Donald and other members:
I have tracked Cotton and yarn industry during 1997-2003 period. Probably one of the few analyst tracking that sector at that time. Find enclosed my view on Ambica:
- Cotton crop in 1998 Cotton season was around 177 Lakhs bales (of 170 kgs) which have grown now to around 400 Lakhs bales (of 170 kgs) in 2014 cotton season. The main driver to cotton crop are BT which improved yield per hectrae from 250 kgs to around 450 Kgs which is still lower than global cotton yield. Australia and USA in 2000 used to have 1000 kgs/hectare in 2002. You can check INternational Cotton Advisory Council (ICAC) which provide global cotton area, production and price forecast (measured by Cotlook A Index).
In Indian context, Jayalaxmi is the longest staple cotton which can spin yarn of around 80s counts. In case, we need to spin yarn 100s+, we have to import cotton from US (Pima) or Egypt (Giza). Egyptain Giza has superior staple length and can spun as high as 160-180s count.
Find enclosed India cotton balancesheet downloaded from Textile Commisisoner office website:
- Historically, India has the strong cost competitive advantage for cotton. With Cotton acccounts for around 45 of selling price in case of 100 counts cotton to more than 60% in case of 10s count cotton. 80+ Count is categoirsed as finer count. While realisation for finer count almost 3 times (say price for 20s count is 100, 80s count would be around 275 per kg. These are not current price but indications based on my memory), the production per spindle shift also decline significantly. As per BTRA (BombayTextile Research Association), the old production norm ( 1995) production per spindle shift for 10s count is 430 gms/spindle shift which decline to 128.7 gms/spindle shift and 34.3 gms/spindle shift for 80 count.
However, advtange of superior count is there are very few players. While, sales per spindle is lower, margin are more stable for these players. Also, producing quality is very difficult in 60s+ count. In India GTN, Patspin (GTN group only) and Chesling Textile were among few which have specialised in these market in 2005 (after which I stopped tracking the sector). Average count produced in Indian Cotton yarn industry is around 30s.
In FY2013, as per Ministry date find enclosed Cotton yarn countwise production
Total production 3583 million Kgs.
<10s Count: 646 mn kg
10-20s: 630 mn kgs
21-30s: 851 mn kgs
31-40s: 987 mn kgs
41-60s: 294 mn kgs
61-80s: 120 mn kgs
81 and above: 54 mn kgs
So the production of 80 count and above 1.5% of total production.
- Global cost competitive:
India and Pakistan were among top two cotton yarn exporter globally during late nineties. In Early 2000, India replaced Pakistan as the largest global cotton yarn exporter. Most of finer counts were exported for finer and higher value added fabric. In Domestic market, Dhoti is the lagest end use for finer counts (60s and above). With decline in Dhoti Demand and increase in Denim and normal shirting demand, share of finer count consumption decline significantly. Denim and industrial purpose textile use requires coase count (10s) while normal shirting use 20-40s count.
In 2001 ITMF Cost of production for spun yarn was as under (20/30s Carded not sure)
India: 2.51 USD/kg
Brazil: 2.69 USD/KG
Indonesia: 2.86 USD/kg
Itlay: 3.14 USD/kg
Turkey: 2.88 USD/kg
USA: 2.67 USD/kg.
India’s lower labour cost was an advantage but high power and capital cost were disadvantage. Also, wastage in India was among highest in early 2000s.
Ambica cotton would have following challenges in going forward:
Cotton prices globally declined due to lower Chinese import. While Ambica, since dependent on imported cotton, have not gained majorly, one need to see whether they are able to pass on increase in cotton price. Given that the segment in which it operate has limited competition, but still there is a headwind against the sector.
Typical Minimum economy size for Cotton spin inning mills is around 25,000 with capex of around Rs 40-50,000/- per spindle. In order to grow, the company need to raise debt/equity for expansion and hence free cashflow equity holder are limited.
Hope this assist the forum on assessment.
Discl: No investment
Cotton_Balance_Sheet_From_1991-92_updated_upto_31.xls (50.5 KB)