This company recently showed up in my screen. Following is my initial thought process as to WHY CMP WARRANTS A DEEPER LOOK AT THE BUSINESS. It is by no means a concrete research but just a simple back of the envelope kind of calculation with tons of assumptions and pure guess work. Idea is to understand that with logical assumptions and guestimates whether the business looks interesting after providing for a large margin of safety. If it does, our job would be to verify/correct those assumptions and take up a deeper subjective analysis of the business and go through the ARs and other materials.
Ambika Cotton is a well known quality business. This time it looks even more interesting.
Market cap at CMP is roughly 1000 cr. Company has zero debt. Cash is 280cr and inventory is 229. That is net current asset of roughly 500cr. Which means we are paying 500cr for the business as things stands today.
We can not extrapolate the margins though, in fact we have to provide for large room of correction in margins because the cotton prices have increased significantly.
Current OPM is 29%. 10 year average OPM is roughly 20%. Let’s assume that due to increase in RM the OPM would be 15% (this is pure guess).
In year 2022, revenue increased from 633 to 921. Since I don’t know if revenue growth is sustainable, for this back of the envelope calculation I will assume that the revenue will be 650cr which where it has been for last 3-4 years.
So, we have revenue of 650cr at conservative PAT margin of 8% (vs 19% currently) i.e. PAT of 52cr.
Subtracting net current asset from CMP we are getting the business at valuation of 500cr so 52cr PAT would mean PE of 10 which is right at the 10 year median value!
Positives :
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Company has inventory of 229cr. Increase in RM price might result in higher realization for the company because it has inventories from earlier levels. So temporarily for few quarters we may even see a jump in realization!
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Company is well known for its well established position in the industry, good management.
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In ideal scenario, if RM prices goes back to average levels right after company is done selling inventories at current levels then it would be a huge benefit.
This optimistic thesis is enough for me to initiate a deeper look at this business. I will share more notes as I go but I will really look forward to all view points and especially the anti-thesis points. It would be a huge help if those tracking this business would provide corrections in thesis above or add more color to it.
Not invested.
