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Soumya will take care of the technicals and I will try to make you learn what I have learned over the last 12 years.I remember visiting several cybercafes which charged 70 bucks per hour,back in 2003.Whatever pocket money was gathered,got "invested" in learning the aspects of the game.Dividend takes care of the living and hence there's little motivation to work more.Inflation may compound at 8% but tax free dividend too ain't inferior with 20% yearly growth.So if I could teach even a few passionate ones the fundamental aspects,that will be a satisfaction booster.
Need a demo of what will be taught?Lets prepare the analysis in couple of ways.One for the nerd and the other for the geeks.Simple note for the simple investor and an interesting note for the professional investor who invests for living.Thanks to Saurabh,Saumya,Ujjal da,Dibyajit and Keshav for helping me with the inputs.
Scripscan:Ambika Cotton Mills
Avg buy price:895rs
1)ACML operates in a niche segment which is estimated to be only ~ 10% of total yarn market by volumes.
Note:Cotton yarn is boring commodity but ACML seems got a differentiated model.Manufactures for the premium shirt manufacturers.Hell yah it's the market leader,he'll yah it's a monopoly.No comparable peers.
2)Debtors days of less than 5 or receivables of just 5crs on nearly 480crs of sales.
Note)Can be two aspects:
A)Unlike other commodity yarn manufacturers who first manufacture yarn & then look for customers, ACML it seems only manufacturers against orders.
B)It exports over 60%,it surely will take more than 4 days to reach to its clients.That hints at "advance payments from largest premium manufacturers of the world".
Quote:The bargaining power will be with the manufacturer."So pricing power is certain".
4)Since we are talking about premium and largest,ACML's customers ought to have stringent processes for quality compliance.Inventory days at 80.
Note:Thats a moat out here.Not any xyz can take its market share just like that.
Inventory days ought to be higher as it imports raw material from Egypt,USA.Operating cycle just at 3 months vs over 8 months,five years ago.
5)ACML's Debt has reduced from a peak of 280crs. in FY08 to 70Cr. without dilution, & the co. is expected to become debt free by FY15 end.
Note)Debt reduction with higher sales,great going.Debt free to boost NPM.Higher payout too.
6)Opm peaked at 29% in 2011,present Opm at 20%.
Note:Related to cotton prices which saw a high of 165 cents per pound in 2011 to just about 80 now.Still it's at 20% Opm vs nothing of peers which got royally banged.It ain't a commodity obviously then.
7)Capital turns up 150% in 5 years from 60 paisa in 1 re to nearly 1.5rs with same 1 rupee.
Note:Company seems sweating its resources big time.Ones cotton prices starts to outperform,Opm will rise which coupled with higher capital turns will boost the ROIC.ROIC already at a respectable 17% which itself is a moat as per Dorsey.
8)Opm at such higher levels also due to captive power.Power is the 2nd largest cash expense & the co. has 27MW of captive Wind Mills which is boosting the margins.
Note:Higher margins but on a capital employed of 90crs.That ain't your ROE booster.
9) ACML's sales have increased from 40Cr. in FY00 to 477Cr. in FY14 & has never declined in the 14 year period.EBITDA declined only once in the past decade in FY12 due to forex losses.
Note:Impressive achievement which market couldn't fathom as it always perceived it to be a boring commodity player.Things to change as perception changes but ya susceptible to forex losses.
10)Debt free-Internal accruals,Tuf subsidy?Return ratios down?
Note:Promoter seems want to keep the co. debt free & incur all future capex only through internal accruals, despite availability of TUF subsidy as norm, which might pull down the Return ratio.
11) During the past 5 years, cos. dividend per share has increased from 2/- in FY09 to 12.5/- in FY14.
Note:That's called increase in commitment towards the minority shareholder.Will increase more as mcap increases(psychology) and as it becomes debt free.Market perception to change slowly from boring to not really boring to hell yah wow(experience).
Misc stuff/Anything am missing?
Note:Reduction in Working Capital in 5 years - from 45% of Sales down to just 8%.Positive EVA generator,AltmanZ score of 2.49 vs 1.14.Still not in safe zone but will get better with time.Spindle production capacity has grown from 42k spindles to 110k spindles in last years at 11% Cagr. Revenues per spindle has increased at a healthy cage of 9% in the same period(20.7k to 43.4k).ACML's scrap sales at 8% vs at max 4% for other cotton yarn manufacturers.This is probably because ACML rejects the cotton that others might have used, as its yarn is used in premium garments.
Promoter and Foundation:
Note:Chandran grandpa at 64,fit guy,can still run the show.Daughters on board.Can run the show?
Note:Supima,oeko-tex,GOTS.Not available to many.
Retail investors Psychology/Market perception nature?
Note:They ain't interested anything about 1000 as pensive guys got gusto only towards penny priced craps.Markets will give it it's deserved due,from oversold 5 PE to double digit multiples slowly.Stock to be steadily chased.MF's,HNI's to get in.Opportunist/Chartists to get in.
Put together:Ethical visionary promoters+Holding margins inspite headwinds+scalability+Monopoly with pricing power+debt free+high cash flows+ robust ratios+Higher payout+20-25% cagr for eternity with higher margins+too cheap valuations and low floating stock.
Conclusion:ACML is a high quality co with good clean,visionary promoters, which is wrongly being valued as a commodity yarn manufacturer, thus, the stock is ripe for a re-rating.
Company & Business Overview: Incorporated in 1988 in Coimbatore (Tamilnadu), Ambika Cotton Mills Ltd. is engaged in the manufacture of premium quality cotton yarn for hosiery and weaving. Today, the company has become an established player in the global yarn market with exports comprising nearly 60% of its revenues. The company makes both, compact ring yarn and eli twisted yarn, though, majority of the production is of compacting system. The company has four manufacturing facilities at Dindigul, (Tamilnadu) with a total spindle capacity of 110,000; of which 100,000 spindles is of compacting based system. Compact spinning is recognized as a revolution in ring spinning. This technology is claimed to offer superior quality and better raw material utilization. The company is said to be a whiz in the shirting segment and is considered to be the preferred client of all top quality shirt and t-shirts manufacturers across the world for its specialty cotton yarn. The company, over the years, has managed to carve out its own niche in the huge cotton yarn market by focusing on producing the specialty cotton yarn.
Industry Overview: Now before we go into analyzing the company, just have a look at the current developments in the industry. India is the world's second-largest producer of textiles and garments and accounts for about 22% of the world's spindle capacity. It also has the highest loom capacity with 61% of the world's market share. The industry contributes ~14% to the country’s industrial production and 4% to GDP; and it is expected to expand at a CAGR of over 10% to reach USD 223 bn by 2020-21. At the same time, the exports have had a smart growth over the last few years. In the overall basket of cotton textiles, cotton yarn has shown a tremendous growth of ~29% (as compared to fabrics and made-ups) increasing from USD 3,535 mn in FY13 to USD 4,503 mn in FY14.
However, according to Directorate General of Foreign Trade, the cotton yarn export is following the declining trend for the last several quarters on account of weak demand from China, which is the largest importer of India’s cotton yarn. The stocks started piling up in the spinning mills, though mills have yet not reduced the production. In April 2014, China has terminated its old cotton procurement policy and now shifted to a direct subsidy based policy, under which, farmers would sell the cotton at the market prices and in case the market price is lower than the government set target price, the difference i.e. subsidy would be directly paid to the farmers; this shift towards direct subsidy would make cotton available at market rates to mills in China, thereby, reducing the dependence on imported cotton as well as imported cotton yarn. Now, the import duty on cotton and cotton yarn in China can be a key determinant of cotton yarn exports from India. According to a report of ICRA, The demand for cotton yarn continued to remain healthy with cotton yarn production increasing by ~9% to 3.9 MT, during FY14, thereby, substantially increasing the capacity utilization levels.
Point to note:Now, talking about the raw material, cotton & cotton prices; India is the second largest cotton producer of the world, just next to China. The cotton prices have already come under pressure due to higher stocks and the world cotton industry may witness fifth consecutive surplus season thereby giving no sigh of relief for the cotton producers & suppliers and at the same time, any worrying factor to them who use it as a raw material. The best thing is the demand for yarn and textile from the country is growing and is set to grow higher. We have recently seen the boost in businesses of companies like Pearl Global Industries, Orbit Exports and others. A rough idea about the current demand and supply economics about cotton can be looked at through the following article.
Financials & Valuations Outlook: Since the company has carved out its own niche and is involved only in the manufacturing of specialty cotton yarns primarily made from the imported raw material, it remains isolated from the usual cotton and textile demand-supply economics of the country. The company also boasts of several exclusive things as compared to other players in the industry; the company does not carry much debt and inventory on the books along with very low receivables which is quite a trend in this industry. This loudly speaks out of efficiencies employed in the work, demand and quality for its products and efficient working capital management with low credits. During the previous fiscal, the company spent nearly Rs.29 crores towards modernization of Unit-I and implementing EHT facility ensuring dedicated electric supply exclusively to support the operations of Unit – II, III & IV; and also pre-paid the loans to the extent of Rs.17 crores. During the five years, spanning FY09-FY14, the company has grown at a CAGR of ~21% from Rs.184 crores to Rs.477 crores while the Earnings Per Share have grown over 8x from Rs.16 to Rs.82 during the same period. Since, the cotton prices are hovering at such low levels while the demand is likely to remain consistent in the mid-term, we expect company’s operating margins to resume to 25% plus levels. At the existing growth,we expect the company to report top-line of Rs.710crores in FY17 and Rs.850crores in FY18; at an operating margin of 20%(most conservative estimate),we get an operating profit of Rs.170 crores. The company will soon be debt-free and depreciation could be Rs.40 crores at max. So, this has all the potential to show an earnings per share of Rs.170 after taking out corporate taxes.This company has tremendous book-data unlike any other company in this area – better return ratios, low debts, efficient working capital management system, etc.At 8x you get your target price.
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Note: The above is not a research report but assimilation of information available on public domain and it should not be treated as a research report.
Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”
Disclosure: It is safe to assume that I might have ambika in my portfolio and hence my point of view can be biased.Readers should consult registered consultants before making any investments.