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.