@samir_brd Though question was not to me, a similar discussion happened with one of fellow VP colleague which pushed me to think in same direction few months back and hence sharing the findings.
First thing first, future is unpredictable, so, let us look by history:
I had data available only till FY 16 that time. Hence, analysis is based till FY 16 numbers
Analysis of profitability on the basis of margins, mean and variation to mean in terms of consistency of performance:
- Due to size and leadership, though Vardhman has a better margin, the gap between maximum and minimum is relatively lower for Ambika which means more consistency. However, there are few other business reasons and I will come to this. However, they overall look comparable
Deployment of resources for revenue generation
- Though Ambika on a long term lagged on revenue generated per unit net fixed asset but it is catching up well. Now, this may happen due to different age of assets and utlization increase which would be more evident once you start analyzing net fixed asset to gross fixed asset ratio and depreciation numbers
3 On a man power productivity basis, Ambika loooks ahead of Vardhman but Vardhamn leads when it comes to SGA expenses
4 So far on profitability scores look at par where one has relatively better margin, other has more consistency and still quite comparable
Story starts getting interesting once we get into operations and cash flows
Let us analyze efficiency of operations by looking at working capital , debtor and inventory days
5 Ambika leads Vradhman by a huge margin more than 2x times on working capital management and 3x times on debtor management. though historically, Ambika was lagging on inventory management, offlate, it has started performing better than Vardhamn. All thsi is reflected consistently year after year whichever comulative average one takes
6 This remarkable different performance gets reflected further in cashflows where due to strong working capital, debtor and inventory management Ambika is able to converts more profits into cash and hence compensates for lesser profit margin (which is an accounting concept to actual cash) on a cumulative basis. Also, please note few things here that during 2011 cotton crisis, none of textile companies were spared including Vardhman whose cash flow went negative but Ambika looks more consistent. Infact out of 10 years , Vardhman had 3 years of low cashflow but Ambika has been more consistent. Also, please note that in 2015 , Vardhamn CFO to PAT is 3.4 but i think Vradhamn textiles apart from holding textile business has few unrelated businesses like steel and i think this exceptional gain was due to some one time gain or sell off please check. Having these unrelated businesses is another reason why Vardhamn ROCE is lower than Ambika apart from higher leverage despite of similar kind of other paarameters
7 Also, looking at ability to convert accounting profit into free cash flow, Ambika wins it over Vardhaman. Similar thing could be analyzed even in terms of FCF to sales ratio. I am not sure if Vardhman is working under capacity and it can improve. However, believe Vardhman has plans for 300 cr capex in next 3 years ,so, that does not look the scenario where as Ambika revealed their latest capex plan which converts into 35% ROCE analysis as per done by @vivek_mashrani which is again much better than Vardhman. Offlate Ambika performance looks deteriorating but we need to exclude Vardhman one time gain and check numbers and also for cashflow related stuff, it is better to take a long term consolidated view.Still, it makes sense to deep dive further into why Ambika has deteriorated and Vardhman has improved. This could be an important trigger for future valuation if compared relatively
8 In terms of leverage, again, Ambika wins over Vardhman and in future also, Ambika is expected to be debt free
9 Considering how these two companies have grown historically in terms of revenue and profit, on a long term basis, by revenue they were comparable ,however, Vardhman had upper hand in profutability. However, in 2016, Ambika had a dismal year where has Vardhman had strong growth (hoever i think this profit growth was a result of one time gain, people who have tracked Vardhman in detail can confirm)
So, overall on accounting profitability and growth basis, both companies more or less look comparable but when it comes to convertion of accounting profit to cash profit and cash profit to free cash flow, Ambika looks clear winner on a long term consistent basis.
Now coming to future, both Ambika and Vardhman have revealed thier plans. The extra challenge for Vardhman would be to prove their mettle in value added product but given their backgroudn they should be able to do. But i think if one does a return on capital on additional future investments, I have a feeling that Ambika would fare better though these would be pure estimates
Also, the unrelated business of Vardhman remains an overhang
now coming to valuation, on a PE basis Ambika is trading some where around 13 and Vradhman around 10 which is approx 30% difference. I would leave it to individual to decide how they would like to valuate businesses in long run on a relative basis.
Disc : Hold 7% of portfolio in Ambika and 1% in vardhman (have started a slow accumulation recently , however, if valuation gap closes by Vardhman's appreciation, wont mind switching the money to Ambika considering everything else remains the same in investment assumptions)
Note ; Some of conditional formatting elements are not true reflection of what I wanted to project as the excel used tool is still in development phase