Stock Analysis

Ambika Cotton

What is the Business?
Ambika Cotton is a speciality yarn producer based out of Tamil Nadu (Dindigal). It produces speciality compact yarn from long staple cotton procured from the US, Australia and India.

Industry Structure

  • Yarn production is a highly competitive industry with large labour requirement.
  • Wide variation on raw material prices (cotton) cause frequent losses to yarn producers.

What is unique about Ambika Cotton?

  • Ambika has zero loss making quarters in the last 10 years. None of the other yarn producers (including those who also manufacture speciality yarn) have managed this feat.
  • Credit Sales (Receivables) is the lowest in the industry for Ambika Cotton. For an industry known for its low bargaining power with customers, this is a huge achievement.
  • Both of PV Chandran’s daughters have been working for the company for Rs 75,000 p.a. for the last 7 years which is unparalleled in Indian Corporate History.

 

Financials (10-year record)

  2007 2012 2017
Revenue (Rs Crs) 141 156 528
PAT (Rs Crs) 17 13 55
Operating Margins (%) 30% 20% 18%
PAT Margins (%) 12% 6% 11%
ROCE (EBIT/CE) 8% 11% 15%
Total Debt (Rs Crs) 202 152 0
Net Asset Turnover Ratio 0.68 1.21 1.88
Inventory Days 283 109 100
Inventory Turnover Ratio 1.3 3.3 3.7
Receivable Days 11 15 9                 


Comparison with other textile manufacturers

  Ambika Nitin Vardhman Welspun Trident
Revenue Growth (10 yrs) 15% 22% 11% 19% 18%
ROCE (Avg 10 years) 16.1% 12.7% 12.3% 13.4% 9.1%
Receivables (Days) 9 19 44 32 19
Net Asset Turnover Ratio 1.9 1.9 2.2 2.0 1.1
Inventory Turnover 3.7 7 3.2 5 4
Payable Days 14 6 11 62 21

 

  • Receivable days have always been abnormally low – Ambika Cotton enjoys great relationships with its customers who are ready to pay up almost immediately. It takes 15-20 days to ship from India to China.
  • Ambika has consistently improved it asset turnover and inventory turnover ratios in the process improving its ROCE.

 

Concerns or what can go wrong

  • Ambika Cotton already processes about 10% of the US Supima Cotton. How many multiples can it grow is the biggest concern.
  • Organizational Structure – Does it have the capability / intention to forward integration, product expansion?

 

Valuations
Market Cap =Rs 783 Crs
Debt-Cash~0
Pre-Tax Owner Earnings = 72+(30-7) ~ 95
(Owner Earnings / Enterprise Value) Yield =12.4%
GOI 1 year Treasury yield = 7.7%

Ambika Cotton is available cheap considering the quality of the business

 

Disclaimer:
The stocks discussed in the above post are only for educational and illustrative purposes.
The post may not be considered as a recommendation to buy/sell
Do your own study and analysis to decide on your investments or get in touch with us to get professional advise

Details of Financial Interest in the Subject Company:
Currently, I do own Ambika Cotton mentioned above in my portfolio.
I may/may not buy/sell the above mentioned stocks as and when I consider appropriate

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