Ambika Cotton Mills Ltd. – Spinning Towards Glory

Background: Textiles industry provides second-largest direct and non-direct employment (after agriculture) in India. The industry relies heavily on government support for its survival and government has a special loan scheme (Technology Upgradation Fund Scheme – TUFS) for this particular sector. All the companies in this sector have huge debt on their balance sheet. The companies in this sector keep on diluting their equity to service their debts. No wonder the industry has hardly managed a PE of double digits and have never really participated in any bull market.

Introduction – Ambika Cotton mills is a Coimbatore based company engaged in the manufacture of premium quality Compact and Elitwist cotton yarn for hosiery and weaving. The company also has a unique distinction of having zero complaints with clients, shippers and raw material suppliers. Wow. It also has a 100% governmental and legal compliance record and has never had any trouble. Ambika Cotton Mills is the number one in the shirting segment and is the preferred one for of all top quality shirt manufacturers around the world. The company is backed by an ethical, profit oriented management.

Its Amazing: Textiles, though an important industry has always been plagued by labour problems, loan defaults, ever diluting equity etc. Ambika Cottons is one such company that has not diluted equity in last 8 yrs and has also drastically reduced debt – just through internal accruals. The company has even pre-paid most of their loans (something you don’t hear in this industry) and now has a debt to equity ratio one of lowest in the industry (without diluting equity – an important point to remember). The company is also very rewarding to its shareholders, had you bought that company five yrs back (2009) then what ever you had paid in stock price have almost all been returned to you by means of dividends. Also, the dividends are increasing every year. Ambika Cotton has one of the best 5 yrs RoCE/RoE/RoA in the industry and has one of the best Net profit margins in the industry. The stock is relatively low beta and therefore is rock solid even in the most turbulent times. Whereas, companies in this sector has taken expansion at the expenditure of several hundred crores, this company has already enough spare capacity. The company has been generating tremendous cash and that has played a significant role in debt reduction and has also increased the reserves tremendously (when reserves becomes several tens of times the equity capital, the companies normally give bonuses too – I am not saying it will happen, just FYI) and CRISIL has taken a note of it and has upgraded this gem’s rating for both short term debt and long term debt recently.

Valuations: The stock currently trades at 5.5 PE, The company has grown its revenues by 118% in last four years and profits have jumped 166% in the same period. The dividends have also increased significantly from 3rs to 12.5rs per share in the same period. With the crashing of cotton prices, the profits and thus dividends could improve further. Promoter holding has also increased from 36.4% to 48.63% during the last four years (no pledged shares). Looking at its ever increasing performance and yield, the stock could command a premium valuation and could prove to be a steady compounder in years to come.

Technicals: Has broken out after 10 yrs consolidation so technically brilliant.

Note: Please understand that that this sector is filled with gems and therefore, one should not look for a turnaround candidate (until and unless there’s an exceptional case). A turnaround candidate makes sense in established sectors. This sector has this brilliant company then why should we worry about companies that are trying to turnaround. Shouldn’t we stick to companies that have stood the test of times? Normally, the safest companies are the best investing options for long term and provides maximum wealth creation. Just take yourself to 2009 and think panic. During that panic you had a choice between a Kajaria Ceramics and Madhav Marbles, which one we should bet? Valuations wise not much difference right? Should we try to bet on madhav and pray every day and night for turnaround to be sustainable or just buy the best in business, kajaria and enjoy life? People keep asking on Nitin spinners, but IMHO, this rock solid business is way better than nitin and should stand up to the test of times.

By the way keep an eye on this sector as this sector has never led a bull market and with Modi Govt’s “Make In India” movement, along with the sector’s employment potential, this might be the sector to be in so if there’s a great gem available at throwaway valuations that has potential of becoming a large cap, it might be a good idea to invest in it for long term and reap the benefits in future.

Disclaimer: No Vested Interested.

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89 Responses to Ambika Cotton Mills Ltd. – Spinning Towards Glory

  1. hg says:

    > Technicals: Has broken out after 10 yrs consolidation so technically brilliant.
    A break out after 10 years consolidation? Its been a 3 bagger since 2011.

    • i hope you understand what’s consoliation. have you bothered to look at the long term charts or not ?

      • hg says:

        I have…and I hope you understand what is a breakout. That’s my only peeve with your writeup…

        • i know and also know there’s not one kind of breakout. what do you call a breaking of 325-330 resistance of HUL or 385 resistance of bharat forge. individually e.g. bharat forge was already a 4 bagger before this resitance broke, and all that while occilating between 385 to whatever levels that it was in those 8-9yrs is termed as consolidation. For me that breaking of resistance is breakout and a significant one and that’s where the trend become “very strong”. I can go on and on with such examples. even minor resistance breaking people call it breakout but not me. I like clean stuff and not cluttered. Anyways, everybody has a style and patterns they follow so no problems. God Bless

  2. Mukund says:

    hi Ace, bought 100 @ 532.45, thanks for the GEM.

  3. not atleast this blog. I am compliant as mentioned tons of times earlier in the blog. The rules were there for 3 months and people had time to comply.

  4. Niranjan says:

    HI Ace,

    Good writeup. I have been looking into this Textile business which looks promising. I hold Kitex from lower levels as well.

    Coming to my quesion.

    I always assumed that you personally hold all shares that you recommend on the blog. But for Ambika you have mentioned Disc as No vested interest?


  5. Mayur says:

    Ace, do you think Liberty is nicely consolidating around 250s and its good time to take some action?

  6. sam says:

    Hi ace..
    Your views on sujana universal industries?

  7. Gaja says:

    Hi Ace,
    Thanks for the exercise and the recommendation on this. I noticed that the lowest OPM% of Ambika Cotton is 20 and the highest OPM% is 32. The average OPM% is 22 which is bit above Page industries and close to Kitex (OPM% of this year is 25%). Can you guess where the price of this stock will lead to in the next 5 years. Unbelievable! It gave enough time to buy around 520-530 Rs inspite of your recommendation. Thanks again.

    • sorry, no price targets. noone can give targets and normally people who do, would revise it when they are met so what’s the point right? the stock is very low beta so actually i am surprised that it has ended 10% up.. i was replying some scared souls last night that there’s nothing to worry about prices and thankfully everyone must have got good time to enter….

  8. Niranjan says:

    Thanks Ace for the clarifications.

    How was your management meet? What is the sales / profit / EPS growth are you foreseeing for ambika in FY15/FY16?


    • they would maintain the five year growth rate in the long term. No short term views unfortunately, but thats’ good enough. for such companies you need not worry too much, but be prepared to track cotton prices, as its commodotised business.

      • Niranjan says:

        Yes, cotton prices have been soft which augurs well for companies like Ambika / Kitex etc.
        Not sure if you track commodities closely but globally there’s been a sharp declines in all commodities. I don’t pay a lot of emphasis on global macros as such but I have been reading that we there would be bear market in commodities, your views on that?

        • no i dont track commodities closely and therefore, i dont invest in commodity related play but i know some people really play commodity stocks really well. Ambika has proved itself across cycles and therefore, i liked it among these. but as far as crude goes, i think we’ll get a spike down and then form a botton coz now people have started talking about 30$ and normally this kind of talk is associated with bottoms..but this is so good for the economy though not necessarily good for petro construction companies but overall great for economy. also with commodities down among BRIC, only china and india remain and among these two again india is by far the best given the growth potential and falling crude prices, so we’ll have dispropotionate flow of money too….therefore, so far so good.

  9. amit says:

    how is ion exchange and wonderla for long term.also in liberty when merger will get completed.this FY or next

  10. Harish kumar says:

    Few days ago i asked what is your view about “ambika cotton” He said i do not like it. Now all of suddan you stated liking this stock. What is this indicating . It is suspecting that let me buy first at lowar price Than i will recomand to follower and they will buy blindly . Price will rise and i will off load at higher price . Good trick you are using mr ace . Keep fooling ur followers good luck

    • harish, i dont know what is your problem. i do not like stocks for various reason and when those reasons cease to exist i can start liking them. This has happend in the past and will continue to happen. and its not just with me but with various others as well, maybe not with you. I am not stubborn but flexible with my views as i like to judge an opportunity rationally rather than emotionally. Also, you have clearly not bothered to read the stock story and the Disclaimer. Although i am not answerable to anyone i am choosing to answer you so that people like you would get the message. Have faith and if not, this blog is not a compulsion for you. God Bless.

    • Meraj says:

      Every trader and investor should ALWAYS remember that Market is the Boss here ! And nobody can control the Boss ! With the help of Fundamental and technical analysis we try to predict market movement (what ACE is doing and trying to help other). But we can never control it by suggesting on blogs (what you are complaining to ACE). Good strategy and money management is very much necessary to control our losses and protect the profits i.e the thing which you have to learn.

  11. sam says:

    Hi Ace
    What are views on MIC Electronics?

  12. mesh says:

    once again telling u
    the game of demand & supply is started
    any stock , supply will come sure at this lvl
    try as many u want to try
    i am not great like u but but has experience..

  13. Rajesh says:

    Hi Ace,

    Your views on the Monte Carlo IPO? Niche player with brand recall, fair valuation. There is an overhang about subsidiaries, and related party transactions.

    Although the woollen business is seasonal, they have started diversifying.


  14. indianbull10 says:

    Ace, V2 continues to march on

  15. sangram says:

    Cybertech is falling down like it doesn’t have any breaks. I have stopped accumulating now. Will it create wealth for me in future. As you follow some technical also is there any stop loss for it.

  16. Vivek says:

    Whats your view on Vinyl Chemicals? Thanks

  17. Meraj says:

    Ace; Seling volume is slowly decreasing in Wanbury, do you see any V turn in Wanbury

  18. parinan says:


    Kindly request you to kindly provide your views on Premco Global.

    Thank You


  19. vandana says:

    Hello Ace!

    Is it good time to buy Sika interplant aur persistent systems at current level?

  20. mil says:

    Hi Ace,

    Whats your view on Greenply Industries? Can I buy it at CMP of 750

  21. sangram says:

    Singer going awesome

  22. acefollower says:

    Sir, cyber going down everyday. As per technical indicators, where we can expect that it will take support and bounce back.

  23. ace sir your views on cupid. its testing a lot of patience. i think the 2% circuit limit is the main culprit for the low volumes and fall of the share price.

  24. NIRAV KARIA says:

    Sir please throw some light on continous falling price of Prima and Cupid. Pls dont take me wrong. I have enough conviction on business of both the companies. I just want to know whether there are some punters in the stocks because i am not able to figure it out.

    Pls tell me whether i should add Prima and cupid more or not considering the fact that 50% of my portfolio consists of prima and cupid only.

    thanks in advance

    • how can i say whether there are punters or not? in cupid also pending orders are very less, and prima also the price was higher…business wise all good so far.

      • nirav karia says:

        Sir i mean to say y both r under strong selling pressures n price is not rising of prima n cupid despite bull run. This wories me.

        • how do i know…cupid is doubled, prima is 18% higher…not sure why you saying price not going up. if it worries you so much then you should exit. but if it starts moving up after the consolidation dont regret as well. learn to understand and differenciate between value and price….are you convinced about cupid and prima yourself ?

  25. srinivas says:

    ACE whats your view on ausom enterprises and global vectra helicorp?

  26. Mayur says:

    Do u like any of these?
    – Gulf oil
    – Ashiana Housing
    – Lumax Auto
    – Garware-wall ropes

  27. Mayur says:

    Also, falling crude prices is generally good from plastic companies like Prima..n i hope investors of prima will be rewarded sooner or later…expecting a great quarters coming ahead…do u think same Ace?

  28. Ravi multani says:

    hello ace
    some positives for prima…falling of crude oil…nilkamal result was bad and it is near it’s 52 week high and wimplast also…sellers exhausted…big holder has sold almost it’s shares…and today market was down and it was up today…what’s ur view..

  29. Raj Gupta says:

    Ace sir,

    A lot of thanks for ur kind services. I have prima Cupid n cyber also but not bothered about these prices because my experience of 8 years in mkt says these r the opportunities n one should catch up.
    My mind is stuck on one thing in these days n that is SEBI GUIDELINES, i know u have proper knowledge than me but most of the bloggers has shut their blogs due this reason.
    So can v expect, Ace will be continue with us in future! Please ur comments

  30. adifferentshadeofblack says:

    A word of advice to you. When you recommend a stock, please look at the macro issues that are in play. Spinning mills have had a gala time in the past year. It seems as if the party is getting over. I dont think that Ambika mills will give stellar returns.

    China’s decision to raise spending on farm subsidies 10 per cent is likely to boost yarn production in that country, as cotton will be available to Chinese spinning mills at a cheaper rate. This is likely to hit Indian mills catering to the Chinese market.

    In the past three years, consistent growth has been recorded in cotton yarn export to China, as so far, mills in that country have secured cotton at higher prices. China is the largest importer of cotton yarn in the international market. It is estimated in the recent past, cotton yarn export to China accounted for half of India’s overall exports of the commodity.

    S P Oswal, chairman of Oswal Group, expects a fall of about 20 per cent in yarn export to China this year. “The demand for cotton yarn from China might come at razor- thin margins, which many Indian companies might find unviable. Those who cannot afford to export at such prices might not be able to sustain. Our mills have sufficient capacities but are underutilised due to power shortages,” he says.

    • dont worry too much of china, atleast as far as ambika is concerned. ambika performed even when china was a massive threat in the last decade. infact now that its dependent on farm subsidies makes ambika even more compelling now. Also, one needs to understand if there are any credible china based competitors or not before jumping on conclusions. ambika has maintained its leadership position for quite a while and is expected to do so for a while. Yes, it could be a “little” threat to companies with ordinary products and capital profile. This is not the case with ambika though…God Bless

  31. MyInsignia says:

    Ambika Cotton has now caught eye of Ace picker like Proff Sanjay Bakshi. You found this gem at 300+ & others are now accumulating at 600+ .

    Good job Ace! God Bless you

  32. what a detailed,cogent ,brief note on Ambika?So sorry to visit this site so late.How is Ambika at CMP? how good are the 2nd gen and is the growth mindset still there in PV Chandran as he is aging ? How Is Bhavya Chandran as director n is she married? How big is opp size?Is power generated from wind energy so reliable as its available only for a few months a year?How does the co is having pricing power in commoditised yarn business?what are the moats for the co?Any caveats?

    • as mentioned in the stock story and their AR, its very clear that their pricing power comes from their premium product and their biggest moat is their laid back management who’s focus sole focus is making top product with sole focus of better profitability on decent growth than anything else.

  33. Karan says:

    Hi ace,

    Do you have any visibility on where the next phase of Ambika will come from? The company seems to have grown a lot without expanding capacities over the last 6 years. However, is there any direction on any new capex/growth for the future?


    • the next phase would obviously come from utilizing the current capacities to the fullest and some capex. The company is very mindful of bottomline led growth as mentioned in the stock story.

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