Very detailed and comprehensive analysis Rohit… Thanks for sharing
Quite insightful study…what is the total Compact yarn capacity in India? What is the source for the tabulated table on page 3 ?
Will entry of competitor with bigger capacity impact Ambika in any way? (Sintex is coming up with 320,000 spindles for high grade value processed Compact yarn… they have alliance with European design houses like Armani, Hugo, etc.) They have local sourcing of raw material advantage and logistics advantage since its located very near to Pipavav port. Also the cost of power is subsidized by Gujarat government which is a big advantage.
Link to Sintex’s spinning project:
Ambika Cotton Mills Q4 FY16 results are out http://www.bseindia.com/xml-data/corpfiling/AttachLive/7141E639_78C6_483E_9236_612DD259D0E5_171404.pdf
Topline is almost flattish as expected. PAT has gone down due to higher tax out go. PBT is consistently similar which I feel should gives us a clearer picture than PAT.
Company has spent 23.7 crs on technological upgradation.
Does this includes additional spindles which the company was planning to install?
Furthermore, company is planning to install Knitting machinery which would probably be operational by October 2016. As far as my understanding goes they are trying to get into manufacturing of fabric, hence, doing forward integration.
It is not clear in the report if up-gradation includes additional spindles. I have written to IR department. Hopefully we might get reply from them in the coming week.
They had 5% of revenue coming from knitted fabrics last year. Now they are expanding further on that.
Apologies for asking a basic question. So the future growth for Ambika will solely come from knitting facility expansion? Is their current capacity fully utilized or there can be additional growth driven by higher utilization of the existing facilities?
Ambika has planned at investment of130 crs for increasing their spindles by 30%.
What we have seen previously in Ambika’s case that even when capacity is increased by a small amount the Ebitda/spindle increased exponentially. So, this would be crucial factor to look at as when the new spindles are installed.
Questions that now come up are:
Does this investment of 23.7 crores include amount spent on adding any additional spindles?
If yes, how many spindles have been added?
By when can we expect the complete expansion of additional spindles?
Is the market or buyers ready for Ambika’s expansion?
Will the expansion be for captive use of yarn to produce knitted fabric.
Eagerly waiting for a concall by the management
Currently they are running at full utilization and operate almost entire year at full capacity. Future growth drivers would be:
- Knitting facility (it contributes 5% revenue currently)
- Additional spindles
- Margin expansion through improved efficiency and utilization of new spindles
There are no concalls for this company as far as I am aware, correct me if wrong. Only window to interact directly with management will be AGM which happens in September generally.
Hi, The announcement for capacity expansion was made I think almost a year ago. Since then there have been no further updates from the company. Any idea when it is expected to be complete?
Hi. Thank you for all the help. I have been using the points you have listed in the previous comment to do my stock analysis. Being fairly new to value investing, this is the only standard set of guidelines I have. The file you have uploaded for Ambika is for the old template. Could you do one for the new template as well?
Cheap Chinese fabric cripples Surat textile units
Ambika clarifies queries of an investor http://www.moneycontrol.com/livefeed_pdf/Jul2016/04072016-98.pdf
Is this a normal practice to share it with the exchange for the benefit of everybody?
Great. Haven’t seen many companies doing this. Speaks of their transparency and integrity.
Discl: holding. No recent transactions.
But they don’t do any conference calls, interviews, presentations etc.
I had sought details on some clarifications that were needed. I was amazed to see that management actually replied and also uploaded it to the exchanges. Proud to be the shareholder of this company.
on a completely different note, ethics and growth of business may or may not go together. while ambika mgmt is of highest integrity, but is the company also growing on a fast pace? last 2 years are flattish? how do you measure it from return on investment prospective?
You concerns are very true. Recently growth is lacking. We need to understand few things here:
Is it a cyclical company or not? >>> Since the company serves to niche clients with niche yarn, its capacity utilization is always on higher side around 95-100%. Hence, it is a non-cyclical company in a cyclical sector. Implying it might not see distress which other companies in sector might see in the downturn. Hence, the multiple assigned to it should not be on the basis of average earnings during entire cycle, but on status quo basis.
Considering longevity >>> Can I stick with this company as dormant partner for really long time? Answer to me is yes, given the nature of products, ethical management and highest standards of corporate governance. I mean which promoter forgoes 2 Cr. per annum renumeration and align its interest to minority shareholders? Of course there is key personnal risk with the company.
What are historical growth triggers of company? From careful look its (a) New spindle addition or capex (b) Increase in efficiency and enhancing EBIDTA/spindle. If you see company has carefully increased its profits from 2012 onwards just by efficiency improvement and better capacity utilization. Again 30k spindle capex is going to come sooner or later. I understand that management is very conservative in doing capex and also do not like to take much lucrative TUFS loans…but do you like a company which flies when times are good and crashes when times are bad or something that protects you from bad days?
On valuation front, as @rohithpotti mentioned in his note, even if company do not grow and steady state 60 Cr. is generated, at discount rate of 10% the valuation comes to 600 Cr. So I have cushion of margin of safety + call option if company grows in future. So its like heads I win and tails I don’t lose much.
yes agree on all point, but key diff being again ROI and CAGR on investment. if co generates steady cash then mkt will value it as bond and thats why 10 or less PE ( prob similar to noida toll). on expansion reply to your queries shows that some way down the line. with 95% utilization, till expansion happens, we may see stable profit without growth and hence mkt may not value it higher than where its trading currently.
my point only was related to opportunity cost. do you stick to this company waiting for expansion to happen to drive growth or do you look at any other company which can give you growth. given the fact capital is limited to invest for most of us, some of these question are tough to raise and tougher to answer.
Disclosure: own ambika because of all the reasons you mentioned , but contemplating on opportunity cost.
Completely agree with you. There is opportunity cost involved. And in this market if one gets good company with reasonable valuation which can grow very fast with certainty, then one should obviously invest there.
The stock price probably may remain flattish until the capex is not started or completed. And there is uncertainty here in terms of land clearance for this. I am waiting for increasing my allocation until then and enjoy dividends for now. Since I am confident that even if this happens in next 3 years, I might see upside of around 30-40% in proportion to the capex…and I am happy to live with taxfree return of 12-13% + dividends until then.
Plus market is not factoring any upside from knitting facility they are going to commission in coming months.
I need a clarification… When they say capacity utilization is up to 95% Does it mean it is approximately around 95% on an average or it can be 85% as well. What do we mean by “up to”?