Ambika Cotton Mills

Not a good company to own. Here’s why:

It’s cheap on valuation, but

1. Industry::Textiles is a cyclical industry, presently with high cotton (raw material) prices and muted export demand. The conditions are a strong deterrence to both earnings growth and multiple re-rating probabilities;

2. Company:their business is in a very competitive industry - they have had great double-digit margins bc. of their loyal customer base (compared to Nitin Spinners and so on), not their exceptional operational ability (i.e. page industries). This is an advantage they can lose easily, given brands do not particularly have high supplier loyalty.

3. Lastly, the management: is old and conservative. That is not necessarily a bad thing. But in an industry which is hyper-competitive and extremely vulnerable to demand and supply trends, I want to see management which strives for sectoral leadership by taking bold steps. The survival rates for textile mills are among the lowest (funeral homes being the highest). Thus, if they do not snatch market share, their share will always be eaten away by other sharks. Moreover, in an industry which has immense potential to draw investment out of China, Bangladesh, Vietnam and into India (mainly bc. India has close proximity to cotton as a raw material domestically and from Pakistan + cheap labour), I just do not see the management of Ambika taking the risk and trying to grow. They have been and always will be in survival mode.

In conclusion, the stock presents a limited downside due to cheap valuations and a strong balance sheet but does not present multi-bagger-like growth opportunities. Expect 10-15% earnings growth and equivalent share price growth.