By IE&M Research
I have owned Ambika Cotton since last 7 years. It’s been a great multibagger for me. I understand it may not be a multibagger from present levels, but can I expect steady 15% return from it? Please help. – Raju Patel, Vadodara
CMP: `1295; 52 wk H/L: 1319/1295
Incorporated in 1988 in Coimbatore, Ambika Cotton Mills (BSE 531978) is engaged in the manufacture of premium quality cotton yarn for hosiery and weaving. It is an established player in the global yarn market with exports comprising a major portion of revenue. The company makes both, compact ring yarn and eli twisted yarn, though, the majority of the production is of compacting system. Of late it has also entered the knitting segment. The company has four manufacturing facilities in Dindigul (Tamilnadu) with a total spindle capacity of over 100,000; of which a high percentage of spindles are of the compacting based system. Compact spinning is recognized as a revolution in ring spinning. This technology is claimed to offer superior quality and better raw material utilization. The company is said to be a whiz in the shirting segment and is considered to be the preferred client of all top quality shirts and T-shirts manufacturers across the world for its specialty cotton yarn. The company, over the years, has managed to carve out its own niche in the huge cotton yarn market by focusing on producing the specialty cotton yarn. Since the company has carved out its own niche, it remains isolated from the usual cotton and textile demand-supply economics of the country. The company also boasts of several exclusivity as compared to other players in the industry – it does not carry much debt and inventory on the books along with very low receivables which is quite a trend in this industry. This loudly speaks out of efficiencies employed in the work, demand and quality for its products and efficient working capital management with low credits. During the last 10 years, the company has grown at a CAGR of 15% from `140 crore to `528 crore while the PAT has grown over `17 crore to `55 crore during the same period. Since, the cotton prices are hovering at low levels while the demand is likely to remain consistent in the midterm, we expect company’s operating margins to remain at 20% plus levels. It should continue to grow its bottom line at 15-18% CAGR for next 5 years. You will probably achieve your return target here.
I own 6500 shares of Modison Metals at `52. Do you find any upside potential in the company? Shall I hold the shares? – Prem Doshi, Kolkata
CMP: `78; 52 wk H/L: 83/46
Modison Metals (BSE 506261) was founded in 1965 by Girdharilal Madanlal Modi, Rajkumar Mohanlal Modi and Sureshchandra Purshottamdas Modi. The company is an established manufacturer of electrical contacts made of silver and silver alloys for low, medium and high voltage switchgear industry. Over the last 10 years, the company’s topline has grown at a CAGR of 8% to `190 crore. Although, margins have been widely fluctuating, going forward with the introduction of new value-added products and higher contribution from the high-margin HV contacts, the company was expected to have better margins than FY17, as already being witnessed in first quarterly performances. The company has consistently ended up with positive operating cash flow for last ten years; despite posting decent growth it has not incurred major capex and played it safe. The company has been able to manage its short-term and long term borrowings well. Going forward, conservatively assuming that it will achieve a turnover of `260 crore in FY19 with an operating margin of 15-16% (again on conservative basis, considering the commodities bottoming-out; any increase in raw-material procurement is likely to offset by the rise in contribution from high-margin products) which will enable the company to have a net margin of over 7%, thereby, an earnings of nearly `6 per share is not questionable. Given its high market share and less competition on account of entry barriers, the company can easily command a P/E multiple of 20x – showcasing a good upside potential from current levels of stock price. Further, promoters holding showcase creeping acquisition over the last few years, although quite tiny but gradual increase depicts a positive picture. Additionally, most of the public shareholders (not classified under promoter category) above 1% are Modis which further gives a good sign. The company has consistently paid dividend for past 10 years.