Ambika Cotton Mills

[varadharajanr]

I may have posted this earlier but these points got missed out - so re-posting again.

I spoke to someone who is involved in the TUF businesss and he knew ambika well

1. ambika is the only indian name that apparently chinese and vietnamese can pronounce (with some difficulty)as their yarn breaks much lesser and hence give a much higher productivity - they are willing to pay 2-3 % premium for that

2. ambika’s cotton procurement is becoming increasingly tough as most farmers in TN have moved out of cotton. As a result, they have had to procure cotton from maharashtra and gujarat which is leading to increased logistics cost. Structurally, bankers feel the TN belt is on a decline (heard this verbatim) and only differentiated players like ambika will survive - cost fofr cost, labour/water/cotton TN is less competitive than gujarat and rajasthan and this is leading to pressure on margins.

[karanmaroo]

@Donald

As you’ve pointed out, the lower margins in the last 3 years is attributable to gross margins declining in FY12 and then remaining where they are in FY13, FY14 and FY15. Thats my point - the decline in FY12 was expected (I’ve stated the reasons above), but why didnt the gross margins rebound in FY13, FY14 or even FY15? Thats the big question for me. (Maybe what @varadharajanr is a part of the answer to the question). However, IMHO we definitely need to answer this question - be it a change in product mix, competition, whatever.

Listing the data above in another format:

Why have gross margins for Ambika not reverted back to mean (Whilst they have done so for the industry as a whole)?

[Donald]

@karanmaroo
The answer is simple. Increasing imported RM (US PIMA and Egyptian Giza) versus others who import very little of these (lower quality blends?). Think we had presented a table that showed imported RM now accounts for 80% plus in FY14 up from 50% 2-3 years back.

Since you are doing a detailed peer comparison, will be good if you tabulate imported RM/Indegenous for the bigger names mentioned. Please don’t do it an aggregrated industry level on this parameter - we should compare apples to apples. Those who do lower counts commodity priced volume business have zero incentive to import top quality ELS. The finer count guys should have that incentive, but my random checks showed they dont import in any meaningful quantity. Will be good to look at these figures closely.

If you check the figures, Ambika imports 1/4th or 1/3rd of the total Supima imports into India (dont have my notes ready, check supima site). This may be one of the primary reasons why Ambika yarn quality consistency is way ahead of others - still to be established

We have got enough corroborating evidence from multiple stakeholders/competition -that Ambika yarn is considered superior. My hunch is that - focusing primarily on the whys - asking the right questions, seeking what they are doing differently, may lead us to the right questions - and eventually the answer to the puzzle.

@varadharajanr
I have some interesting data/opinions on the South Mills vs North Mills - from a industry veteran of 30 plus years - will share when I get the time, next

[karanmaroo]

Yeah @Donald - while he has been importing higher quality of cotton (because of the need for finer count) since 2011, his realizations have not increased proportionately (RM/Sales has gone up). Whats your take on that? Why have realizations not really gone up as yet in proportion to increasing costs (due to higher level of imports)?

[karanmaroo]

I could speak to one of the promoters’ sons in Gimatex last night (Donald - saw your post this morning only, however will ask him for more references if he can provide). Gimatex is from the Mohota group which has been in the textile industry for five generations now. They’re present across spinning, weaving and processing; however, their forte is high quality spinning. The guy I spoke to is relatively new in the business, but still gave me a few good insights.

Here are a few salient points from the conversation:

1) Spinning & Counts

"We do cotton yarn in the count of range 60, and upto a maximum of 80. The bread and butter of most companies is counts in this range and its a good growing segment. Whatever type of spinning you use, you can manufacture cotton yarn in this range (<60). However, if we stretch, we can manufacture yarn upto counts of 80.

For yarn with a count > 80, you need specialized machines, greater levels of moisture (created through machines), controlled temperature conditions (again, created through machines), more power etc. It is not easy, and you need a fair bit of specialization, technology and know how. If I have to enter the finer count cotton yarn segment (even with the decades of spinning experience in my organisation), it would take me atleast 4-5 years to come upto terms with both manufacturing and marketing (Will come to the marketing part later). However, I am not interested in entering this segment because the growth has kind of stagnated in Europe and USA. In India, there are not more than 10 players in this segment, and Ambika is certainly the leading name"

2) Why does a player like Ambika not forward integrated into manufacturing of grey fabric and finished fabric

"For this, I will venture into the textile process:

So, each of these processes is an industry by itself.
Spinning - High capex, low labour, no environmental norms for starting.
Weaving - Medium capex, high labour intensive, environmental and discharge norms in place. Besides, weaving for high quality / fine count shirts does not take place in India - Turkey and Italy are hubs for the same
Processing - Medium capex, high environmental and discharge norms serve as a major entry barrier (lot of water & chemicals usage)
Garmenting - Highly labour intensive

So why can’t / won’t Ambika forward integrate? Well, first because of labour and environment issues. Second, to the segment it serves, manufacturing takes place in other countries and not India because of the quality required (weaving has various processes in itself). In yarn, it is easy to outsource and buy from other countries. However, when it comes to fabric for premium shirtings, conditions have to be controlled and a lot of manufacturers prefer to process in-house. However, its possible for a player like Vardhman to do this. Third, yarn can located at far off location as procuring it is not a problem. However, delivery schedules are extremely critical in procuring grey fabric and finished fabric. For this reason, players prefer to manufacture fabric themselves or outsource to locations closer home."

3) Marketing

"Yarn is sold through agents to fabric manufacturers and the payment is received from manufacturers directly. However, finished fabric is sold through intermediaries to end users and payment is received through these intermediaries (Dalals). You do not know where your finished fabric lands up.

Normally, fabric manufacturers do not ask for the yarn of a particular company, except for specialized organic yarn. If, as you are saying, Ambika’s yarn is specifically asked for, its a big deal."

4) More questions

I asked him to find out

• Ambika’s reputation in the market
• More about other fine yarn manufacturers and why Ambika enjoys the reputation it does
• More entry barriers for the fine count industry
• Growth and demand for higher count yarn

Will add Donald’s request for more references and will drop him an e-mail.

[Donald]

@karanmaroo
Thanks. Keep asking for the right references. Primarily South based mills with finer counts similar to Ambika. Why they have chosen not to blend in higher quality ELS cotton, e.g.

Good question. The answer may lie in Revenue/Spindle and EBITDA/Spindle (especially as capacities have remained stagnant from 2009) as Aveek Mitra suggested. Please compute that for Ambika and other comparable players and share. That may be a revelation . Notwithstanding that, perceived inability or reluctance to expand capacities (environment not being conducive in Mgmt judgement?) is a big bother. We need to wait for an announcement on their Capex plans.

[anil1820]

Superb points @Naman & @karanmaroo

Thanks

[rohitbalakrish_]

@karanmaroo Great points Karan. Thanks for sharing your notes. On the reduction on Ambika’s GM- the way you can perhaps understand is that while other spinners got the benefit of rupee depreciation (through better sales realization in export markets), Ambika’s benefit was curtailed by high imports (higher imports higher costs).
donald

[ayushmit]

@rohitbalakrish_ Not sure if that would be the answer. Can we try putting up an excel sheet with revenue, operating profit and net profit per spindle for 4-5 good yarn cos?

[karanmaroo]

@ayushmit - As suggested by Donald I started doing the comparisons for a few high count companies, but have gotten busy at office; will try to complete it in 1-2 days.

@rohitbalakrish_ - Thats part of the answer - but if you theory was to be true it indicates that pricing / negotiation power is quite low. Another likely theory is that imports have increased implies quality is increasing implies realizations could/might increase over a period of time because of better quality. We also need to check the hedging policy of the company and FX losses and relate it to the overall picture of currency depreciation. I’ll state the third likely theory below:

Scuttlebutt

Back to Mr. Fisher for his technique (Btw, I went through the threads of Avanti and MPS - the kind of scuttlebutt done on this forum is unbelievable. Just too awesome!)

I managed to have a brief word with the rating agency guys for Ambika and here is the information which I could get:

1. Other players in the finer count segment: A few players, but the good ones / Ambika’s competitors are Rajapalyam Mills, Thiagarajar Mills, Premier Mills and Akkamamba Textiles. The competition, both in India, and abroad has been increasing since 2011 but Ambika is the leading player

2. Gross Margins decreased in FY12 due to the cycle (which we have discussed in detail). As for FY13, they were not quite sure as to why margins have not rebounded to the same levels. For FY14 and FY15, they mentioned the tough time which the global textile industry has been going through (Volatile cotton prices). The single most factor which impacts the company’s margins the most is volatility in cotton prices mostly due to changing Chinese policies (End user segment is relatively stable) (we should check for Chinese competitors if possible)

3. They refused to name the major buyers, but in the domestic market the major buyers are ‘some really large players’. Both in the domestic and export market, they supply directly and not through agents

I couldn’t chat for a longer time with them - this is all I could get.

[aveekmitra]

I forgot to upload this earlier…

Supima License holders in India … Company / Item for which licensed by Supima etc…

Total 31 companies … There are many more in China…

Also, here is Supima licensed brands details…

http://www.supima.com/find-retailers/

Point to dig further ----

1. How the major brands of very prime quality shirts like Armani or Canali don’t use Supima?
2. What type of cotton do they procure and from where? Peru / Australia / Acala Cotton of California / anything else…?
3. What would be the price difference between a 100% Supima certified shirt vs, a super premium branded shirt?

Any insight from anyone???

SUPIMA LICENSE HOLDERS INDIA.docx (36.8 KB)

[Donald]

@karanmaroo

Well done again, on the scuttlebutt efforts. If done properly, there is nothing more fruitful or convincing than what you can directly pick up from the ground. Please continue your stellar efforts.

We (personal emails to me) have received glowing acknowledgement for the research/analysis/scuttlebutt process being followed in VP - and now more specifically for this Ambika thread - thanks to great inputs from folks like you, Naman, Aveek and many others - and this is coming from some senior practitioners in the market, so we are definitely on the right track of producing a process document from this effort. Thanks to all participants.

One other thing - we are probably carrying the @mention thing too far :).
a) We DON’T have to use it at every mention of the person - e.g. just referring to the person by name is enough in most cases
b) Proper Intended use - when there is a direct query/response sought from the specific person
c) there is a cost built-in - every @person, system tries to send out a notification email if the person hasn’t logged in recently
d) folks are anyway being sent digest emails as per their preference settings, so this becomes an overkill and an avoidable burden

My intention in asking folks to use this feature was to get the most sought after guys identified readily for the community to acknowledge. Have tried to edit out normal references to just Donald (minus the @prefix) in some earlier posts

Requesting @pratyushmittal and @vml to see if the email sending feature for every @mention can be disabled in code/settings (I tried but couldn’t find in settings).

[karanmaroo]

Donald (Sorry for tagging you again) - you can find the same in settings.

Please go to

1. Profile
2. Preferences and then scroll down
3. Uncheck this:

[Donald]

No No.
I meant global settings. Extremely inefficient to ask every guy to do that!

Sorry again, edited out @ Donald to donald, this message did not require a tag for sure

[Naman]

Below is data compiled on revenue, EBITDA and net profit per spindle…which throws some interesting insights…

1. Ambika has increased its revenue, EBITDA and net profit per spindle over the last 5 years significantly, with a small decline in 2012 due to overall slowdown
2. Ambika’s per spindle metrics are better than other comparable yarn players, and the gap has increased significantly over time…the Company made a significant jump in FY14 over the previous year, when EBITDA per spindle has increased by 19%, whereas net profit per spindle increased 55%
3. Interestingly, Nitin Spinners per spindle data is better than Ambika except net profit per spindle (due to higher debt in Nitin)…EBITDA per spindle for Nitin is 30% higher than Ambika…what does this imply?
4. The strength of Ambika’s business model is visible in down years such as 2012, when others are down significantly whereas Ambika is down only marginally

Would love to hear views from everyone on the implication of the data

-

Please note that I had taken a look at some other companies but either their information is not available, or they have significant fabric revenues …hence making EBITDA not comparable…if we would like to include other companies, let me know the names so that I can make include them.
Also, sales includes total sales (power, waste etc) as it would not be possible to apportion costs for various heads

[ayushmit]

Hi Naman,

Thanks for the table

I had done the same for Ambika + Rajapalayam + Premier. Just wanted to check - if you have confirmed that the no of spindles for Rajapalayam was constant at 1.25 lac for last 5 years?

Here is the sales per spindle for Premier for last 3 years:

and EBIDTA per spindle for last 3 years:

How come Nitin is having such high nos? We need to check if there is some error?

One more question comes up - why have the high quality players like Ambika, Rajapalayam, Premier etc not expanded for last 3-5 years?

Thanks,
Ayush

[Naman]

Hi Ayush,

For Rajapalyam, FY2011 Annual report provides the number of spindles as 125,792, and they had added 4,800 spindles in that year (so 121,856 spindles in FY2010). There is no additional spindles added in the next 2 years and the Company added 3,312 spindles in FY14 so total capacity is 129,104 at the end of March 2014. They seem to have added some more spindles in FY15 as per an ICRA report which suggests that total capacity currently is 131,216 spindles.

For Nitin, below table provides the financials and calculation of per spindle metrics…Very high numbers indeed!

[aveekmitra]

Naman,

Thanks a lot for the table… At last someone took the initiative… Wonderful Please mention the no. of spindles in each year for all company to understand at what rates spindles are increased or changed …

Also, post this in Nitin thread… For those who follow Nitin Spinners only… Lot of food for thought… Though the total Rs. 488 Cr. includes other item like knitted fabric etc but I just checked, overall direction would remain the same.

So, Nitin is doing something which also needs much closer scrutiny

[karanmaroo]

Here goes as promised:

Housekeeping:

1. I have taken only companies which operate in the higher count space
2. I have not taken companies which derive a significant (>15-20%) portion of their revenues from fabric sales or garmenting
3. I have removed power sales, other operating income from sales. This figure, I believe, is more pure for comparison
4. • is for unlisted companies
5. I have annualized the Sales/spindle and EBITDA/spindle for FY15 (Since we only have 9M data)

Conclusions:
1) Just as Naman has said, what stands out is the strength of Ambika during bad times such as FY12 and FY15. This is extremely critical and certainly shows some big strength in a cyclical industry like this
2) The true competitors for the company in this space seem to be Thiagarajar, Satyanarayan, Kallam and Rajapalayam (Didnt find Premier data). We need to focus on these companies
3) When it comes to the lowest power costs, Ambika is the undisputed king

Need to digest the numbers a little more. I wish we had the sales volume and purchase volumes for Ambika every year

[karanmaroo]

Why are players not putting up more spinning capacities - My theory:

I think the answer could be in this particular image:

A couple of people have been telling me that there has been significant capacity addition in spinning over the last 3-4 years in states like Gujarat, MP, Maharastra driven largely by various subsidies and incentives given by the state governments (In addition to TUFS). So I guess what could have been happening is significant capacity addition in West/Central India → Overcapacity leading to pressure on realizations (and hence the downturn in the industry for the last 2-3 years) → Players in south not having much incentive to put up capacities because they are running below optimal utilization + they have no subsidies from the state government → Spinning industry slowly shifting out of TN. That is why we can see players like Nahar (MP based) and Sintex making significant capex investments in spinning while South based players are relatively quiet.

Again, just a theory which has not been tested.