I have been diligently reporting on how all the whiz-kid investors are scooping up large chunks of textile stocks.
Marquee names like Dolly Khanna, Ashish Kacholia, Anil Kumar Goel, Kenneth Andrade, Porinju Veliyath etc have bought treasure troves of stocks like Nandan Denim, RSWM, Welspun Syntex, KPR Mills, Kitex Garments, Himatsingka Seide etc on the expectation that the textile sector in India will do extremely well owing to the slowdown in China.
In fact, two leading experts, Ravish Kumar of RSQ Capital and Nooresh Merani, have conducted a formal study of the subject from a fundamental and a technical perspective and concluded that the boom times are beginning for the textile sector.
Prof Sanjay Bakshi’s favourite textile stock is Ambika Cotton, a micro-cap with a market capitalisation of only Rs. 508 crore. The stock came to the limelight in March 2015 when the Prof’s investment arm, Valuequest India Moat Fund, bought a chunk of 40,000 shares.
The good news is that the Prof has been buying the stock aggressively ever since. As of 30.09.2015, Valuequest India Moat Fund’s holding of Ambika Cotton has soared to 142,801 shares. The holding is worth Rs. 12.30 crore at the CMP of Rs. 830.
The better news is that Catamaran Management Services, the investment arm of Narayana Murthy, the legendary billionaire founder of the blue chip software behemoth, Infosys, has also decided that Ambika Cotton is a worthwhile investment candidate. In the July to September 2015 quarter, Catamaran has been stealthily buying Ambika Cotton. As of 30.09.2015, its shareholding stands at 117,498 shares.
Now, the reason this is very significant news is because Narayana Murthy’s business acumen cannot be doubted. He is a visionary with a strong understanding of business and economics and has the ability to sense when a business cycle is turning.
His purchase of a textile stock is a clear indication that he endorses the view of the other whiz-kids that the golden period for the Indian textile industry is starting.
To understand the merits of Ambika Cotton, we have to turn to the expert analysis by Prasanth Victor of Karvy. Prasanth Victor has summed up all the salient points of Ambika Cotton is a succinct manner and one can do no better than to quote him verbatim:
“Rock solid ratios with higher dividend yield
Ambika Cotton has recorded outperforming return ratios of RoE, RoCE & RoA at 18.2%, 20.6% & 11.3% in the industry in FY15. The company has paid dividend per share of Rs.14 implying dividend yield of ~1.7% at CMP of Rs 835. The profit after tax is growing with a CAGR of 30% in FY12-FY15 and expecting a growth of 20% CAGR in FY15-FY17E.
Excellent execution of business in hard times as well
With the peers facing labor problems, high debt, diluting equity, currency crisis and higher cotton price, ACML executed unique distinction with them and has crossed those business challenges. ACML’s debt has reduced from Rs 2662 mn in FY08 to Rs 468 mn in FY15, which is a reduction of net debt to equity from 2.5x to 0.2x in FY08-15. Looking at the healthy cash flows, the company is likely to become debt free shortly.
Long-standing Yarn Manufacturer in the market
The company also has a unique distinction of having zero complaints with clients, shippers and raw material suppliers. The yarn produced by Ambika Cotton Mills is the preferred one for many top quality shirting manufacturers around the world. ACML has a strong presence in export markets such as Europe, Asia and other countries which constitute a significant part of the company’s total export revenues.
Going forward, in FY16E-FY17E, ACML will be able to sustain its margins, with balanced demand, stable yarn realization and healthy demand for specialized yarn, both internationally and domestically. We expect revenue will grow by 13% and 15% and the EBITDA margin will be in the range of 20-21% in FY16E & FY17E respectively.”
At the end of his research report, Prasanth Victor recommends a buy of Ambika Cotton with a price target of Rs. 1004, giving a 16% upside from the CMP of Rs. 866.
However, judging from the fact that Prof Sanjay Bakshi and Narayana Murthy have expressed such confidence in Ambika Cotton, it does look like Prasanth Victor’s target price is very conservative!
It would have been more helpful if this post had diclosed the average paid by Mr Murty.To my understanding it should be nearer to today’s price. At the present price laval, it is fairely valued on BOOK VALUE,P/E,P/S, EV/EBIDTA parameters with fundamentally stong( in considerations of high quality management, high profitabilty and low debt laval) company investment with significant upside potential in the long run.
But at the present laval,it is certainly not an under valued investment.It is a growth investment and growth will exist as long as demand survives.
With PE less than 9 stock is definitely trading less than 50% value as the next quarter results going to be rock solid.
but, historically all textile stocks were traded at low PE valuations..ITS NOTHING NEW..
but historically all textile stocks are traded at low P/E Multiples..there is nothing new.
We are bullish in IT ,but IT poster boy is interested in reverse TI. I mean Textiles INDUSTRY TI. With due respect to my hero and poster boy of IT Sh Narayan Murthi ,it may ends as Dur Ke Dhol Suhawane in Ambica cotton ,a average textile company in my view.But Narayan Murthi is genious, I am trying out to find out what I am not able to see and is visible to IT HERO and Prof Bakshi.
Hi Kharb, If it is not realty, textile, cement then kindly let us know the sector which you are betting with some details. I am big follower of this website and your comments and also I am new to market. My investment horizon is 3-5 years. My portfolio comprises of – Granuels India, DCB, IDFC, Ambuja Cements, Suven lifescience, Kitex garments, waterbase, coal india.
Hi Vipin,
You can consider adding “Technocraft Industries” to your portfolio.
I have DCB, Granules, Yes Bank, Waterbase, Technocraft, Pincon SPirit, Pondy Oxides, Nandan Denim in my portfolio.
WHATS TRIGGER IN TECHNOCRAFT..??
Dear Vipin ,thumbs up to your portfolio.I never said no to textiles and cement.I am just not comfortable with realty sector.But I expected some great Idea from our Hero and IT poster boy.It could have been better idea like Page was some years back although over priced now.But I don’t deny brilliance of Narayna Murthi, but some how it looks a mediocre Idea to me from a person like him.Dr Azim prem ji other Hero and ITposter boy too had also poor bets in past ,if I remember correctly lost huge money in Subhiksha unlisted company and on other unattractive counters. Different acts need different skill sets.
@ Vipin,
Thats a good portfolio : I like companies like Granuels India, DCB, Kitex garments, Suven lifescience in your portfolio.
The stock like coal india, hmmm iam not very sure. Offcourse they have good dividend yields but its not a real growth stock.
Today’s jump in volume and price appriations ,despite market trading in negative zone,this site is being follow by quite good nuber of invetors!
The fundamental analysis based on latest data points to tough times for textile on near to medium term, I think next quarter results may reflect that. Most of the yarn exporters will have an impact as china has gone slow on import and recent cotton purchase in India is sluggish and cci is supporting minimum purchase price. If there is some body to steal the garment export share from china or grow sale in domestic they may be the outliers – that may be the only safe place in textiles to hide. This whiz kids bought few months back when picture was little different, for all we k know they may be reducing their exposure out it might be a tiny portion of their portfolio.
Hi Kharb, I agree with you to the fullest however this investment is made by their companies not by them. Like, Arjun mentioned about Big B investment couple of months back however if we will ask Big B about that company, I will not be surprised if he don’t even have heard about that company. I don’t put Kitex to textile sector. Read about their promoters and growth plan. They have created their own brand and new entity in US. I am just looking for one- two multibagger but not doing any compromise on quality, leadership of management. We should be coming up with one fresh idea i.e. hidden gem which can be multibagger and then everyone can do the brainstorming on that. What u suggest?
narayan mirthy has the investment arm.
It is not at all necessary that he will make the decision to buy individual stocks. Pls rectify the same in your article Arjun.
It is a pity that murthy instead of competing with Elian musk, zuckerbrg and the like ,is competing with investors in Indian stock market. Does he have anything worth his while to do
Elian Musk? I guess you meant Elon Musk. Irrespective, there is a difference. Narayana Murthy as an individual is not investing in these companies, its his investment firm that is. And most importantly consider Murthy’s age, you cannot compare him with other names you mentioned. Murthy is done with majority of his entrepreneurial journey having co-created Infosys. Think before you post stuff with lopsided views.