cost and Depreciation
=492/11342 = 4.3%

Current years
942/12510 = 7.5%

So there is a minor increase. You will be surprised that it was much much higher in earlier years. But was well managed.

Now the question is, how low will the stock go? I do not want to rely on DCF for midcaps (that too for textiles in a bad economy).

I see 700-800 as a supportive belt. If more bad news comes-by then price will swiftly find itself around 450, which will be the best time to buy.

On margins, this is what I get:

Particulars / Rs. In Crores FY13 FY14 FY15 FY16 FY17 FY18 FY19
Operating Profit = PBT + Dep + Interest - Other Income 86.65 103.08 98.86 92.32 104.34 112.08 123.53
OPM % 21.78% 21.62% 19.96% 18.75% 19.74% 19.18% 18.84%

And on Raw Material imports, this is what the Annual Report says:

image

“Rs. in Lakhs” is a typo, it should be Crores. Most of this outflow is on account raw material imports though a small amount could be other expenses like travel, machinery & spares etc. This figure was Rs.352 crore last year.

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Dear all,

I am a new investor and tracking ACM.

In the annual report , i am trying to find how the value of 4.96 lakh and 8.82 lakh is allocated against sale of assets and sale of fixed assets under cash flow from operating activities and investing section.

Appreciate your guidance

If there is a lose on asset sale the same has to be recorded in the income statement. Lost on sale of Machinery of 4.96 is added under other expense in income statement (check note 28). So this expense has to be removed from the CFO. It looks like the same asset was sold for 8.82 and so it’s added under CFI. So the actual asset value after depreciation was 8.82+4.96.

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thanks senthil for your quick reply.

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Cotton prices increasing in international markets in last 2 weeks and decreasing in India . This is positive overall.