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.
- 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)
|Revenue (Rs Crs)||141||156||528|
|PAT (Rs Crs)||17||13||55|
|Operating Margins (%)||30%||20%||18%|
|PAT Margins (%)||12%||6%||11%|
|Total Debt (Rs Crs)||202||152||0|
|Net Asset Turnover Ratio||0.68||1.21||1.88|
|Inventory Turnover Ratio||1.3||3.3||3.7|
Comparison with other textile manufacturers
|Revenue Growth (10 yrs)||15%||22%||11%||19%||18%|
|ROCE (Avg 10 years)||16.1%||12.7%||12.3%||13.4%||9.1%|
|Net Asset Turnover Ratio||1.9||1.9||2.2||2.0||1.1|
- 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?
Market Cap =Rs 783 Crs
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
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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
Hey, thank you for such informative information, how you got enterprise value yield??Can you elaborate ??