Analysis on the new capex that is announced:
Extract from Annual report 2015-2016:
“The company is implementing knitting facility at an estimated cost of INR 834.92 lakhs (~8 Cr), fully funded out of internal accuals…expected to be operational from October 2016 onwards”
Since the new Spinning unit is stuck in land approvals, they went ahead to start knitting facility in the approved unit
Total outlay was ~8 Cr for this capex
Below is the sales in kg and value terms for Knitting unit for 2015-2016 (plant started after Oct-2016)
Sales 757990 Kg - Value: INR 156780807 (from annual quantitative data sheet provided by the company)
It comes out to be INR 206 per Kg. Assuming 4 months since knitting was working (~120 days) it produced 6,316 Kg. per day; Net profit margin for Ambika is roughly 10% which translates to INR 1.5 Cr profit for this period
Annualized profit translates from this to INR 4.5 Cr. against outlay of INR 8 Cr. >> RoCE of 56%
Company had capacity of 8,000 Kg per day which translates to ~79% capacity utilization of knitting facility soon after the commencement which is excellent sign of demand
After June-2017 results, company announces plan to increase its knitting capacity by 3x, from 8,000 Kg per day to 24,000 Kg per day by November 2017
Assuming capacity utilization of 70% initially i.e. ~16,800 Kgs per day it would translate to 61.32 lac kgs per year; Assuming same sales of INR 206 per Kg it would translate to yearly INR 126 Cr incremental sales and assuming 10% net profit margin it should translate to total net income from knitting facility at INR 10-12 Cr. (incremental net income of ~INR 7-8 Cr. assuming existing capacity gives INR 4-5 Cr.)
On an investment of INR 20 Cr., this translates to RoCE of 35-40%
Current net profit is INR 50-60 Cr per year on LTM basis; Incremental net income from this capex will increase net profit by ~20% even if we assuming status quo for spinning unit (for 1 year from Nov-2017)
At a market cap of INR 750 Cr. with full-year net income by Dec-2018 of ~INR 65-70 Cr. gives comfort in terms of valuation and growth; Owner’s earnings are going to be even better @ INR 75 Cr.+
Approval of pending plant (additional 30,000 spindles) remains additional upside whenever that happens
Disclosure: Invested