Ambika Cotton Mills

             Ambika Cotton Mills

I have been looking at the charts of Ambika Cotton Mills and Cotton prices. Prices seem to be moving in perfect correlation with cotton prices except for a deviation in 2014. The company has been existence for a very long time and has gone through many difficult cycles. The company is known to have maintained inventory levels quite well in the previous cycles.

I tried to plot how inventory has changed with cotton prices. Just wanted to know how well the company has managed the inventory over the cycles. Inventory has increased over the years as sales has. So I plotted Inventory to sales over the years. Inventory to sales has remained the lowest in 2022 when cotton prices were at the peak point. Also to be noted the inventory especially raw materials were at the highest point in 2021 when cotton prices began to increase. However, one significant difference that I have noticed this time was the increase in finished goods inventory. Every year until now finished goods inventory was only a small share of overall inventory. However, the finished goods inventory has significantly increased this time around.
The company may be finding it difficult to sell its finished inventory. Noticed the chairman saying in the AGM that they are not selling at lower margins to increase the sales. Inventory has further increased in half year from 397 crores to 498 crores.

Inventory may go increase further going forward until the cycle reverses. Most of these inventory would be yarns and other related items which has a high shelf life. Similarly, the company doesn’t have to worry about the style or anything of that sort which should affect the selling price once cycle reverses. I think the strong cash position is one of the company’s competitive advantages. The company can still run business as usual, even if cotton prices fell further. The company is run like a traditional business with focus being solely on the core business. That could be one of the reason why company was not very positive on buybacks. The company never had a lot of cash on their balance sheet until 2022, and they are already in a poor cycle. So the next time cycle reverses the company may have to look for better utilization of cash. Also, the current market rates are good as well. The company had an interest income of 5 crores in the current quarter, so the return on the cash is not very bad either.