Ambika Cotton Mills

I believe the reference was to Working Capital Loans. See Note 26 in the latest Annual Report as an example.

The short version of my answer is – without any disrespect to the Chairman, I think interest costs have risen simply because interest rates have gone up worldwide – and most definitely in the U.S. I don’t think it mattered whether the reference rate was LIBOR or SOFR. For detailed response, read on.

The interest on most Corporate Loans are charged as Reference + Spread. Earlier, this reference rate was LIBOR. So if LIBOR was 0.5% and the bank decides a spread of 1%, the loan would be quoted at a floating rate of 1.5% (LIBOR being the floating component). Recently, LIBOR has been abandoned and has been replaced by the Secured Overnight Funding Rate (SOFR). More on why LIBOR was abandoned here: What Is Libor And Why Is It Being Abandoned

You can check out recent history of SOFR rates here: Secured Overnight Financing Rate Data – FEDERAL RESERVE BANK of NEW YORK

This clearly show that SOFR rates have moved up from around 0.5% in early 2022 to 6% today. My point is that even if LIBOR was somehow retained in wide global use, interest cost would have gone up because LIBOR will have also risen with the general interest rate increases around the world. Anyway, if it’s any consolation, SOFR forward rates indicates a softnening towards 4% (Source), although it might take a while.

To summarize my personal understanding – any sort of leverage or working capital loan has become quite costly. Energy costs are another reason quoted. All of this aligns with the information from the Management that many of their Competitors aborad had to shut down.

Overall, what is the impact on Ambika?

1. Increase in Interest Costs from 2-5 Crores to 10-12 Crores. Although that’s a sizeable increase, not much can be done by the company. All the firms in the industry will be suffering from the same issue.

2. Increase in Energy costs. According to logic provided in this Hindu BusinessLine article, the increase in Energy costs for Ambika could be as much as Rs. 5 Crores. Again, similarly all players in the industry would be facing the same issue. You can find many articles, including this one, where Indian Yarn Manufacturers are protesting the increase in unit prices and even stopping production.

What can/will Ambika do?

1. The increase in Working Capital cost can be partially or fully offset by passing it on to the customers. I don’t think it’s easy to do that when demand scenario is stagnant. I expect it would be possible once demand picks up, whenever that happens.

2. Ambika is installing Solar Panels to mitigate the rise in energy costs. According to the Chairman, the company has spent 40 Crs. to install Solar Panels that produce 8.33 MW of power and this will provide them with an IRR of around 10 Crs. per year. In gross for the coming year, 63 Million units out of 78 Million units required for production will be via internal energy generation (Wind and Solar power). The future plan is to take care of the entire energy requirement for production through internal energy generation. (See Chairman’s speech from the 40:23 mark)

Ultimately, in my mind, these minor cost increases are short term pains and not long term detriments. Ignore and move on.