>CHEVIOT COMPANY LIMITED: Industry of Jute & Jute Products

“Value Play on Jute ”


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.


To read the full report: CHEVIOT COMPANY
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