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
One response
Hey, thank you for such informative information, how you got enterprise value yield??Can you elaborate ??