ValuePickr Forum

Ambika Cotton Mills

Donald,

While screening different companies while evaluating Ambika and Nitin, I found few major problems in Cheslind…

  1. All there machinery is quite old and this company plans to modernize by selling old second hand machines by buying better condition second hand machine. It didn’t sound very appealing to me.

  2. No captive power and hence exposed to vagaries of power situation in Tamilnadu.

  3. The modernization and capex cycle just started in a small way after CDR and may take a while to take propershape.

Hare are some data points to ponder about

Ambika

FY09

FY10

FY11

FY12

FY13

FY14

CAGR

Sales

185.41

223.14

327.24

390.13

398.05

477.08

20.81%

Exports

75.06

121.41

178.16

229.16

244.75

295.82

31.56%

% Contribution

40.48%

54.41%

54.44%

58.74%

61.49%

62.01%

RM

94.89

120.94

170.74

238.21

238.01

285.92

24.68%

RM Imports

45.42

59.02

92.88

78.97

145.24

235.54

38.98%

% Contribution

47.87%

48.80%

54.40%

33.15%

61.02%

82.38%

EBITDA %

28.37%

26.30%

29.90%

20.20%

21.84%

21.66%

RM/Sales

51.18%

54.20%

52.18%

61.06%

59.79%

59.93%

1. Ayush had mentioned that the big drop of Margins from FY 12 onwards is the worrying sign for Ambika, if any. And how do we know what is a sustainable level?

I thought we could first check if there is a direct correlation with RM prices.

The above data shows a very clear 1-1 correlation between EBITDA margin spikes/falls with RM spikes/falls. If margins fell from 29% to 20% RM/Sales also spiked up from 52% to 61% and has more or less remained there. Margins have also remained in that range

2. Specialty Giza Cotton - any clues to that being the clinching argument for superiority

I thought we could check the ratio of RM Imports as a clue - how much of imported specialty cotton are they really using. And has its use gone up over the years?

FY12 was the first year the company mentioned in its AR that they are only into specialty cotton yarn. That year RM imports were the lowest at 33%. Prior years imported RM was ~around 50%. FY13 and FY14 has seen a real ramp up though in imported RM going upto 61% and 82% !!

However the imported RM and its use - has not seen them fetching higher realisations/margins, it appears.

We have also learnt that its possible to achieve similar yarn quality - Stength & elongation parameters - with right mix of blending and twist!!

As Aveek has mentioned before, this aspect of Imported Giza Cotton prices parity versus domestic needs to be investigated and understood better. As aso, the optimum blend of local Shankar 6 and MCU varieties for achieving desired yarn characteristics

Is there a Geographic Market advantage for Ambika, supplying to the most premium shirtings players in developed markets?

Ambika

FY10

FY11

FY12

FY13

FY14

CAGR

Europe

43.08

42.25

14.25

14.68

26.74

-11.24%

% Contribution

19.31%

12.91%

3.65%

3.69%

5.60%

E &SE Asia

72.31

125.52

207.67

223.28

232.21

33.87%

%Contrib

32.41%

38.36%

53.23%

56.09%

48.67%

India

101.73

10.39

160.28

140.26

163.7

12.63%

% Contribution

45.59%

3.18%

41.08%

35.24%

34.31%

Others

6.02

10.39

7.24

6.79

36.87

57.31%

% Contribution

2.70%

3.18%

1.86%

1.71%

7.73%

Waste Cotton

28.12

30.88

35.08

% Contribution

7.21%

7.76%

7.35%

Exports to Europe has shown hugely deteriorating trends. While East and SouthEast Asia seems to be the mainstay. This could be the result of the actual manufacturing for the brands being understaken mostly in South and East Asia??
Also heartening to note that they are able to develop other markets - which has gone up to a significant 7%+ consistently now.

Finally do we see the picture getting better from here? Where is Ambika at this juncture in driving up efficiencies/margins, or will they need to now again pump in significant Capex for the next phase of growth?

Ambika

FY09

FY10

FY11

FY12

FY13

FY14

Capex

1.67

36.29

84

5.55

8.63

30.98

Spindles

109872

109872

109872

109872

109872

109872

Compact Spindles

100800

100800

100800

Wind Power

15.4

15.4

27.4

27.4

27.4

27.4

Captive Use

25.9

25.9

27.4

FY14 states that the entire 27.4 MW Wind Energy is now being utilised for Captive Power. There is not much scope for adding more Compact spindles - just around 9000 spindles.
They have made a substantial capex of 31 Cr in FY14, which most likely would have been used for capacity addition?? since there wasn't any mention of adding more Wind Mills??
Capex/Spindles data prior to Fy09 may give some clues to the cost structure

Posted the above, as much for illustration purposes as also for soliciting further insights into the business. Hoping someone will do a similar job at Nitin Spinners. Maybe we will get a few more insights.

The more insights we can acquire into technology, market segments, efficiency and profitability drivers - the better equipped are we to quiz professionals from the domain, and eventually the Management/Competition

Hope to see more people asking questions/forming hypothesis - and looking for supporting data that confirms/belies the hypothesis.

So far, haven’t been able to get any concrete insights into - why the hell shuld Ambika Yarn be the most preferred source for premium shirtings worldwide. It may boil down to proprietary processes/blends - that they just have been doing much better and more consistently than anyone else in the fray.

Equipment/Technology headstart is unlikely to be the answer - as there seems to be many others at higher than Ambika Capacity. Shanmugavel group has 4x Ambika’s no of compact spindles.

I am still waiting for the Industry Map - for someone to put his hands up and compile :). Believe me that’s a very important piece of data (in the puzzle) - to enable us to quiz better

1 Like

I talked to an industry insider today and gathered the following…

  1. Compact spinning is becoming a defacto standard for Shirting (80% of compact spinning is used for Shirting Yarn) but premium is going down as it is becoming de facto standard … In shirting people will perish if they don’t have compacting but possibly the premium won’t be there in future just for quality alone. He said five years back the premium was 5% and now it is less than 1%.(Possibly a very plausible reason why Ambika margin down and stabilized over the years)

  2. This year Yarn export to China gone down substantially and situation may remain like this for year or two.

  3. Compact Spinning are two types … a) Apron Drafting and b) Perforated Drum Drafting. Rieter / Suessen caters to both segments but complete Rieter solution comes in Perforated Drum (Steel) solution. Apron type solution (cheaper by 20%) needs regular maintenance and change of apron every 9 - 12 months increasing downtime. Energy saving, low downtime as low regular maintenance needed, higher uptime due to machine starting at 85% speed level (50% for Apron) and lower doffing time (150 sec vs. 180+ sec) are key benefits of using Compact Spinning apart from the shinier look, less hairiness, lower fly generation while knitting etc. Also it can withstand many subsequent chemical treatments.

  4. Compact can be retrofitted to old ring spinners assembly effectively. As was done in Nitin Spinners.

  5. Trouser and Hosiery fabric makers and gradually using compact machine where they use higher TM yarns … Compacting reduces softness which are needed in hosiery and bed linen and their adoption is restricted to where softness of end product is not a criteria (like mattress cover). Airjet or Rotor Spinners are best suited in these situations.

  6. Quality is a function of three things a) Technology, b) Raw Material and c) Skill of Operator. He said skill of operator is the single most factor affecting yarn quality than technology and raw material.

  7. According to him shirting yarn quality wise top three players are a) Vardhman Textiles, b) Thiagarajar Mills and c) Premier Textiles.

  8. In Hosiery / Bed linen segment Welspun is largest user of compact spinning system.

3 Likes

Donald,

I have posted about the price parity issue (which you mentioned above) in Nitin Spinners thread. I am posting the link here again so that people who read only this thread don’t feel clueless…

Also, the Ambika vs. Nitin comparison (excel file) which I posted few days back on Nitin Spinners thread, is being attached here too … I should have done it earlier … Just missed.

AMBIKA-NITIN.xlsx (16.5 KB)

1 Like

Just checked Vardhman has 1 million + spindles vis a vis 110000 for Ambika.

Sales of Yarn for Vardhman is Rs. 2980 Cr. vs. Rs. 476 Cr. of Ambika. Total sales of Vardhman is Rs. 6000 Cr.+ in FY 2014.

My hypothesis — This premium shirting Yarn may not be a niche area at all with any sustainable moat – it is just marketing ploy. Manufacturing scale with right technology, sourcing skill, expert machine operators in large number, long term customer engagement etc can create a big enough competitive advantage but it’s not a moat. A moat is my understanding is something which gets wider with passage of time not narrows down over period (Coke, Google, HDFC Bank, Sun Pharmaceuticals, or a possible small future candidate may be Shilpa Medicare :slight_smile:

1 Like

Hi Aveek,

I think this is super work! the first piece of real-value addition in this thread - over what is generally known about Ambika Mills/Industry,thanks.

1). Point to note - Technology and Raw material being equal - most important is the operator skill in processing for the right quality at optimum efficiency. I was coming roud to the same conclusions in last couple of days - that if Ambika is one of the most sought after yarns - then it must have to be their proprietary processes/QAnthat is delivering better than most others

2). Good to know about quality output also from Vardhaman, Premier and Thyagrajar Mills.Good pointers to get a bit more deeper

3). Your Cotton import price article - was mostly about imported (contaminated, lower quality) Africa Cotton; dont think the article quoted premium quality Egyptian Giza or US Pima cotton is cheaper than local. We need to enquire more on the cotton sourcing/blending for shirting quality yarn

Donald,

Thanks!!

On point 3, let me explain my point in detail for better understanding…

What I tried to mean was, bulk of import of Ambika is due to cost advantage over Indian cotton sourcing. They must be importing Giza / PIma cotton along with that which is clubbed in total import.

It is obvious that 84% of their Import can’t be all Giza / Pima cotton. Industry sources tells me that 5% to 20% mix with Indian cotton is all it needs to make a great shirting fabric if Indian sourcing is efficient.

Let’s compare with Vardhman … It imported Cotton worth Rs. 209.90 Cr. in FY 14 (Rs. 157.45 Cr. in FY 13) vis a vis their total Cotton RM cost of Rs. 2073 Cr. in FY '14 (Rs. 1718 Cr. in FY '13) … So it’s about 10% of total. And probably (assumption) these are Pima / Giza cotton.

Hope my attaching the above article can be understood in this perspective.

Hi,

While checkinghttp://www.supima.com/locate-suppliers/ with Products selection of Textiles > Yarns > Compact, then only very few are available world wide.

India – Ambika and Rajapalayam Mills Limited (Ramco group) looks to be certified from 2003 onwards.

-Muthu

Good article on how CRISIL analyses this sector on credit scores. Gives some key points on which we can check Ambika and also invert these points to see why Ambika is unique.

  1. Business Analysis
  2. Market Position- Quality and Range
  3. Product Mix to insulate cotton price fluctuation
  4. Geographical mix
  5. Operating Efficiency
  6. Cotton Procurement Efficiency
  7. Cost Structure
  8. labour
  9. Power
  10. Modernization
  11. Economies of Scale
1 Like

Saurabh,

Thanks a lot. Good paper.

My takeway from the CRISIL paper is to focus also on understanding/investigating cotton procurement efficiencies of various players.

Will update as we get more informed.

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:

  1. 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:

  1. 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.

  1. 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:

  1. 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.

  2. 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)

4 Likes

Dear Dhiraj,

Super!

Really amazed that you felt compelled to write in at just the right moment:))Grateful for some of the insights you bring in.

Next week I am planning to meet some industry people, and some of the data points that I was wondering about are exactly what you have brought up (though may be dated); we can easily get these updated

1). Realisation for finer counts vs the avarage counts - 3x

2). Borderline of finer count - 80s

3). Minimum economy of scale needed - 25000 spindle

4). Capex per spindle - 40-50K/spindle

5). Indian Extra Long staple (ELS) grades - today we hear of Shankar -6: what is the price variance for ELS india or ELS Giza or Pima.

6). Blending Mix/Twist - that can use short staple fibres also - for upto certain counts?

7). For finer counts - can use blend ELS 20% and normal staple 80%; or everything is ELS

8). Whats the typical product mix for speciality yarn guys like Ambika? How much of finer counts, and how much lower counts:

9). Market size of Finer counts - may not be very big and may be a closed market? Whereas normal count market has the volumes and is open to all. Thatswhy most players can play only the volumes commoditised game?

10). Even if you have all compact spindles - you may still be producing only normal counts and not finer couts, right. So just knowing someone has 3x Ambika compact spindles - may not mean anything?

Which are the top benchmark companies to compare Ambika against - for apples to apples comparison - Vardhman, Premier and Thiyagarajar?? like Aveek mentioned after his talk with an equipment supplier

What about Shamugavel group, LS MIlls group, Sportking?

I am sure you can come upto speed faster than us - enquire with your friends and equip us better to quiz industry folks/Management?

2 Likes

Dhiraj / Donald,

Super set information from Dhiraj and super set of questions from Donald … Both of you are amazing!!!

I guess with Dhiraj’s inputs and Donald’s probing, we can be able to hit the nail on the head much sooner than we expected !!!

Fantastic…!!!

I think as per my info only Rajapalayam Mills of Madras cement group came close to Ambika in terms of quality.However since last 3 years it has gone into problem of its own like debt etc while Ambika has moved ahead reducing debt and controlled growth.

The key differentiation for Ambika imho is

1)Technical skill of Chandran and his team which are closely guarded business secret. Chandran spends lot of time at his mills in Dindigul which works for 361 days in a year. .Though he is 64 he is very fit leads a very disciplined life style and has clean food habits. He accepts the order only if he gets advance and adequate margin.

2)Ambika customers are top notch who appreciate real high quality .The special yarn is sent to China for fabric then to Vietnam for Stiching and then to Japan as shirts in top notch premium stores.Pacific textile group is their main customer it seems.

  1. He being a veteran of textiles industry he has learnt from the mistakes of other cos like Alok who went in for reckless expansion with huge debt.He too has taken debt but mostly from TUFS at 5% concessional rate and has now turned the co into zero debt.Focus is on increasing the EPS and dividend by reduction in interest and power cost and other savings.Now that debt is zero he will go for expansion relying mostly on internal accruals

The company seems to be a typical first gen entrepreneurial company which we very much like at VP where hands on promoter eats sleeps and breathes nothing but Ambika.His execution is superb and now that tailwinds are tehre is the co on cusp of big opportunity?

1 Like

A dated but informative report on Ambika.

Hi Everyone,

Really happy to see such a wonderful flow of discussion…this is the strength of VP - with collaborative work we are able to discuss on a company from so many angles and learn so much!

Coming specifically to Ambika - a lot of points have already been covered. However to summarize - Good thing about Ambika is that it has always had very good margins and they used to be quite stable despite high cyclicality in the industry - for eg - a comparison with Nitin shows that though Nitin has had good margins but they got badly hit in bad years (though the story may be changing now) which says a lot about the customer relationships or the niche Ambika is operating in. Its also really commendable that Ambika has focused on de-leveraging the balance sheet over last 4 years and reducing loans from about 260 Cr in 2011 to almost debt free now. At the same time the turnover has increased from 320 Cr to 500 Cr in this period without any material capex thereby resulting into significant improvement of ratios like fixed asset turns, inventory turns etc. Though there has been deterioration in margins but this kind of change is not easy possible in a competitive industry like textile - so will still need to specifically understand the reason behind this change. One reason could be - like Donald has hinted - that the co has gradually moved to 100% premium yarn in recent years and also as its a niche high end area, it takes time to scale up. If yes, then its a very good thing for the company. Also, why has it come at the cost of lower margins?

We also need to understand about the growth prospects going forward and also the capital intensity needed for the same?

Ayush

1 Like

Excellent discussion…

had discussion with a industry person one month back, here are highlights [from memory, that time failed to make notes]

  1. Compact yarn is in various counts starting from 10s to 140s. Ambika cotton is mainly into higher grade super fine cotton which starts from 40s and major production is into more than 50-60 counts.

  2. higher counts [> 50s ] is a specialized field with higher margins. End market is not that large. He seems to be worried about growth and said long term growth may be ~ 15% not more than that.

  3. Its not difficult to manufacture super fine cotton. Just like what Kitex is doing is not difficult for anyone else to do. end market is not that large. Someone cannot built Vardhaman textile like scale with only focus on super fine variety

  4. Main thing is attitude. Ambika attitude is to focus on margins and not scale. Generally players focus more on scale than on margins.

  5. Lastly even in China it may be difficult to find one single player with Ambika size super fine variety cotton scale. China focus where end market is large

Moat is to some extent reflected by High ROE compared to all other players. If one runs a simple screen where in to find textile companies.Filter applied M.Cap > 50crs, ROCE 10 yr avg > 10%, ROE 10 yrs AVG > 10%, Sales/total assets> 0.8 & Assets/Equity < 3x [To select companies better than Industry average]

Out of 560 companies only 15 could satisfy above simple criteria of average ROE & ROCE > 10% in textile companiesâ.Ambika is one among them.

of-coursewe still need to look for sustainability, but should give equal importance to history. Most important questions are just two in my opinion

1)Sustainabilityof ROE 2) Sustainability of growth. Ofcourse to answer these two questions, all the questions raised by donald on Industry need to be answered.

Note: Safe to assume my opinion isbiased.