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Investment Rationale
Cheviot has been around for a number of years now and contrary to market apprehensions about the Jute business, the Kolkata based company has in fact shown a credible performance over the years.
Cheviot in our view can easily maintain a 50:50 sales mix between domestic and export business and has the flexibility to shift products between the two depending on the demand situation.
Our belief that the government shall not implement any measures to jeopardise the labour intensive jute industry in Eastern India stands vindicated by the fact that market fears on Jute being a dying product seem unfounded since Jute continues to be an eco friendly product compared to plastic or polyethylene having demand for specific applications.
This debt free company with a book value of `600 is valued at cash and we believe that given the fact that there is no major capital expenditure needed going forward we expect a minimum 25% dividend payout going forward and this would imply a dividend yield of 6%. Cheviot in our view deserves to trade at 0.75 times book and we recommend a BUY with a one year price target of `450.
FY"11 was exceptionally good for Cheviot and the company posted an EPS of `63 and even enjoyed pricing power with good demand locally for sacking products as well as robust export demand. While this is not sustainable during the current fiscal, we believe that with the market valuing Cheviot at cash, there is ample upside potential once the management spells out a dividend policy for returning surplus cash to its stakeholders.
Valuation
Cheviot which operates in a highly labour intensive industry like Jute has been able to hold its fort well over the last many years and the stock trading at 0.4x book has cash and cash equivalent of over Rs1bn which is `220 per share even at current market levels. Further, the company has successfully introduced value-added jute products in its portfolio which enabled them to compete in a very competitive market scenario.
The debt free Cheviot trading at 4x earnings and 0.4x book is valued at cash and we recommend a BUY with a one year price target of `450.
Risks:
Bangladesh poses serious threat to the Indian Jute Industry as they enjoy benefit of lower wage cost and power cost, making them more competitive in the international market as compared to Indian manufacturers. Moreover, in the wake of SAARC benefits, Bangladesh enjoys various concessions and exemptions leading to increasing flow of Jute goods in India and creating unhealthy market conditions. This could impact export business of Cheviot which may lead to forecast revenues and profits being lesser than our estimates.
Jute industry has to operate in a competitive environment and is regulated in India. Instability in supply and price of raw jute which depends on the vagaries of nature remains a concern. Further, use of HDPE/PP bags in violation of Jute Packaging Materials (Compulsory use for Packing Commodities) Act, 1987 JPMA is the key concern.
Crisis in West Asian countries has resulted in serious reduction in Jute Yarn exports due to a contraction of the Carpet Industry in those countries.
Wage inflation in our view continues to remain a key challenge for this business
Business Overview:
Cheviot Company, originally known as Delta Jute Mills Company, was incorporated in 1897 in Calcutta. It offers a wide array of products which includes fine jute, yarns, hessian sacking and industrial fabrics. Fine yarns are exported to Belgium, UK, Germany, USA, Holland and other countries. The company has expanded operations at its 100% export oriented unit at Falta SEZ, presently engaged in manufacture of jute fabrics, by setting up a backward integration project to create facilities to manufacture jute yarn as per permissions granted by the government of India. The expansion of the unit makes it an integrated unit manufacturing and exporting value added jute fabrics and yarn. Cheviot sources power from CESC and also has an in house captive power unit.
Risks:
Bangladesh poses serious threat to the Indian Jute Industry as they enjoy benefit of lower wage cost and power cost, making them more competitive in the international market as compared to Indian manufacturers. Moreover, in the wake of SAARC benefits, Bangladesh enjoys various concessions and exemptions leading to increasing flow of Jute goods in India and creating unhealthy market conditions. This could impact export business of Cheviot which may lead to forecast revenues and profits being lesser than our estimates.
Jute industry has to operate in a competitive environment and is regulated in India. Instability in supply and price of raw jute which depends on the vagaries of nature remains a concern. Further, use of HDPE/PP bags in violation of Jute Packaging Materials (Compulsory use for Packing Commodities) Act, 1987 JPMA is the key concern.
Crisis in West Asian countries has resulted in serious reduction in Jute Yarn exports due to a contraction of the Carpet Industry in those countries.
Wage inflation in our view continues to remain a key challenge for this business
Business Overview:
Cheviot Company, originally known as Delta Jute Mills Company, was incorporated in 1897 in Calcutta. It offers a wide array of products which includes fine jute, yarns, hessian sacking and industrial fabrics. Fine yarns are exported to Belgium, UK, Germany, USA, Holland and other countries. The company has expanded operations at its 100% export oriented unit at Falta SEZ, presently engaged in manufacture of jute fabrics, by setting up a backward integration project to create facilities to manufacture jute yarn as per permissions granted by the government of India. The expansion of the unit makes it an integrated unit manufacturing and exporting value added jute fabrics and yarn. Cheviot sources power from CESC and also has an in house captive power unit.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Rationale
Cheviot has been around for a number of years now and contrary to market apprehensions about the Jute business, the Kolkata based company has in fact shown a credible performance over the years.
Cheviot in our view can easily maintain a 50:50 sales mix between domestic and export business and has the flexibility to shift products between the two depending on the demand situation.
Our belief that the government shall not implement any measures to jeopardise the labour intensive jute industry in Eastern India stands vindicated by the fact that market fears on Jute being a dying product seem unfounded since Jute continues to be an eco friendly product compared to plastic or polyethylene having demand for specific applications.
This debt free company with a book value of `600 is valued at cash and we believe that given the fact that there is no major capital expenditure needed going forward we expect a minimum 25% dividend payout going forward and this would imply a dividend yield of 6%. Cheviot in our view deserves to trade at 0.75 times book and we recommend a BUY with a one year price target of `450.
FY"11 was exceptionally good for Cheviot and the company posted an EPS of `63 and even enjoyed pricing power with good demand locally for sacking products as well as robust export demand. While this is not sustainable during the current fiscal, we believe that with the market valuing Cheviot at cash, there is ample upside potential once the management spells out a dividend policy for returning surplus cash to its stakeholders.
Valuation
Cheviot which operates in a highly labour intensive industry like Jute has been able to hold its fort well over the last many years and the stock trading at 0.4x book has cash and cash equivalent of over Rs1bn which is `220 per share even at current market levels. Further, the company has successfully introduced value-added jute products in its portfolio which enabled them to compete in a very competitive market scenario.
The debt free Cheviot trading at 4x earnings and 0.4x book is valued at cash and we recommend a BUY with a one year price target of `450.
Risks:
Bangladesh poses serious threat to the Indian Jute Industry as they enjoy benefit of lower wage cost and power cost, making them more competitive in the international market as compared to Indian manufacturers. Moreover, in the wake of SAARC benefits, Bangladesh enjoys various concessions and exemptions leading to increasing flow of Jute goods in India and creating unhealthy market conditions. This could impact export business of Cheviot which may lead to forecast revenues and profits being lesser than our estimates.
Jute industry has to operate in a competitive environment and is regulated in India. Instability in supply and price of raw jute which depends on the vagaries of nature remains a concern. Further, use of HDPE/PP bags in violation of Jute Packaging Materials (Compulsory use for Packing Commodities) Act, 1987 JPMA is the key concern.
Crisis in West Asian countries has resulted in serious reduction in Jute Yarn exports due to a contraction of the Carpet Industry in those countries.
Wage inflation in our view continues to remain a key challenge for this business
Business Overview:
Cheviot Company, originally known as Delta Jute Mills Company, was incorporated in 1897 in Calcutta. It offers a wide array of products which includes fine jute, yarns, hessian sacking and industrial fabrics. Fine yarns are exported to Belgium, UK, Germany, USA, Holland and other countries. The company has expanded operations at its 100% export oriented unit at Falta SEZ, presently engaged in manufacture of jute fabrics, by setting up a backward integration project to create facilities to manufacture jute yarn as per permissions granted by the government of India. The expansion of the unit makes it an integrated unit manufacturing and exporting value added jute fabrics and yarn. Cheviot sources power from CESC and also has an in house captive power unit.
Risks:
Bangladesh poses serious threat to the Indian Jute Industry as they enjoy benefit of lower wage cost and power cost, making them more competitive in the international market as compared to Indian manufacturers. Moreover, in the wake of SAARC benefits, Bangladesh enjoys various concessions and exemptions leading to increasing flow of Jute goods in India and creating unhealthy market conditions. This could impact export business of Cheviot which may lead to forecast revenues and profits being lesser than our estimates.
Jute industry has to operate in a competitive environment and is regulated in India. Instability in supply and price of raw jute which depends on the vagaries of nature remains a concern. Further, use of HDPE/PP bags in violation of Jute Packaging Materials (Compulsory use for Packing Commodities) Act, 1987 JPMA is the key concern.
Crisis in West Asian countries has resulted in serious reduction in Jute Yarn exports due to a contraction of the Carpet Industry in those countries.
Wage inflation in our view continues to remain a key challenge for this business
Business Overview:
Cheviot Company, originally known as Delta Jute Mills Company, was incorporated in 1897 in Calcutta. It offers a wide array of products which includes fine jute, yarns, hessian sacking and industrial fabrics. Fine yarns are exported to Belgium, UK, Germany, USA, Holland and other countries. The company has expanded operations at its 100% export oriented unit at Falta SEZ, presently engaged in manufacture of jute fabrics, by setting up a backward integration project to create facilities to manufacture jute yarn as per permissions granted by the government of India. The expansion of the unit makes it an integrated unit manufacturing and exporting value added jute fabrics and yarn. Cheviot sources power from CESC and also has an in house captive power unit.
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