Hi guys, I was thinking about Ambika Cotton mills from the Owners Earnings perspective and this is my conclusion - Under two different scenarios, the Pre-tax owners earnings are understated by atleast 8-10% in the conservative scenario and by 29% in the aggressive scenario.
I am hereby attaching an extract of my calculation for owners earnings of Ambika.
Conservative Scenario -
Just a few pointers on my calculations -
1. I had attended the AGM held in September 2015 where I learnt from the promoter Mr. Chandran that the estimated useful life of the spindles is ~22-23years while for accounting purposes they have assumed a life of 19years. Thus, I have calculated Maintenance capex as Accounting Depreciation * 19/22.
2. Reported PBT is understated by 8% for FY15 when compared to Owners Earnings and understated by 10% when checked over FY05-15.
3. Pre tax earnings yield comes to ~14% (Pre tax owners earnings 69 / Market cap 510 ) which is twice the pre-tax Fixed Deposit rates.
Aggressive scenario -
Capex information has been given in all annual reports in the directors report section. I have tried to cull that information out and i have prepared an alternative scenario for calculating the maintenance capex. We know that reducing the figure of growth capex from total purchase of fixed assets, the balance should be maintenance capex. After doing this calculation, i found out that pre-tax owners earnings exceed reported PBT by ~128cr in total for FY05-FY15. Also since in textile companies capex happens in spurts, it is safe to assume that once the capex cycle is over, additional capex in the Cash flow statement shall be maintenance capex.
It will be better to look at the FY05-FY09 figures cumulatively since break-up of growth capex and maintenance capex is difficult due to absence of information in the Annual Report of 2005 and 2006.
In any case, the cumulative growth capex comes to around 414cr, maintenance capex is ~90cr while the total depreciation comes to ~275cr. Thus, we see that the Owners earnings will be higher than reported PBT for FY05-FY15 by (275-90) 185cr.
Now if we see just for FY15, the reported PBT is 64cr and the owners earnings are 82.4cr. Pre-tax owners earnings to Market cap (yield) comes to around 16% (82.4/510) which offers sufficient margin of safety in my opinion. Also, Post tax owners earnings is 82.4*(1-tax rate) = ~58cr. Hence, P/E ratio comes to 8.5x, whereas the current multiple based on reported Net income as on FY2015 is ~10.7x. In short, owners earnings are at a discount of 25% to the current multiple.
I may be incorrect in my calculations and thus am posting in this forum hoping the moderator(s)/senior investors would guide me to a better understanding of concept.
Thank you for your time.
Disclosure: I am invested.