Ambika Cotton Mills

[ayushmit]

Hi @rohitbalakrish_, thanks for the details…thats good work!

We had earlier done a search on the Supima website for the players qualified for yarns - http://www.supima.com/locate-suppliers/ and it gave names of about 18 players from India. However, on closer scrutiny its right that very few are seriously there in counts higher than 80. Few names are:

http://www.rajapalayammills.co.in/products.html

http://www.tmills.com/products.html

http://www.premiermills.com/products.html

http://www.owmnahar.com/spinning/yarn.php

Perhaps we should try to compute the spindle capacity, margins etc of these players vs Ambika. I’ll try putting this up.

Ayush

[rohitbalakrish_]

@ayushmit Of the 18 names I think we have got the majority covered. You can refer to my list above. yes, that data would be really helpful. I’ll try and find more stuff too.

[aveekmitra]

@rohitbalakrish_ @Donald @ayushmit

Let’s step back and think about few basic things again… Based on whatever we have gathered till now…

1. Nitin and Ambika don’t compete with each other … It is akin to comparing Rahul Dravid with Chris Gayle Ambika caters to premium shirting fabric / t-shirt segment which are mostly woven. Better quality cotton, entrenched current position, management focus towards this objective gives them an edge in holding on to that premium segment. Nitin mostly caters to comparatively better quality hosiery segment where cotton quality is important but available in India and can be made by relatively lower quality cotton.

2. Ambika wants to establish its niche in this premium segment. Nitin never claimed to any such ambition. They are increasing their knitting capacity with spindle capacity. So, we can assume most Yarn would be fit for knitting regular apparel & garments, undergarments, carpets, denim, home furnishing etc where stretchability is an important factor. So, operating efficiency and business cases are different for both. Also, if you see the type of fabric they manufacture, it is Single Jersey, Rib Fabric, Interlock and Eight lock fabric, Fleece for Sportswear etc. All of these don’t need any premium yarn and has a big market to cater.

3. Assume you are the CEO of both NITIN and Ambika and owner gives the balance sheet and P&L to you and allow you to run it as you like? I guess, you would surly take different route to take the organization to next level. The kind of flexibility to explore and experiment the Amibika CEO would have for its much smarter balance sheet, won’t be available to the CEO of Nitin. He has to pay off the debt, service regular interest, may be having more demanding suppliers and he has to increase the asset efficiency first before doing anything very ambitious (especially after CDR etc). So, it would be steady, mass market oriented approach where you can do things incrementally better and gradually get to a level where you get the breathing space. Unlock the value is critical for Nitin.

4. Ambika on the other hand can expand its capacity further if market opportunity is there. Can go for even higher end of the market if it exists and improve its capabilities / marketing skills further to become a more robust player. Sustain the value created and extend the value chain is critical for Ambika.

So, both the companies can do well and that is beside the point … There are not many known “unknown” things for Ambika but there are quite a few known “unknown” things for Nitin which we may see unfolding in coming year or two. But Ambika can cover territories “unknown to us” to take it to next level.

I apply these simple mental modelling to make investment decisions and hence thought of sharing… Not sure if it would help you all…

[Raghu]

Hi all,

I checked out every single company mentioned on the icra report posted previously by @aveekmitra @rohitbalakrish_ Collated all the information which I thought was relevant in terms of their capacity, counts, yarn type, and some additional information on where they export (if available). Attached is the file with all the details. Please note that I have placed all the ones with higher counts (potential competition for Ambika at the top). I have also added a few additional companies(towards the end of the list shaded differently) which are not in the icra list but came across as part of my research

Few things I learnt-

1. It seems like most of the companies are producing counts <60s
2. Out of those who are producing higher counts, most of them are diversified like not just 100% cotton, or forward integration into fabric production etc.

Now, an off-topic question: I am not a technical person to understand the intricate details completely in this industry like types of yarns being combed, carded etc or types of machinery used, blending of materials producing wider variety of outputs etc… Does that mean that this is out of the “circle of competency”?

p.s: For the reason mentioned in my off-topic question, pardon me if I got a few technical aspects wrong in my excel.

Installed capacity_Market_Ambika Cotton.xlsx (131.2 KB)

[rohitbalakrish_]

@aveekmitra Great post. I was also coming to a similar conclusion that Nitin and Ambika are not comparable. Both have good numbers, in an industry which has many players in bad shape.

I again had a conversation with Nitin Spinners, Finance Head. He made a few things clear.

• The decision to manufacture what count is to be determined at the time of expansion. You cant retrospectively change the count number as machines have to be alligned together and higher count machines will be different and thus in the mill the back end machines have to work well with these high end machines. So for guys today manufacturing less than 40 count, it will not be an easy decision to suddenly move to a higher count.

For Nitin, he mentioned, its a conscious call that they have taken to be in the <50 count category.
-More an academic point- Open End yarns are low value items, the yarns here are more thick/fat- used in denims industrial fabrics etc. Nitin started as an open end yarn player and now is more a ring spun player…
-FY 13 & FY14 were great years for Cotton yarn industry as cotton prices softened but cotton yarn prices were firm due to high demand from Chinese mills.

Will post my detailed notes on Nitin Spinners in the relevant thread.

While I have not really worked in detail on Ambika, I feel Nitin is close to a ‘commodity’ player with no significant advantages to itself, and thus your entry price is very critical to ensure MoS.

[krishere]

I must great work here. VP is just outstanding… Guys please read my posts in Nitin also to get a much deeper prespective…

One major advantage that Ambika has is its geographical positioning. In India you will find most of the finer count spinners are in Tamil Nadu, a few in Andhra but almost none in Maharashtra, Gujarat, Rajasthan or anywhere else… The key reason for it is the labor… Labor in TN is since generations into yarn spinning, that is something not replicable… it will come to other states too but will take a longer time… Earlier other states couldnt do it because the climate there didnt support fine count spinning but with Artificial Climate Control its now Theoritically possible in other states but will take time for them to become efficient…

From what I have read so far the key differntiator for Ambika is lower electricity cost and promoters insistance to reduce debt and moving up the value chain towards finer counts…

I can get key people in touch with major yarn agents in Erode & Tirupur also spinners in coimbatore for more indepth questioning and understanding the local industry there. Will try to find contact points in Bhilwara to prod about Nitin Spinners.

[krishere]

Here is the historical price chart of cotton. I was not able wondering about the increase in sales even with the same capacity. Looks like there was a great support from cotton prices.

31-3-2012 : 16420
31-03-2013: 18350
31-03-2014: 20650

Now the aberration is 31-03-2015 cotton is 15550. Still screener shows they would beat last years turnover. Has there been capacity addition this year?? Also in the previous years how much of the sales increase is because of the increase in cotton price and how much because of value addition?

[Ashish]

On margins, almost all the listed cotton companies reported significantly lower margins in FY2012 - a result of sharp dip in cotton pricing and large inventories that most textile companies usually work on (start stocking around April, to last through ~Oct).

Perhaps the margins before that were extraordinary (maybe because cotton price kept moving up) and 20% OPM is sort of the norm going ahead. Need to research this observation.

[krishere]

One comparable company in the listed space would be K.P.R. Mill Ltd.

[Gaurav_Agarwal]

KPR mills is not comparable with Ambika cotton. KPR is vertically integrated textile company engaged in manufacturing & marketing of readymade knitted garments, knitted fabrics and cotton yarn.

[dd1474]

Donald and other friends;

At the current capacity, the company would have limited scope for sales growth. If I look at sales and profit are moving mainly by capacity expansion. Also, I would also suggest to compare last 4-5 years margins. Geneal EBIDTA margin are around 14-16%. With Per spindle capacity of 50,000; production per spindle at around 150 kg per annum (150 gms/spindle/shift with 1000 operational shift) and price of around Rs 300/kg for Ambika, expected Realisation for spindle of Rs 45,000. While EBITDA has been around 20%, we shall get EBIDTA per spindle of Rs 9,000. Please note that in last three years, Indian cotton yarn industry has been major beneficiary of good domestic cotton crop. While Ambika is dependent on imported cotton, still globally also cotton price are expected to decline as ICAC.

In long term, with Rs 50,000 capex, Rs 40,000 sales, Rs 8,000 EBITDA, EBIT, Rs 7,000, ROCE, ~15%.

Hence, we need to consider cyclical nature of industry which has very high volatile raw material. The last 4 years were driven by lower cotton price. Considering the price record, Ambika shall be able to maintain the margin, the scope for margin expansion is limited.

I would need to understand how growth would be achive without capacity expansion and what would be impact of declining cotton price globally as forecasted by ICAC.

I am enclosing excel file in which I have compared FY2006-2009 various parameter for large spinning mills and taken average for all major Indian cotton yarn price. When cycle is against the sector, they do incur loss as we can in these data. The second file has Cotlook Index by which global cotton (mid staple) is measured. It is in cents per pound. I have converted at kg with Rs 63 per kg.

Hope this would assist you to assess the company. Since the free cashflow and margin are not consistent and also average ROCE is around 14-15%, I normally find difficult sector for wealth creation. Having said that, Ambika has show superior performance with virtually no working capital. That is really outstanding. So wanted to confirm that Ambika is like Page and not Maxwell/Rupa/Loveable before deciding to invest.

The worst thing which new annual reports has been they have done away with quantitative information which was available till 2009. The data for all players was available in annual report and I had compiled from same.

CY Industry Data FY2006 to FY2009.xlsx (39.9 KB) ICAC May 2015 Press release.pdf (79.8 KB)

[rohitbalakrish_]

@dd1474 Great analysis. I have tried to a rough cut analysis on similar lines for Nitin Spinners, their RoCE works out to be ~ 10% …

[Vivek_6954]

Capacity expansion is happening.Orders have been placed and production will start by Jan 2017 as per my info.
-Opp size remains large so expect good growth.
-,Execution is the forte of this v ethical workaholic promoter who is in pink of health.

• ROCE is decent.
• Margins and thus EPS and dividend expected to improve due to lower interest (Co now zero debt co) and lower power cost due to better transmission .

My checklist implies buying this high quality co.

[Donald]

Attached is a Marketing document from Suessen - Elite Compactset V5.
elitecompactset_v5_india_slp0108ne06_12.pdf (2.5 MB)

Rich context for understanding the domain issues. Also Case Study/Testimonial from many customers that will provide further context. Some of these case studies you may have seen in different Spinnovation magazine issues. Read unbiasedly, unhurriedly - there is lot of industry context

Read at leisure

[Donald]

Let’s examine production/efficiency dynamics for the lower-end 30s count market to start with

Again this should be roughly right.
[30s CH Rate/kg data from SITRA - South India Textile Research Association]

For lower counts getting more than 1.4-1.5x Turns, is almost impossible even for the best players.
The other metric from Industry/Sitra - 85% Utilation is break-even. To be viable you have to be atleast 95% utilsation & above. Most players run at 99% utilisation

Idea is to compute the same for higher counts, and get this validated by industry professionals
You can try at your end with your contacts, while we try the same

[Donald]

Now lets try and capture some MARKET dynamics

It appears that the market dynamic is so screwed up - if say the average price is Rs 100 - at Rs 101, there will be ZERO buyers. And at Rs 99, there will be a OCEAN of buyers swooping down on you. And you can buy/sell 100T on the phone.

Again, this is roughly the broad picture - A Spinners minimum investment is 100 Cr. Weaver minimum investment is 1 Cr-5 Cr. 80% of the market is dominated by the small time weavers. There might be Corporate buyers for the bigger/better Spinners, but price setting is done by the small weavers. So 200/Rs kg normal 30 count if a corporate buyer was buying from a quality spinner at 230 Rs paying a 15% premium. When prices crash to 150, he is not going to pay you 200, but may be at the most 185. And there goes phut the viability. This is the picture for most of the spinners, except for a very select chosen few, who are able to hold prices stable.

So price setting is done by the traders/small buyers. There is always plentiful supply with world’s second largest spindelage in India. The Spinners can defer by 1 day, 2 days, a week but how long?

Is it any wonder that despite India being the 2nd largest cotton producer in the world, the 2nd largest spindelage in the world, no Spinner has created market value of $ 1 billion in India, after so many years? It’s almost impossible to create lasting value. Prices crash regularly. You have some good years and some bad years.

Disc: As understood from talks with an ex-spinner. According to him, an average spinner has to surrender at some stage. He may get lucky in 1 cycle, and they do have some bumper years, but overall Spinning is a losing game. No wonder the industry profitability statistics are so grim. TUF subsidy is the only silver lining - but that spawns bigger problems, and even malpractices. Please try to validate this from your own sources

[aveekmitra]

I have made a calculation of 80s CW for 25000 spindles … Asset turn comes below subsistence level low based on 80s Cotton Price of SITRA Magazine January '15 edition.

COTTON CALC.xlsx (10.7 KB)

Assumptions are all given in my sheet …

Few observations …

1. You have taken GPSS for 30s CW compact efficient as 265 gms (the data from Suessen brochure) … They claim efficiency increase by 15% (page 10 of the brochure), so average player would be GPSS 230 gms instead of 240 gms.
2. What is the basis of arriving at the GPSS of conventional spindle? 188 gms? Seems too low and unviable to produce.
3. Price of 30s CH is Rs. 219.60 as per SITRA January '15
4. No price premium at 30 s CH segment as per Sussen — why did you take the price differential?

My calculation based on the model given by you gives very interesting data point to probe deeper

SITRA price link enclosed

http://www.sitra.org.in/images/pdfs/janfeb2015news.pdf

[Donald]

@aveekmitra
We are trying to get rough trends, mota mota right as they say. So average player gpss 240 or 235 is okay. 188 gpss for 30s CH count for a conventional spindle spinner is a real number quoted back to me by a spinner :). That is the stark reality of this industry.

I too got unsustainable figures for 80s CW count based on Rs 380-400 rate per kg; so have sent it off to an industry expert to validate/show what is wrong in the modeling.

[aveekmitra]

Just revised the excel to take effect of the 20% premium … even then it is weird

[Donald]

@aveekmitra
You can edit original post as many times in our super VP forum
Remove original table and paste a different one; or upload a different document.

Let us all become conscious of thread quality; let us avoid clutter via multiple uploads of same thing; resort to Edit. Each of my table’s above I must have edited back 3-4 time with incremental improvements