Ambika Cotton Mills

I had the privilege to attend the AGM of Ambika Cotton Mills on Sep 23, 2015 at Coimbatore. Following are the key highlights:

On Mr. P.V. Chandran
• This company is what it is because of Mr. Chandran, he sounded very positive on the growth and future of the company
• Seemed much focused on the Corporate Governance of the company. Doesn’t use company transport, drives his self owned car. He said he feels he is robbing shareholders if he uses company assets for personal use.
• Very shareholder oriented. In the AGM, he said that you all shareholders are my partners and have the same right as I do except for the fact that I have an additional duty to run the company
• This year owing to an experiment in Ginning process he is foregoing his annual commission, because he thinks this experiment is critical to safeguard the success of the company. This cost is approx INR 1 crore (last year his commission was ~1.2 crore)
• He doesn’t like debt on his balance sheet. He claims he sleeps peacefully at night if he has no debt
• He is fan of Warren Buffet, gave several one liners of the legendary investor during a candid chat

On the 30,000 new spindles
• This is work in progress for the company. They require some govt approvals for this to install this. He candidly admitted there is slowdown in the approval process, but he won’t use any measure other than the actual process to take approvals from the govt. That speaks volume of his integrity and honesty
• Once the approval is sought, it won’t take much time to ramp up production. He claims he has man/skill/scale/orders
• New 30k spindles will have knitting facility, but the process of installing it would depend on the mkt conditions and demand from his buyers. He said he can’t just install the spindles and start manufacturing yarns. He needs to see and check if the additional spindles would be a net positive for the company, EBITDA/spindle is favourable (explained below)
• These 30k additional spindles would be most probably the last spindle capacity addition. In future, fabric manufacturing and garment manufacturing could be the possible, but would depend on the mkt condition then
• When asked if fabrication and garmenting would be outside his circle off competence, he said that fabric/garment manufacturing is easy because quality of the yarn is the most important –> Sounds like Never ask the barber whether you need a haircut or no! 
• Fabrication cost is just INR 6/metre and packing cost is INR 4/metre. Garmenting involves some skill; he said we can do it.
• Any additional task like adding spindles or improving a process he always check if there is net +ve for Ambika
• Ambika’s customers were pushing for capacity addition since a long time, but he said owing to the nature of the industry, one should carefully assess the mkt and then take the leap
• New spindles will be provided to the same set of customers, no new customers for now

On customers
• Customers and the qty supplied are an extreme secret owing to the nature of the industry
• Decline to comment on the customers names and their % share in total revenues
• Long lasting customer relationships (some for the last 17-18 yrs)
• He said that the industry is such that you have to be very mindful of the P&Ls. You have to ‘rob’ the profits (yes, rob!) from other stakeholders, else it’s difficult to be successful and profitable in the long run

On Suppliers (Domestic)
• Procures cotton locally through brokers with v v long lasting relationships
• Met one of the brokers, who said that this man is like a God to them. Never cheats them, never directly crosses them and procures directly
• Thinks like a pure gentlemen and gives reasonable profits to his suppliers
• His domestic suppliers are shareholders since its IPO –> Huge positive. One man claimed he will never sell their shares

On Suppliers (International)
• He claims the global supplier for Supima cotton has said that Ambika is his most trusted and favorite customer
• He claims he will always get Supima from them at good terms
On the future
• Sounded extremely confident on his company future
• No comments on growth and profitability in 5-10 yrs down the lines questions, but he said that we can keep doing the right thing and keep everything else to God!
On decline in Pima and Giza Cotton production decline
• He said ppl look at the textile spinning companies at the wrong way, it should be looked at EBITDA/spindle rather than top line growth since raw material cost as % sales is high. Gave the example of Gold manufacturing companies’ vs silver manufacturing companies.
• EBITDA/Spindle is the highest in the industry and nobody comes even close. Growth of Ambika should be measured by this metric rather than absolute growth. There are companies in India which do INR 300 crs of turnover with 150-200k spindles (vs INR 500 crs of Ambika with 110k spindles), this is lower because yarn spinning is extremely skilful and not everybody can do it
• They manufacture only if they have an order. The buyer knows about the availability of the raw materials. He will undertake an order only if he thinks there is a profit
• In future, if there is a shortage of Supima/Giza, the buyer will understand and Ambika can blend other cotton varieties as per the requirement of the client.
• He in fact admitted that he will be happy if there is a shortage of Supima and Giza Cotton because spinning these cottons is very very skilful and very few ppl in the world (even fewer in India) can do it.
• My opinion: I wasn’t convinced by his explanation on above points especially the decline in Supima and Giza cotton production

On the yarn and cotton industry in India
• He admitted that the cotton/yarn industry in India, especially in TN, is in a mess.
• Dr. Venkatachalam (Independent director on Ambika’s board) who is an advisor to 600+ yarn companies in India, said there will be many mills (~30%) that be insolvent by the end of the year. He had mighty praises for Mr. Chandran and Ambika. He said that this is one of the best managed companies in India in this industry.
• India is closely watching China, since its steps to tackle a slowdown could affect yarn companies in India
• Chinese companies could possibly start operating at prices below cost to eliminate competition from India. For now, its wait and watch
• Power shortage is a critical problem for the industry in TN. However, the TN govt is committed to this problem and by next year TN will be a power surplus state. The industry is negotiating very hard with the discoms for a better rate and claim that they are on the verge of a solution. Starting next year, power situation would not be an issue for the industry

On Local competition
• Hardly any players in India who makes what Ambika does. He admitted that he is facing stiff competition from Gujarat based spinning companies (not sure which companies he was referring to)
• His view is that their business model isn’t sustainable because they supply to yarn traders (and not the end customers like Ambika does) which operate on 1-3% margins. Given how wildly yarn prices fluctuate, one swing and they will out of the mkt.
• He said that Guj based companies have access to cheaper power (~INR 5/unit) because Guj state govt grants them power subsidy (~INR 1/unit), but with the improving power situation in TN plus the windmills of Ambika has, this advantage isn’t material enough for the Guj based companies vs Ambika
• Additionally, companies in Gujarat work for 330 days a year vs 362 days for Ambika (Not sure how he arrived at 362 a year figure). This additional 32 days of operation in year covers a good proportion of cost of Ambika vs the Guj based companies

On debt
• He reiterated that he doesn’t like debt for two reasons. 1) He can sleep well at night if he is BS is debt free. 2) The T&Cs under which banks give loans in India isn’t what he likes. He would like to take loans under much favourable conditions than that they presently do
• One of the shareholders asked why he is repaying debt when the TUFS loan can be availed at 5%. He countered by saying that he would be happy to place surplus money in deposit at 8-9% vs the 5% loan cost and would continue to that in future
• By the end of FY16, Ambika will be almost debt free (LT debt of only INR 3 crs by end of FY16)

On Spindle life
• I asked him, what is avg life of the spindle of the new 30k spindles and existing spindles? He said that the actual life is 22-23 yrs but they take a conservative view and depreciate it over ~19 yrs (stated in AR)
On succession plans
• Frankly, this is one of the concerns which I have and unfortunately, I have no good news. There wasn’t a talk of a succession plan
• He has 3 daughters (incl. 2 twins) and the eldest one is actively playing a role in company. She is with Mr. Chandran from 10am to 6pm day in and day out. Other 2 twin daughters have no interest in running the company.
• I spoke with one of his suppliers, he said that Mr. Chandran is in the pink of his health and for now we shouldn’t worry

NOTE: The above information is for INFORMATION PURPOSE ONLY. This is my first attempt at writing detailed notes for a AGM. Other members who have attended pls add points which I may have missed.

Views/Critics most welcome!