You have raised a very pertinent question and @vivek_mashrani has answered it beautifully. I am invested in Ambika myself and I thought I will share what I think.
In my investments I like to think of the downside risk and margin of safety first. And for me margin of safety comes from business, management and valuation together.
Ambika is in a difficult industry but has never made a loss since inception. The business has been quite resilient in an industry where base rates are pretty horrendous.
The management is first rate and I draw a lot of comfort from their quality.
I am reasonably comfortable with the valuation. Current PE is overstated as economic depreciation seems to be lesser than accounting depreciation.
A downside risk here is that though Chandran sir's yarn is niche and has higher realizations, a yarn price crash would affect his realizations also. But he is never made a loss and he has zero long-term debt currently (a very important point on MoS).
So for me, Ambika will survive in a very bad scenario. And there seems to be reasonable MoS.
Once I am reasonably sure of MoS, what is the upside? As you very rightly pointed out, it is heavily dependent of capex. If there is no capex the upside is pretty limited. Here what I am betting on is that over the past 15 years, if the management says capex is planned, they always end up doing it. So I am betting here on the management execution capabilities. But still, there is risk of execution here.
Given all the above, I think there is reasonable margin of safety, but growth depends on capex execution.
As such, my allocation for Ambika is ~4% of my portfolio, which could be changed.