Ambika Cotton – Leading Yarn and Fabric Manufacturer

Company Name – Ambika Cotton Mills Limited (Ambika Cotton)

Current Share Price – INR 1,476 (February 13, 2023)

Market Cap – INR 845 cr

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1. What is interesting about the stock?

Cotton and cotton yarn is extremely important for human beings, as they are widely used in a variety of products that are essential to our daily lives. Some of the key ways in which cotton and cotton yarn are used include:

• Clothing: Cotton is one of the most popular materials used in clothing due to its softness, breathability, and durability. Cotton clothing is widely used by people all over the world, as it is comfortable to wear, easy to care for, and long-lasting.

• Home textiles: Cotton is also widely used in home textiles, such as bed sheets, towels, and curtains, due to its softness, absorbency, and ability to keep its shape and color over time.

• Medical supplies: Cotton is used in a variety of medical supplies, such as gauze and bandages, due to its softness and ability to absorb liquids.

• Industrial products: Cotton and cotton yarn are used in a variety of industrial products, such as rope, twine, and batting, due to their strength and durability.

Overall, cotton and cotton yarn play an important role in our daily lives, as they are used in a wide range of products that we rely on every day. Their versatility, comfort, and durability make them one of the most important natural fibers used in the world today.

Ambika Cotton Limited is a textile manufacturing company in India. The Company is engaged in the production and sale of cotton yarn, grey fabric, and finished fabric. They have spinning, weaving, processing, and finishing facilities to produce a wide range of products for their customers. The Company was established in 1984 and has since then grown to become one of the leading textile companies in India, known for its quality products and innovative solutions.

The Company spins cotton yarn primarily in the finer count range of the 60s-100s and manufactures fabric. While more than 65% of the revenue is derived from exports, the rest is from the domestic market. The Company operates with a total installed capacity of 10,8,288 spindles housed in four units and a knitting facility of converting 40,000 kg of yarn per day into fabrics. The Company imports raw cotton from farmers/intermediaries from the USA, Egypt, and Australia. The Company has installed windmills for 100% of its captive requirements.

Ambika Cotton caters to a wide range of customers, both in India and globally. Some of the key customer segments of the company include:

• Textile manufacturers: Ambika Cotton supplies yarn, grey fabric, and finished fabric to textile manufacturers who use these raw materials to produce finished textile products.

• Garment makers: The company supplies yarn and fabric to garment makers who produce clothing, home textiles, and other textile-based products.

• Exporters: Ambika Cotton exports its products to customers in countries such as Bangladesh, China, and others, who use the company's products in their own textile and garment manufacturing operations.

• Retailers: The company also supplies its products to retailers who sell finished textile products to consumers.

Ambika Cotton operates in a highly competitive industry, with a large number of players operating in the textile sector both in India and globally. Some of the key competitors include:

• Birla Corporation

• Grasim Industries

• Arvind

• Alok Industries

• Welspun India

• Trident

• Vardhman Textiles

• Raymond

These companies are among the leading textile companies in India and compete with Ambika Cotton Limited in terms of product offerings, quality, prices, and market presence.

Mr. PV Chandran is the Chairman and Managing Director of the Company. His remuneration for FY22 was INR 25 lakh (0.14% of net profit) – a very good sign from the perspective of corporate governance.

Why invest in Ambika Cotton?

• Extensive experience of the management team

• Established market position in the finer-count yarn segment

• Long-standing relationships with its key customers

• Captive power generation

• No debt; cash balance of INR 309 cr (37% of current market cap) as of September 30, 2022

2. Key Historical Financials

• Company revenue and PAT grew at a CAGR of 12% and 26% respectively in the last 5 years

• Ambika Cotton had an exceptional FY22 on account of higher demand for cotton yarn and knitted fabrics coupled with price increases – which also led to a higher EBITDA margin of 29%

• Market situation has eased in FY23 driving a fall in revenue and EBITDA margin in Q3FY23

• CFO/EBITDA was healthy in FY22 as the working capital reduced from ~190 days in FY20/21 to 94 days in FY22

• ROCE/ROE increased to 38% and 28% respectively in FY22 – steady-state level should be around 20% or maybe lower as the Company is lower in the apparel manufacturing value chain

3. What is my view on company valuation?

The Company trades at P/E (TTM) multiple of 6.5x vs a 5-year median of 7.5x. Other players like Vardhman Textile trade at 9.4x, Indo Count at 9.7x, Arvind at 6.1x, and Nitin Spinners at 5.7x. So, the valuation is in line with the industry.

However, the TTM multiple is a bit depressed as the market situation was exceptional up to Q1FY23 and has turned to normal condition in Q2FY23. The P/E multiple of annualized profit of Q2 and Q3FY23 is 7.7x which is also reasonable.

On an overall basis, Company looks quite interesting. Long-term investors could evaluate investing if they want to invest in this part of the apparel manufacturing value chain.

4. What are the risks to the investment analysis?

Risks to the analysis are:

• Susceptibility to volatility in raw material prices and forex rates

• Highly competitive industry – both in India and global markets

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About the Author

I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across various sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.

Disclosure

I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.