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!