Ambika Cotton Mills

Stock Opportunities Not-so-Hidden Gems
1

Hi,

I am new to value investing.

I have been observing Ambika cotton mills for few months.

ACMLis engaged in the manufacture of premium quality cotton yarn for hosiery and weaving. It is an established player in the international and domestic yarn market with exports contributing 60% of its revenues.

Below are some of my observations :

Sales growth for last 5 years : 21%

OPM for last 5 years : 23%

NPM for last 5 years >= 8%

Tax payout for last 5 years >= 20 %

Interest coverage ratio for last 5 years >3.5

Debt to Equity ratio has decreased from 1.72 to 0.27 in last 5 years

Current P/E :10.14

Has anyone else also invested in ACML?

How does the future looks like for ACML?

Disc: Invested and adding every month via Stock SIP

14 Likes
2

Nice article by Dr Vijay Mallik on this company

3

yes and another one -> https://aceinvestortrader.wordpress.com/2014/11/30/ambika-cotton-mills-ltd-spinning-towards-glory/

4

There is no mention of their customers, what countries they export and client concentration. So far what we could gather is premium shirting, but no more details.

1 Like
5

I heard that they are a good company run by ethical managemetn who make good quality threads that command a 2-3 % premium. y scutttle butt indicates that in bangladesh and in china, they are the only yarn name that is recalled for their quality.

This is because stoppage of yarn is a painful process that results in lowered labour productivity. All in all, a fair business at a fair price now - I bought some but would buy more below Rs. 700

2 Likes
6

Hi Chetan,

I like the way you introduced Ambika Cotton, highlighting the aspects that caught your attention.I like it more because you say you are new to Value Investing - the investment thesis put up is crisp and on the money. Tells me you are a keen observer :slight_smile:

New learners at VP and old hands too - please take note - Chetan has been able to highlight most of the things that are good to note while deciding whether to get interested in a new prospect (or not).

I have heard good things about the business, but as is my wont been lazy about looking it up. I had a quick look just now. Have the following to add to Chetan’s excellent note:

1). Super reduction in debt in last 5 years while achieving steady sales growth - something we always lay a premium on

2). Great reduction in Working Capital in 5 years - from 44% of Sales down to 8% of Sales - something that again tells you something good is playing out here - we need to break this down - Inventory, debtors, creditors - what is the main driver of this super performance?

3). Great improvement in Capital Turns -2.5x in 5 years - from 0.6x to 1.45x - tells us again the business is much more efficient today

4). Now if only Operating Margins had shown similar improvement - One wouldn’t have been able to stop me from jumping up :slight_smile:

It’s very rare to find a business where both Operating Margins and Capital Turns both show improving trends. If you do, everyone must sit up and take note - that that could be a very special business. Because as we know - RoIC has only 2 drivers - OP Margins & Capital Turns.

5). While Margins have declined by 4% over 5 years (down to 22% from 26% and much higher 33% earlier), Capital Turns going up 2.5x has made RoIC go up from measly looking 7% to a respectable looking 18%

6). Which leads to EPA/Sales at a very respectable 5% of Sales (being a Textile company I have assumed TUF funds and WACC at 10%. if WACC is 12% EPA would still be a very respectable 3.84% of Sales

The numbers tell a good story - for a Textile Yarns company. Valuations aren’t cheap, probably fair.

Now we guys need to find out the real story - understand the business behind these numbers. What makes a textiles yarn company earn very decent margins - declining but still north of 20%?? Could this be sustainable?? Why?? At what levels??

Disclaimer: No positions; I had a first 15-20 min numbers look-up now; Please cross-check my observations - there could be slips (mis-reads)

6 Likes
7

Now if some are wondering how to get number-crunching customised to above nailed in 10-15 mins, well just download an Excel from Screener.in :slight_smile: and donate something for such an excellent service.

1). Download the Ambika Cotton Mills excel atteched

2). Upload this at https://www.screener.in/excel/

3). Voila! Now you can get this same customised sheet downloaded in less than a minute for every business that you want to dissect

How precious is that? We used to spend hours in 2010 calculating something like this when we started out, and then tens of minutes a year later, and as you know a minute since screener.in debut!

Pratysh & Ayush - take a bow!!

4). The really picky ones might already be asking- what do I do - if I want to change my customised sheet - as I learn a few more things?? What if I want to upload my own sheet that I am happy with?

No problem - Pratyush allows every member to upload his/her individual customised worksheet. Better still, he allows you to reset it too and upload a new sheet, many times over. I might be perhaps the one who would have reset and uploaded 50 times or more :). Have become greedy - even the smallest incremental change, I want that in. He should start charging us for that :slight_smile:

If you think you have developed some tool that works very well for you, make bold to share that and make available to others - you will be amazed how often others will come around and show you how to do it even better :slight_smile:

Ambika-Cotton-Mills-Limited.xlsx (74.2 KB)

9 Likes
8

Thanks Chetan & Donald. I am interested to work more on this business

Donald,

When you say we need to understand the business behind the numbers - you are implying that you are not satisfied with following excerpt from Dr Vijay Malik’s excellent write-up

ACML specializes in manufacturing of premium quality compact and Eli Twist yarn, which is used in making premium shirts. Company uses extra-long staple (ELS) cotton in its yarn manufacturing by importing high quality Giza and Pima cotton from Egypt and US respectively. ELS fiber provides extra strength while keeping the yarn thin. Thin yarn finds usage in premium quality cloth of higher counts. It has the capability to manufacture yarn for counts varying from 24âs to 140âs allowing it to break free from the commodity products of single count of other spinners. ACML is one of the established players in supplying yarn to almost all premium shirt manufacturers around the world.

You are saying we need to understand the premium quality yarn/Eli Twist yarn industry? How many players? Who are the bigger players? What kind of bargaining powers do the Customers or Suppliers enjoy? Why can’t others reach where ACML has reached? If this has been so profitable a business - Margins of close to 30% even 10 years back - why havent other yarn manufacturers moved in? Why someone else is not able to move in and compete effectively or dislodge this business - een in 10 years?

Queries for you:

a) Am I going in the right direction?

b) How do we go about planning a proper scuttlebutt on this business/management and industry?

2 Likes
9

Good numbers.

We should also look at Negatives:

1). Low Promoter Holding - below 50%

At first look this doesn’t inspire confidence. We like it when its 65% & over.

Chetan have you looked at the Promoter Holding over the years. Why is it low? And why haven’t they scaled up faster - since the business has been doing well for quite some time.

2.Cash Flows - BIG continuous slide last 3 years - from 137 Cr to 87 Cr to 37 Cr in FY14

Chetan - have you checked this? what are the reasons for the same? CFO/PAT always looked healthy before. Suddenly in FY14 it has reversed!

There must be other grey spots?? Lets start looking deeper

10

Hi Donald,

I am honored by your humble comments .

Thanks for sharing the customized excel sheet for ACML.

It is very helpful for a new beginner like me to understand the company.

Regards

Chetan

11

_

If :))

Hi,

This is Karthik. I have recently joined the group. One of the first posts i read was this. I am truly amazed at the screener tool and thank you for the demo of the tool using the sample excel file.

I have to thank this forum for the same. I am sure there are more amazing things to learn from this group

_

12

Did some basic quality checks for Ambika… pl have a look.

disc:invested

ambika.xlsx (31.8 KB)

13

@TCX

You are an old hand at VP! Thanks for perking up from time to time.

1). Yes of course - Ambika numbers in isolation look good. Whether it’s super - that perspective will get formed once we have more details on industry/competition/other players. And therefore do more work on establishing sustainability. Post that we should have enough ammo for a detailed q&a

2). In the VP process of due diligence - Scuttlebutt - comes absolutely on top. Sometimes we have first met management after doing desk research, so we understood the Industry from the Management perspective first - and then cross-checked with scuttlebutt. Last 2-3 years experience clearly has shown its gotta be other stakeholders first - have a fairly accurate 70-80% map of the industry, players, and our prospects competitive position - and then go on to meet Management. Almost always the latter has worked better - in thes sense that we could reach desired level of understanding much faster, because questioning was more insightful and penetrative.

VP style of scuttlebutt - someone described it “entrepreneurial” . Do what works; jugad; ask your Mama, Uncle, and father in law :slight_smile:

a) get hold of textile industry friends/friends of friends

b) ask VP members - surely there will be a few from the industry and maybe handling yearns too

c) search professional networks/contacts - Linked in in particular and other social networks, as possible

14

Dear Benny,

Good work. I would love to hear your interpretations though :slight_smile: on the relevance/importance of any of the quality checks findings - specifically for Ambika, and in general. Helping illustrate with other examples would be great.

I have often seen - data-points & analytics, same availability for everyone - we attach importance and also read between the lines, based on our learnings and experiences, and maturity as we progress on the investing journey.

Your comments - will help others new to this absorb and learn faster; and seniors will help improve the interpretation - and even show us how to read between the lines.

Re: Working Capital

Thx for the break-up data; Debtor days coming down to 4 today from 42 in 2010 is absolutely phenomenal. As you said, looks like bargaining power has reversed - it lies with the manufacturer. Large/Quality buyers have to come to Ambika??

We need a yarn guy, pronto :slight_smile:

Textile professionals in VP - please speak up!!

15

Hello @donald

First off thanks for this great platform , started on value investment a year back, new to VP (friend of Pratyush).

I live in Panipat and its a hub of textile business, though I work in software. Will be very happy to ask any questions related totextilesor yarn around (anyone have) and post answer here :).

Regards

deep

16

Welcome Deepender. We got to get answers for these simple top-of-mind questions:

1). What is so special about this Eli Twist spinning yarn from Ambika (that others cant deliver (similar quality at similar cost?) - that premium shirting manufacturers seem to be captive customers of theirs.

2). Why can’t others set up the same? Too capital intensive? Why can’t the bigger textile guys invest in the same technology if Ambika could

3). Is there a technology-transfer arrangement with Suessen Corporation? (see below)

4). In short, what are the real entry-barriers?_
_

Eli Twist spinning

http://www.fibre2fashion.com/industry-article/48/4710/comparative-studies-on-compact-yarn1.asp

Eli Twist Yarns are basically Compact Ring Double Yarns, in which doubling takes place in the ring frame and yarn is single wound.**The technology is developed and perfected by Suessen Corporation.**It is mostly used for high end Shirting Fabric. It combines compact spinning and twisting of a yarn in one single operation. It produces a two-ply yarn with identical direction of twist in both yarn legs. The twist coefficient of Eli Twist Yarns is between the twist coefficient of a single yarn and the ply-twist coefficient of a conventional S/Z two-ply yarn.

It leads to a very smooth structure of yarn, closed yarn surface and circular yarn cross-section. The yarn has a high regularity. It has an extremely low hairiness, especially of long fibers. The yarn has very high breaking load and elongation and very low pilling tendency. It lends itself easily to splicing.

1 Like
18

Discl.: Took an entry position recently.

Some comments:

a) The management seems to walk the talk:It was very clear on getting rid of debt before undergoing any expansion (being totally funded by internal accurals). In one of the earlier reports (I think 2008) they spoke about increase in dividend once the debt levels come down and they have consistently done so.

b) Understanding the value chain: A move from commodity to specialized yarn has been achieved slowly and in a very consistent manner. In the last expansion the company had put up swindles producing commodity yarn. With every passing year they have reduced the commodity yarn and moved to specialized yarn which currently is 95% of the production. This also indicates the demand side of specialized yarn.

c) Promoter holding although less than 50% has increased significantly from 27% in FY06 to 48% now.

Some questions

a) One thing I find strange is how OPMs have an inverse correlation with cotton prices. This is counter-intuitive.

b) Due to imports being 70% of the total material inventory days will always be higher.

6 Likes
19

Anant.

Premco Global another of your old pick also seems to be following the same model in terms of

)- Growing through internal accruals

)- Reducing debt progressively to zero

)- Move from commodity business to specialized high yielding one by upgrading machinery

-Increasing focus on exports

-Long term relationship with big names like Hanes,Fruto of the loom,Jockey Asia

)- Increase in promotes shareholding to 63% now(another 7% in name of Sindhi NRIs)

)- Sub 10 PE & 100 Cr Mkt cap

)- High ROCE of 44%

)- Foray into Vietnam with asset light model of leasing factories n internal accruals

Is there a catalyst in Ambika Cotton in terms of new dynamic 2nd Generation Entrepreneur like Lokesh Harjani for Premco Global responsible for huge improvement in performace?

Who n How good is the main promoter? whats his educational qualification? Which community he belongs to? How is their reputation in their city ,competition and community? Their execution track record seems to be v decent.

1 Like
20

Hi,

I spoke to my ex-client who is probably the largest trader of cotton in India. According to him promoters are top quality and clean. The mills and product quality of company is top notch.

Some hints on the moat can be derived from the certifications received by the company. Example, PIMA is given by a farmer association in USA to selected cos who dont use toxic in Yarn and can maintain repute of PIMA cotton. Similarly found couple more on the site.

PS= starter position

cheers,

saurabh

2 Likes
21

Hello

I made some research on certification mentioned on website:

“Supima” is the trademark name used to promote and market textile and apparel products made with 100% American Pima cotton.

They have Supima certificate http://www.supima.com/get-licensed/, a lot of licencees

Some other textiles which I was able to found having this certification are:

  1. GTN textiles http://gtntextiles.com/homepage.html

  2. Bharat Vijay Mills http://www.bvm.in/ChildPage/HomePage.aspx

  3. Bannari Amman Spinning Mills Ltd. https://www.screener.in/company/?q=532674

Supina website don’t give full list so there are definitely other also in india.

The second certificate which they have mentioned is:

GOTS Certificate from Control Union Anyone can search using GOTS database search http://www.global-standard.org/public-database/search/database/search.html.

Strangely but i didn’t found Ambika Cotton name in any of the list. May be the certificate sis not updated for this year. (Please can anyone confirm this? I might have missed something)

The third certification which they have:

Oeko-Tex Certificate of Standard 100 Product Class I https://www.oeko-tex.com/en/manufacturers/certified_products/certified_products.html

https://www.oeko-tex.com/en/manufacturers/certified_products/certified_products.html ( give you list of all comapnies and they are many (a lot from Bangladesh)

In this case also, I was not able to found certificate for Ambika cotton from database. The certificate on their webiste is valid till 2012 http://www.acmills.in/files/Certificates/Oekotex_Certificate.pdf

Not sure, if certification can now be taken as hint for moat.

thanks

deep

2 Likes