Ambika Cotton Mills


(Rajesh) #223

Ambika is not secular growth story. It is a cyclical play on low cotton prices. Is this right ? Pl help to understand.


(saurabh shankar) #224

Hey Ayush,

Nice work. Fabric sales have 20% margin, that is really big. My sense and
could be completely wrong basis interaction with people is that it would be
lesser.

Regards,


(Naman) #225

Hi Ayush,

Thank you very much for providing the detailed breakup for Nitin (w/ and w/o rotor/ fabric sales). It puts Nitin’s numbers in the right perspective. Sorry had been tied up so could not follow up on my comparative table.

I have spoken to a few industry experts to get a better understanding of rotors and fabric sales, and they confirm your findings as provided in the table, which I am summarizing below -

  • Rotor spinning (like spindles) is a technology used for manufacturing yarn (also known as open-end yarn)

  • However, it is very different from spindles, as they do not allow multiple varieties, or multiple counts of yarn

  • Rotor Spinning is limited to coarser count yarn upto a maximum of 20s

  • it allows few value additions, and is used for denim, towels, bedsheet where fine yarn is not required

  • Capital cost for rotor is ~2.25 lakhs per rotor (compared to Rs 30000 - 40,000 for spindles)

  • However, it allows much higher productivity. It could produce 7-8 kg per rotor per day

  • Margins are in the range of 8-9%

  • ROCE is the same as spindles given higher productivity

Sales of yarn for Rotor for Nitin Spinners

  • Number of rotors - ~3000
  • yarn produced per day per rotor - ~8 kg
  • Yarn produced per annum - 8.76 mn kg (from 3000 rotors)
  • Price of yarn (~100 - 120 rs per kg)
  • Total Revenue from Rotors - 100 crores
  • EBITDA margin - 8-9% = ~8-9 crores

Fabric margins are generally low in the range of 5-6%, however premium fabric margins could be 15 - 20%. As per Nitin annual report, they have produced fabric of ~50 - 75 crore per annum over the last 4 years, but am not sure if they are in premium fabric. So EBITDA per spindle numbers could be revised if we assume lower margins for fabric.

Overall, I think the table summarizes Nitin’s numbers well.


(Karan Maroo) #226

Interesting article on the slowdown in spinning in India:

The article talks about the increasing spinning capacities in India with a corresponding decline in yarn demand from China and a lack of weaving capacities leading to a glut in the industry. The situation as per a couple of players is likely to get worse before it gets better.


(Rohit Balakrishnan) #227

Thanks Karan. Good article, reconfirms the point on margin expansion that most players saw in the last 2 years was because of sudden demand from China. I had spoken to folks @ Nitin and they confirmed that this year the margins were down due to sluggish demand and increase in cotton prices.

This could be interesting situation as many would expect the margin trend of last few couple of years to continue and fall for the bait.


(Karan Maroo) #228

Rohit - Interestingly enough, Ambika’s margins have not seen a major expansion in the last couple of years. They have remained stable (infact, have reduced from pre-FY12 levels). Of course, posters have attributed that to a rise in imports and moving to a finer-count space, but I would love to figure out the answer to this question.


(Varadharajan Ragunathan) #229

@rohitbalakrish_ - may not be that bad as the domestic apparel consumption is reviving although slowly. arvind is adding knitting/sewing etc and this might relieve some capacity although margins will be lower than in exports.

key will be understanding the gains from operating leverage Vs the margin dip because of domestic sales. if the former can balance out the latter, it may not be that bad.


(Varadharajan Ragunathan) #230

Inputs from charles

Textile industry in Coimbatore is structurally challenged –
firms moving to surat in Gujarat to be closer to the produce

Their machines are more efficient too and labour is more
productive in Gujarat

Ambika does things differently – ethical promoter, good guys
but will struggle in the long run as Coimbatore belt has a lot of issues –
power, water, pollution and not close to the source.

Equity Research: Ambika Cotton Mills Limited

Ambika Cotton Mills Limited

(BSE: 531978, NSE: AMBIKCO)

Industry: Textile -Cotton
Yarn

Ambika Cotton Mills Limited (ACML), incorporated in 1988, is a Coimbatore,
Tamil Nadu (India) based company involved in cotton yarn manufacturing. ACML is
listed on both Bombay Stock Exchange and National Stock Exchange in
India.

ACML specializes in manufacturing of premium quality compact and Eli Twist
yarn, which is used in making premium shirts. Company uses extra-long staple
(ELS) cotton in its yarn manufacturing by importing high quality Giza and Pima
cotton from Egypt and US respectively. ELS fiber provides extra strength while
keeping the yarn thin. Thin yarn finds usage in premium quality cloth of higher
counts. It has the capability to manufacture yarn for counts varying from 24’s
to 140’s allowing it to break free from the commodity products of single count
of other spinners. ACML is one of the established players in supplying yarn to
almost all premium shirt manufacturers around the world.

Current Market Price (INR)

BSE (February 6, 2015)

528.40

Market Capitalization (INR Cr./10 million)

Full

310

Free Float

170

One of
the readers asked me to write in detail about my reasons for investing in ACML.
I am holding in Ambika Cotton Mills Limited since September 2014. I still
invest in ACML because I found that ACML is growing at a healthy growth rate
while maintaining its profitability margins. It has been increasing its
production capacity without deteriorating its capital structure.

I find
that ACML’s products have good demand in the market, which it is able to cater
to by selling higher quantities at increasing prices. ACML has been realizing
its profits as cash and utilizing this cash productively in capacity expansion
and paying off debt. ACML has created higher market value for its shareholders
for each INR of profits retained by it.

After
comparing ACML with its peers, I find that ACML provides an opportunity of
investing in a conservatively financed consistent growth story with healthy
profitability margins at attractive prices. ACML also offers a healthy
margin of safety for its shareholders. After analyzing management of ACML,
I find that it has a competent management that believes in company’s future and
cares about shareholder’s interests.

All these
qualities present ACML as a good investing opportunity to me and I have been
consistently increasing my investment in the company.

Below is
my analysis of ACML, where I have done as per the framework described in my
article “Selecting
Top Stocks to Buy”. I have
divided the analysis into four parts: Financial Analysis, Business
Analysis, Valuation Analysis and Management Analysis. Let’s
delve deeper into it.

Financial Analysis

I have
used the framework provided by me in the article: How to do Financial Analysis of a Company to analyze ACML’s financial
statements for determining whether it has a sound financial position.

A)
Analysis Of Profit And Loss Statement (P&L):

Sales Growth & Profitability:

(INR Cr./10 million)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

CAGR
2005-14

Sales (A)

86

106

142

160

184

219

320

389

398

477

21%

Operating profit (B)

22

35

44

46

52

57

93

78

87

103

19%

Operating profit margin (B/A)

25%

33%

31%

29%

28%

26%

29%

20%

22%

22%

Net profit after tax ©

13

19

17

13

9

19

43

24

31

48

16%

Net profit margin (C/A)

15%

18%

12%

8%

5%

8%

13%

6%

8%

10%

We can
see that over last 10 years (2005-14), ACML has increased its sales at a
healthy rate of 21% per annum. It has been able to maintain its operating &
net profit margins (OPM & NPM) at healthy levels of 20-22% and 8-10%
respectively. When we would compare NPM of ACML with its peers later in
business analysis, we would realize that ACML has one of the best profitability
margins in the industry.

Tax Rate:

(INR Cr./10 million)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Profit before tax (A)

12.2

20.3

23.7

19.0

16.9

19.9

56.1

32.2

40.7

59.7

Tax paid (B)

0.6

1.6

6.6

5.8

3.7

5.2

16.7

8.3

9.7

11.5

Tax rate (B/A)

4%

8%

28%

30%

22%

26%

30%

26%

24%

19%

General
corporate tax rate applicable in India is 30%. However, textile sector has been
getting various tax incentives from Govt. to promote exports. ACML has
been utilizing these incentives and paying tax at varying rates of 20-30% over
the years. This healthy tax paid rate can be used to infer that company has
been paying taxes due to it, which is a healthy sign.

Interest Coverage:

(INR Cr./10 million)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Operating profit (A)

21.5

34.7

44.3

45.7

52.2

57.2

93.2

78.0

86.6

103.1

Interest expense (B)

4.1

6.4

9.5

13.0

17.3

16.7

15.5

19.7

18.8

12.0

Interest coverage (A/B)

5.3

5.4

4.7

3.5

3.0

3.4

6.0

4.0

4.6

8.6

ACML has
been maintaining its leverage levels within comfortable levels of
serviceability. Interest coverage ratio has always been more than 3 and is
increasing recently. This is a sign of a healthy company.

B) Analysis Of Balance Sheet
(B/S):

Debt to Equity ratio (D/E, Leverage):

(INR Cr./10 million)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Total Debt (D)

105

141

202

279

252

234

260

121

63

70

Total Equity (E)

65

97

98

111

121

136

175

196

220

260

D/E

1.6

1.4

2.1

2.5

2.1

1.7

1.5

0.6

0.3

0.3

Debt to
equity ratio of ACML has been reducing consistently from 2.5 in 2008 to 0.3 in
2014 as the company is using the cash generated from profits to pay off its
debt. I like such companies, which use the profits to improve their capital
structure. Decreasing debt levels reduce interest costs and thereby improve
the profitability of the company. If you revisit the profitability table above,
ACML’s net profit margin increased from 6% (2012) to 10% (2014), which is the
direct result of decrease in debt of the company.

Current Ratio (CR):

(INR Cr./10 million)

2010

2011

2012

2013

2014

Current Assets (CA)

193

209

128

131

165

Current Liabilities (CL)

95

105

121

140

125

Current Ratio (CA/CL)

2.0

2.0

1.1

0.9

1.3

Current
ratio of ACML is currently 1.3 and has been consistently above 1 meaning that
current assets are sufficient to take care of current liabilities.

C) Analysis Of Cash Flow
Statement (CF):

(INR Cr./10 million)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Total

Cash from Operating Activity

20

5

17

56

51

39

72

135

87

38

520

Cash from Investing Activity

(39)

(59)

(50)

(95)

(15)

(2)

(83)

(4)

(9)

(28)

(385)

Cash from Financing Activity

23

52

35

47

(47)

(34)

8

(132)

(79)

(8)

(134)

Net Cash Flow

4

(2)

2

8

(11)

3

(2)

(1)

(1)

1

1

Cash & Eq. at the end of year

6

4

6

13

2

6

3

2

2

3

We can
see that ACML has been consistently generating cash from its operations and
using it for capital expenditure and paying off debt. If we refer the Debt to
Equity ratio above, it would substantiate this conclusion as debt of ACML
reduced from INR 260 Cr. (2.60 billion) in 2011 to INR 70 Cr. (0.70 billion) in
2014. I prefer to keep such companies in my portfolio that generate cash
from operations to take care of investments and debt servicing.

Cumulative PAT vs. cumulative CFO:

(INR Cr./10 million)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Total

Profit After Tax (PAT)

13

19

17

13

9

19

43

24

31

48

236

Cash from Operations (CFO)

20

5

17

56

51

39

72

135

87

38

520

If we
compare the cumulative PAT and CFO for last 10 years (2005-14), we realize that
company has collected cash more than its profits. It indicates that the company
is able to collect its profits in cash and it is not stuck in receivables &
inventory. It is a good sign for a healthy company.

Conclusion:

After
analysis of financials of Ambika Cotton Mills Limited for last 10 years
(2005-14), we realize that it is growing at a healthy growth rate while
maintaining good profitability margins. ACML is able to increase its sale
by capacity expansion without overly leveraging its balance sheet, as it has
been using cash generating from operations to pay off its lenders. Company is
in a comfortable debt-servicing situation, which is reflected by its
healthy interest coverage ratio.

Business Analysis

I have
used the 5 parameter highlighted by me in the article: How to do
Business Analysis of a Company to analyze ACML’s business performance to
determine whether it has a business advantage.

Comparison with Industry Peers:

10 years sales
growth

Sales CAGR (2005-14)

NPM%

D/E

Ambika Cotton Mills Limited

21.0%

10.1%

0.3

Vardhman Textiles Limited

12.1%

12.6%

1.0

Arvind Limited

15.1%

5.4%

1.1

Trident Limited

20.8%

5.1%

1.8

We see
that Ambika has outperformed most of its peers over last 10 years (2005-10)
without compromising on its profit margins. Its net profit margin (NPM) is
one of the best in the industry. As discussed during financial analysis, we
can notice that the growth of ACML has not come at the cost of impairment of
capital structure. ACML is one of the most conservatively financed
companies in its industries, which is reflected by comparison of its D/E ratio
with its peers.

Increase In Production Capacity
And Sales:

2005

2014

CAGR
2005-14

Production capacity (No. of spindles) (A)

42,446

109,872

11%

Revenue generation per spindle (B)

20,732

43,414

9%

Total sales (INR Cr./10 Million)

88

477

21%

The above
table indicates that the sales growth achieved by ACML over last 10 years has
been contributed equally by product price increase (measured by revenue per
spindle, assuming each spindle produced same amount of yarn in 2005 and 2014)
and increased quantity of product sold (measured by production capacity). This
is a good sign that ACML is not relying solely on product price increases to
achieve sales growth but also expanding its reach in consumer markets by
selling higher quantities.

Conversion Of Sales Growth Into
Profits:

(INR Cr./10 million)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

CAGR
2005-14

Sales (A)

86

106

142

160

184

219

320

389

398

477

21%

Net profit after tax (B)

13

19

17

13

9

19

43

24

31

48

16%

Net profit margin (B/A)

15%

18%

12%

8%

5%

8%

13%

6%

8%

10%

We can
see that though the profit margin has been fluctuating over the years, it has
still been able to maintain it at respectable levels of 8-10%. Profit margin
decreased during 2008-10 due to higher interest cost consequent to capital
expenditure done by company on capacity expansion as well as on wind power
generation. Company now generates 110% of its power requirement by wind
energy, thereby protecting itself from risks of fluctuating power cost and
availability.

Conversion Of Profits Into Cash:

(INR Cr./10 million)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Total

PAT

13

19

17

13

9

19

43

24

31

48

236

CFO

20

5

17

56

51

39

72

135

87

38

520

The above
table reflects that the profits of ACML are flowing to the company as cash.
Profits are not being stuck in the receivables and inventory. This is a good
sign.

Creation Of Value For
Shareholders From The Profits Retained By The Company:

(INR Cr./10 million)

2005-14

Total retained profits of last 10 years (A)

214

Total increase in market capitalization in 10
years (B)

246

Value created per INR of retained profits (B/A)

1.15

We can
see that the company passed the test of creating at least one INR of market
value generation for its shareholders for each INR profits retained by it over
last 10 years.

Conclusion:

Upon
testing ACML at all the 5 parameters to judge the business performance, we can
safely conclude that it has passed on all the five parameters. It has demand
for its products in the market that it is able to tap by selling higher
quantities and able to pass on increase in its costs as higher prices to its
customers. Its profits are not being stuck in receivables & inventory and
are realized as cash. The cash generated is being utilized productively in
capacity expansion and debt reduction and it has created equivalent market
value for its shareholders.

Valuation Analysis

I have
used the framework provided by me in the article: How to do
Valuation Analysis of a Company to analyse ACML’s share market data for
determining whether it is available at attractive valuations.

Price To Earnings Ratio (P/E
Ratio):

10 years sales
growth

P/E

PEG

Sales CAGR (2005-14)

NPM%

D/E

Ambika Cotton Mills Limited

6.6

0.31

21.0%

10.1%

0.3

Vardhman Textiles Limited

6.6

0.55

12.1%

12.6%

1.0

Arvind Limited

18.6

1.23

15.1%

5.4%

1.1

Trident Limited

7.8

0.38

20.8%

5.1%

1.8

At
February 6, 2015, ACML is available at a P/E ratio of 6.6, which is cheap when
compared with its peers. If we see the whole package of conservatively
financed growth rate while keeping healthy profitability margins, ACML
comes out to be a clear winner among its peers.

P/E to Growth Ratio (PEG Ratio):

If we
compare the PEG ratio in the above table, we come to the same conclusion that
ACML presents a case of healthy growth, which is available cheaply in the
market. This is a one of the desirable quality of an investment worthy stock.

Earnings Yield (EY) and Margin of
Safety (MoS):

At P/E
ratio of 6.6, ACML provides an earnings yield of 15.2%. If we compare it to the
10 year government securities (G-Sec) yields, which are currently in the range
of 8.0-8.5%, then we realize that, as per Benjamin
Graham’s teachings, ACML presents a good margin of safety for the investors. This
margin of safety might provide a cushion to the price fall and might help to
restrict the capital loss that an investor may suffer by investing in ACML.

Price to Book Value Ratio (P/B
Ratio):

I am not
a big advocate of referring to P/B ratio for manufacturing companies. P/B ratio
is relevant for companies operating in financial services. However, as it is
one of the widely tracked measures of value and has been promoted by Benjamin
Graham as well, I would analyze ACML for its P/B ratio as well.

P/B ratio
of ACML at February 6, 2015, is 1.04. P/B ratio of 1.04 is within the
conservative valuation levels as per Graham.

Dividend Yield (DY):

ACML paid
a dividend of INR 12.5 for FY2014. At current price (February 6, 2015) of INR
528, it provides a yield of 2.4%, which is a decent yield.

Conclusion:

After
doing the valuation analysis of ACML and comparing it with its peers, we
realize that ACML provides an opportunity of investing in a conservatively
financed consistent growth story with healthy profitability margins at
attractive prices when compared to its peers. Simultaneously, ACML also
provides a healthy margin of safety for its shareholders.

Management Analysis

I have
used the framework provided by me in the article: How to do
Management Analysis of a Company to analyse ACML’s management quality and
performance to determine whether it has a good & competent management that
keeps shareholder’s interests in mind:

Background Check of Promoters
& Independent Directors:

ACML is
promoted by Mr. P.V. Chandran, who is an entrepreneur. He plays an active role
in the management of ACML. As per
Bloomberg, he is
also a whole time director on the board of Mathrubhumi Printing and Publishing
Co. Ltd, which publishes a Malayalam language newspaper Mathrubhumi.
Mathrubhumi has a daily circulation of about 1.5 million. Further web search
about Mr. Chandran and other directors did not reveal any negative information.

The board
consists of seven directors. Three directors are of promoter’s group, three are
independent directors and one nominee director of the lender (IDBI Bank). The
composition of board and presence of nominee director indicates presence of
sufficient oversight.

Management Succession Plans and
the Salary being paid to Potential Successors:

Mr. P.V.
Chandran has introduced his two daughters into the board of directors. Mrs.
Bhavya Chandran was inducted in FY2008 and Mrs. Vidya Jyothish was inducted in
FY2012 in the board as directors. Mr. Chandran is currently about 65 years of
age and it is assumed that he would be able to train her daughters in the
business before he takes retirement from active management of the company.

As per
FY2014 annual report, Mrs. Bhavya Chandra and Mrs. Vidya Jyothish were paid
remuneration of INR 60,000 and INR 45,000 for the year, which is not exorbitant
by any means.

Salary of Promoters vs. Net
Profits:

I have
analysed total remuneration being paid to Mr. P.V. Chandran viz-a-viz net
profit of ACML:

(INR Cr./10 million)

2010

2011

2012

2013

2014

Profit after tax

19

43

24

31

48

Remuneartion of Mr. P.V. Chandran

0.7

0.8

0.8

0.8

1.4

(B/A)

3.8%

1.9%

3.4%

2.6%

3.0%

The above
table reflects that the remuneration of Mr. Chandran has been fluctuating in
line with the profits of ACML. Mr. Chandran’s remuneration increased in FY2014
after the company recovered from the profits fall witnessed post FY2011 where
it doubled its profits from INR 24 Cr. to INR 48 Cr. His remuneration is about
2.5-3.0% of net profits which when compared with other promoter directors of
Indian firms is reasonable. Many other Indian companies have promoters who draw
remuneration almost at 8-10% of net profits.

Project Execution Skills:

ACML
promoters & managers have increased it production capacity from about 6,000
spindles in early 1990s to 109,872 spindles currently. Company has also
installed wind power generation capacity of about 27.4 MW over last decade.
These instances reflect that the promoters and management has good project
execution skills. This experience would be useful for further capacity
expansion projects that would be essential for future growth.

Consistent Increase in Dividend
Payments:

(INR Cr./10 million)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

CAGR
(2005-14)

Net profit (A)

12.7

19.0

17.3

13.2

9.4

18.5

43.1

23.9

31.0

48.1

16%

Dividend Payout (B)

0.9

1.0

1.2

1.0

1.0

1.5

2.5

2.5

4.7

6.1

24%

We can
see from the above table that as net profits of the company have increased over
the years, the dividend paid by ACML to its shareholders has increased. In
fact, dividend payout has increased at a higher rate than profits. This pattern
indicates that the company is rewarding its shareholders by sharing the
outcome of its growth over the years. This is one of the signs of a
shareholder friendly management.

Promoter Shareholding and
Insider’s Buying Pattern:

Current
shareholding of promoters in the company is 48.6% (December 31, 2014), which is
little below my comfortable levels of minimum 51%. However, when I observe the
pattern of promoters buying shares of ACML, I find that since July 2009, Mr.
P.V. Chandran has bought 0.75 million shares of ACML at 46 occasions. He
has increased his stake in ACML by 12.7% during this period (from 35.9% to
48.6%)

I draw a
lot of comfort when promoters buy shares of their own companies. I believe that
no one knows about a company better than its promoters do. Therefore, when
promoters buy shares, investors should buy too.

Foreign Institutional Investors
(FII) Holding:

I prefer
investing in companies with nil or very low FII shareholding. I believe that if
an investor invests in a company that initially have low FII holding and then
the company keeps growing consistently. The sustained good business performance
of the company would bring it to the notice of other market participants
including FIIs and create increased demand for its shares. This demand would
increase the P/E multiple of the shares of the company. I have noticed that
this P/E expansion might account for more than 75% of total gains from
an investment. (Read: How to
Earn High Returns at Low Risk)

ACML has
0.37% FII shareholding at December 31, 2014.

Other Remarkable Feature:

ACML was
hampered with power crisis in the state of Tamil Nadu during 2007-2009 when
companies were directed to draw only about 60% of allotted power. ACML took a
timely step and started installing wind power generation plants to shield it
from such issues in future. Currently, ACML has 27.5 MW of wind power
generating capacity, which is sufficient to meet entire current power
requirement of the company. This is also a sign of timely steps taken by the
management to deal with business hurdles.

Conclusion:

After
analyzing management of ACML, we can notice that it has a competent management,
which thinks about shareholder’s interests and believes in company’s future.
Mr. P.V. Chandran seems to have put in place a succession plan, which would
enable the next generation to take over the company by the time Mr. Chandran
retires from the day-to-day management of ACML.

I am a
bottom-up fundamental investor following value-investing approach for stock
selection. I do not focus on any particular industry while picking stocks for
investing. Therefore, you would notice that I have not discussed a lot about industry
growth projections and supply & demand scenarios etc. I believe in
investing for long-term time horizon during which many cycles of supply &
demand would pass. If a company has good product and competent management, then
it would be able to survive tough times and generate wealth for its
shareholders. I agree with Peter Lynch that moderate fast growers (20-25%)
in non-growth industries are ideal investments.

Stock
investing is full of uncertainties where assumptions might take long time to
materialize. There might be times when a company that has been performing
exceeding well, but the market might keep on ignoring it for years. On the
contrary, the price may fall and investors may start questioning their
analysis. However, every market correction in the past has been followed by
a full recovery and investors of good companies have been highly rewarded.
Therefore, an investor should buy stocks of a fundamentally good company and
stay invested.

There is no
price target for ACML in this report. It is deliberate because I agree with
Nobel Laureate Nils Bohr, when he says, “Prediction is very difficult,
especially if it’s about future.” I believe that ACML has what it takes to
grow its earnings in future and if it could succeed in growing consistently, then
market would recognize its potential and reward it with high stock price.
However, when it is going to happen is anybody’s guess. It might take a few
months, years, or more.

Nevertheless,
credit rating agencies have started to recognize the strong performance of
ACML. Credit rating agency CARE Ltd has consistently upgraded ACML’s rating
from BBB+ (2012) to A- (2013) to A (2014). Each rating upgrade lowers
the cost of debt for ACML and smoothens its future growth path.

Therefore,
the gist is “Buy Right
& Sit Tight”.

Barani
damodharan – texentrepreneurs

Utilization
is always at 98 % - Gujarat is 85% - tamil nadu workers are very efficient and
highly skilled

LGB, LMW
– outperforming

CRI
pumps, texmo pumps

Texpreneurs

Premier,
pricot and super are the pioneers of compact yarn. Ambika started late but is
very consistent

Even
ramco textikles is a renowned name. None of the textile mills in TN do less
than 40 count any more – as labour costs are higher, water/pollution norms are
costlier. On top of it, Gujarat government gives 4 % TUF subsidy and gives a
Rs. 1/ unit subsidy on power. All put together, the difference between TN and
Gujarat works out to Rs. 24/kg including the logistics cost of Rs. 5/kg to ship
from Gujarat to Coimbatore. As a result, all the coarse counts are being done
in Gujarat and rajasthan while TN does only fine counts.

Key
competitive advantages for players like ambika are ;

Consistently
high utilization – utilizations are more than 95-98% unlike in Gujarat where
they are 85%

Gingerly
done capacity expansion – to maximize cash flows

Since TN
government does not provide any extra subsidies, they prefer to grow at the
pace of internal accruals.

However,
Gujarat cotton is not suited for coarse counts and when such companies mix
imported cotton which is imported from china, turkey or Greece, the cost
advantages get nullified.

The
learning curve for TN is at least a decade ahead – others are catching up fast.
The new elephant in the room is seemandhra, where chandrababu naidu is planning
to give 5 % TUF subdiry and is giving a 5 year VAT exemption and a Rs. 1 /unit
power subsidy and wants to put in place 50 lakh spindles. This will kill the
industry in TN since all other costs are comparable between TN and AP.

The
industry has made a representation to the chief minister to restore a level playing field.

All in
all,he did acknowledge that the moat for ambika is strong but slowly shrinking.
He particularly mentioned welspun -
since they are vertically integrated a 2 % subsidy for them cuts costs across
all parts of the value chain and he thinks welspun is the most promising
company (now, that’s a tip to take it on from here ).


(Nikhil Eldurkar) #231

After going through the annual reports and searching for conference calls, I wasn’t able to find any information on it’s customers. Who do they sell to? The obvious answer is textile manufacturers. But there are no specifics to understand their customers behavior and the industries they cater to.

Trying to answer one of the Buffett’s frequently asked questions - Can you predict with a high degree of certainty, what the earnings will be in 10 years?

Other than numbers of the last few years, what other evidence or facts does one look for to see earnings visibility?


(Hitesh Patel) #232

Whenever in any industry or sector there is a mad scramble to increase capacity one has to beware. Because this is often done with a view that demand levels will sustain indefinitely.


(Aman Vij) #233

Couldn’t agree more Hitesh bro. Everyone can see a bull run in pharma sector but looking at recent results I think the textile industry has became the favourite of the market with all players being rerated multiple times from the historical averages. And the funny thing is every other company is talking about what markets want to hear i.e. increasing capacity, better utilization and thus higher return ratios. And to add to all that everything that could have gone right has gone right for the industry be it rupee depreciation, reduction in Raw material prices and govt. incentives. But taking this tailwind as the new norm could be dangerous thing.The only thing missing is M&A and divorsification of the cash flows for venturing into new business


(Whipsaw) #234

@varadharajanr In TN with too many uncertainties in politics and elections next year, it could be game changer for textiles industry in TN. Electricity/Power situation was not bad this year (as compared to last 2 years) and any improvement from here would be a big +ve for the industry in TN.

Regarding Welspun - Is it Welspun Syntex or Welspun India?


(Nikhil Eldurkar) #235

That’s the question I’m trying to answer too, where are things headed?


(Varadharajan Ragunathan) #236

@whipsaw - I think in TN things can only get better - it’s welspun india - the one that makes textiles I think.


(Karan Maroo) #237

Regarding TUFS - claims have reached a very high figure and you’d find that in the balance sheet of most players.

Over the last few days, two different sources in the textile industry (fairly reliable) have told me about an impending change to the TUFS policy, likely in July-August. One of them spoke about the Central Government thinking about the TUFS scheme being entirely scrapped for new projects in textile. The other source told me that through their interactions with the government, it is likely that TUFS would be moderated. He spoke about capital subsidy being removed while continuing the interest subsidies.

Since this is grapevine, I request everyone to take the above information with a pinch of salt.


(Rohit Balakrishnan) #238

This report is an interesting read.
Nirmal Bang - Textile Sector-Sector Update- 22 June 2015.pdf (314.9 KB) ting


(Karan Maroo) #239

I must say that scuttlebutt is not an easy technique. Reaching out to the right people is a very tough task indeed. I have been trying to reach Ambika’s agents for many days but have not been able to do so. Finally, person X (who is an acquaintance of mine) was able to reach out to person Y (who is one of the domestic agents of Ambika). Person Y is a bigshot and does not speak to many people and hence I could not reach out to him directly. However, I got a few of my questions answered through person X. Here are some inputs:

PV Chandran is an absolute rockstar. He is the single most important reason why Ambika is simply the best company in the finer-count segments. He is a no frills man, has his house just above the office and is completely focused on his work. Whats quintessential about Ambika is that everything is in the hands of the promoters, and PV Chandran has taken it to the extreme by being the go-to man for marketing, production as well as procurement. The man is unbelievably good at what he does, almost a freak. He does not access his e-mails even today. He has not put in an IT setup or a professional setup. He is one the phone all day long; however, there is no one as brilliant as him in the textile space.

Comment: Obviously there is also a big risk here - the kind of dependence which Ambika has on Mr. Chandran. It is pertinent to note that he has no sons.

Forget about the Nahars and Vardhmans of the world. Ambika is the only reliable player in the higher counts space, and enjoys a near monopoly situation in the market. With the competitive advantages which Ambika has, there is nobody who can touch the company in this segment. Every spinner worth his salt has 100s of customers - Ambika just has 11 customers in India, and he has no capacity to add a 12th customer. The kind of quality and supply schedules which Ambika provides is unbelievably good, and there is a clamour outside these 11 customers to acquire Ambika’s cotton yarn. Arvind Mills buys 80-120 count yarn exclusively from Ambika yarn. Sanjay Lalbhai, who also happens to be a friend of Mr. Chandran says “I know this guy is charging a massive premium and is ripping me off, but he is the only guy I can buy from.” Such is the level of Ambika’s quality.

Comment: Since this has been said by an agent, we need to take it with a pinch of salt. However, I couldn’t believe it that Ambika has just 11 Indian customers and 3-4 agents. Every single spinner in India has atleast 10 agents and loads of customers. There is no doubt that there is a clamour for Ambika’s yarn - I’ve got the same confirmed by other sources too.

You cannot match what Chandran has done with Ambika- he is running it like a boutique firm. He has changed the rules of the game and is unlike any other spinner. For example, a 110,000 spindle player in the market has 700-800 workers in the factory. Chandran has 3600 labour with the same capacity! He is extremely stringent when it comes to quality, to the point of being obsessed. These workers make sure of the quality of yarn at every single stage, and it shows in the final product. Sure, it adds about 5-10 rupees extra per kg to the yarn cost, but Ambika charges 60-100 Rs extra per kg on the yarn as compared to other players in the market. For premium shirts, Ambika is the go to guy in India. The kind of techniques of production, quality checks which Chandran has in place are extremely difficult to match. Even if they are matched, an organisation would have to hire lots of professionals (who will cost a lot) and create a sustained track record in order to attract customers. Chandra has done all of this single-handedly, and has an impeccable track record. Unlike any other spinner, weavers and garmenters are dependent on Chandran rather than the other way around. Besides, he has been smart in maintaining very strong relations with them. This plus his sourcing of Giza from USA and Australia makes him a very difficult player to ape at similar costs.

Comment: Yarn cost / kg = 600-1000 Rs; One Kg is used to make 5-6 shirts. Each shirt sells for about 3000-5000 bucks, and has 120-200 bucks as its yarn cost. Its a small percentage, but can have a high impact on the final quality of the shirt. Why would garmeters want to take a chance there but source from the best? Even if they find quality suppliers, they will need a track record to start buying in a sustainable manner from him.

Remember, the Arrow shirt which you are wearing is likely to have Ambika’s yarn in it :wink:

Discl - Have taken starting positions in the company


(Vivek Gautam) #240

thanks karan.besides the useful info u hv a flair with words as well


(Karan Maroo) #241

Thanks a lot Vivek for that!


(Varadharajan Ragunathan) #242

Fantastic work @karanmaroo - the big question is an organization - what happens after he is gone ?