Santaram Spinners operates in the textile industry and is in the business of producing cotton and cotton yarn.
The company entered into cotton ginning and export in the previous year perhaps due to the remunerative prices obtainable on cotton and the relatively low investment required (which is the reason for lower switching costs for farmers as the demand/supply situation changes).
Management assert that the company has the necessary machinery, farmer access, and port connection for cotton export and reported large profits from this segment last year (due to high cotton prices).
The company also engages in trading of cotton and yarn (i.e. not produced by itself), which sometimes forms the majority of sales (such as the previous year).
The domestic and international market for cotton and yarn is large. The domestic market, in particular, is expected to grow over the long run with higher disposable incomes resulting from expected economic growth. The scope for investment in retail infrastructure is large and could aid this growth.
The company reported marginal profits in the last five years on erratic revenues – reporting just about 20lacs of operating profits on 80cr of revenues in the last financial year. It operated with a moderate debt load relative to assets.
The yarn segment is still the larger portion of the company’s business and hence, the company is still exposed to high cotton prices for the time being although this could change as cotton ginning capacities increase. The cotton ginning business would be subject to monsoon conditions.
The textile industry is exposed to the economic cycles impacting consumer spending habits as well as investment activities. It is subject to intense competition from China as well as government regulations that have the power to distort the demand/supply balance.
Exports are impacted by a strong INR and low bargaining power with branded retailers who impose stringent quality, labour, and environmental regulations.
Cotton products are substituted by synthetic textiles during times of high prices, which affect the company’s sales.
Increased automation is also rendering power loom and hand loom products obsolete over time.
H/t : investing-reflections.blogspot.com