27 January 2019

Cheviot Company Stock Analysis

We recently came across Cheviot Company in our smallcap radar. The company’s promoters are the Kolkata based Kanoria family who hold a 74.99% stake in the company. The family has varied business interests in the tea, jute and leather sectors.

Cheviot Company Business

Cheviot Company is primarily in the business of Jute. The company has 2 plants which are located in the 24 Parganas (South) district of West Bengal. Under Jute Packaging Materials Act of 1987, it is compulsory to use 100% jute bags (before November 2018, this was 90%) for packing food grains of consignment size of 10-100 KGs and 20% of jute bags for packing sugar consignments of 25-100 KGs.
Exports contribute ~ 35.5% of the revenues as per FY18 numbers. The export revenues are stagnant since FY12, thus the % share of revenue from exports is going down. Jute sacks have low margins while hessian fabrics and jute shopping bags have higher margins.


The raw prices of jute affect the prices of finished jute products and thus affects the top-line of the company.
The company’s EBITDA margins are stable and at par with other well run jute companies. Also, the company derives significant other income from it’s investments. In small companies with high promoter holding, we need to look at the remuneration of the directors with respect to the profits and the employee expenses of the company.
The remuneration spike in FY18 is because of the remuneration being paid to Utkarsh Kanoria. He is the promoter’s son and was appointed as a director in the company in FY18.

Statistical Bargain?

For a company with a market capitalization of Rs 455 Crores, you get net investments worth Rs 290 Crores. That means, you are paying Rs 164 Crores for the core jute business. This business generated a Profit before tax of Rs 50 Crores in FY18. This basically means that the core business is available at a PE of ~ 5. However, considering the slow growth rate and cyclicality of the jute business the PE would be in single digits.
Also, the current Price-to-Book ratio of the company is 0.87. Our view is that the stock trades at a fair value. Moreover, considering the slow growth rates, the stock would not command premium valuations. If we could get the stock for 20% to 25% lower than the current price, we could call it a statistical bargain. Investors can have the stock on their watchlist.

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