Cheviot Co. Ltd.

Report Dated: 30 th January 2005

HISTORICAL BACKGROUND
:
•
This Kolkata-based jute major was promoted by the Kanoria group more than
100 years ago has been operating as a 100% EOU (Export Oriented Unit) and
is today, by far the
most profitable jute manufacturer in the country.
•
Its second plant at Falta (FSEZ) (a 100% EOU) in West Bengal commenced
commercial production on March 27 th 2003. Both its units (the other being
at Budge Budge) are engaged in manufacture of high-grade industrial
fabrics.
•
Over the past few years, the company has embarked upon a modernization and
diversification exercise and has this endeavour has largely been met with
success.
•
Occasional labour unrest is somewhat inherent to the jute industry and
Cheviot too has had its share of the same in 1998, 2000 & 2004. Its
operations though have remained largely unaffected.
•
Its captive power plant became operational in January 2003, thereby
enabling the company to secure itself in the wake of frequent power
failures prevalent in West Bengal.
BSE Code
526817
Promoter Holding 73.13%
CMP Rs.
512
Market Capitalisation (Rs. In crores)
154
2
•
In keeping with Company's strategy to focus on its core business of
manufacturing value added items of jute goods, the Company is taking
effective steps to expand operations at its 100% Export Oriented Unit at
Falta Special Economic Zone, by setting up a backward integration project
to create facilities to manufacture jute yarn as per permissions granted by
the Government of India.
The proposed expansion of the aforesaid Falta Unit would be advantageous
and can be conveniently carried on along with its existing operations and
would ultimately make it an integrated unit manufacturing and exporting
value added jute fabrics and yarn. The work on the said project is expected
to commence soon.


OVERVIEW OF THE JUTE INDUSTRY:
•
India is the world’s largest jute producer followed by Bangladesh, China,
Myanmar, Thailand & Nepal. India and Bangladesh together account for more
than 90% of total world jute production as also the total world area under
jute cultivation. India was 2.6 times the size of Bangladesh in terms of
both area under jute cultivation and jute production.
•
In terms of yield per hectare though, China leads the race with 52% higher
yield than India but since China’s total jute production is just 7% that of
India, this is not very significant.
•
Within India, around 70% of the jute production comes from West Bengal and
productivity in terms of quintals/hectare is also highest in W.B. The rest
of the production comes from Bihar, Assam, Andhra Pradesh, Orissa,
Meghalaya, Tripura & others. This production pattern is in line with
cultivation patterns.
•
The Indian jute industry has been facing very difficult times over the last
few years. Losses have been mounting. In the 3-year period from FY00 to
FY02, aggregate losses for the industry went up from Rs.344.31 crores to
Rs.418.67 crores. This number though has since been falling and stood at
Rs.387.27 crores in FY04.
•
Out of 74 companies in the jute industry, only 33 were profit making during
2003-04.
•
Operations at as many as 13 jute mills stood suspended as at October 2003
and as many as 30 jute mills were BIFR cases.

3
•
Due to mounting losses in the industry, the total capital employed has
eroded fast and stood at negative Rs.1939.7 crores as at the close of FY04.
Cheviot’s capital employed stood at positive Rs.110.82 crores as on the
same date.
•
To put things in perspective, most of the losses were resulting from the 6
jute mills controlled by the Government owned NJMC (National Jute
Manufacturers Corporation) and if one excludes these, the picture is
materially different. To illustrate this, between 2001-02 and 2003-04, the
losses from NJMC & 2 other Govt. owned mills increased from Rs.376.9 crores
to Rs.447.16 crores, the rest of the industry recorded a sharp turnaround,
reporting a net profit of Rs.59.89 crores in 2003-04 as against a loss of
Rs.41.76 crores in 2001-02. (Source: Office of the Jute Commissioner,
Kolkata). A similar trend was also seen in the capital employed figures.
•
The jute industry got a breather by way of the TUFS (Technology Upgradation
Fund Scheme) w.e.f 01/04/99, which enabled textile and jute manufacturers
to avail of loans for modernization at lower costs. As per the scheme
which remains valid upto 31/03/04, the fund would be used to re-imburse 5%
of the interest cost paid by the company to the approved lender.
•
Until 15/10/05, Rs.80.36 crores of assistance under TUFS had been
sanctioned, out of which Rs.69.47 crores had already been disbursed.
•
A number of jute manufacturing facilities have closed down over since May
2005, in view of the non-availability of raw jute and rising prices
thereof. However, the Government’s recent moves to control prices have
brought some stability. In fact, the JCI termed the high prices as
extremely speculative, given the better crop output and 21 lakh bales of
surplus carryover.
All this means better margins for jute manufacturers.
•
Presently, the jute industry’s major products include hessian, yarn,
sacking, CBCs & JDPs. There is however, great potential for the use of
Jute Geo-textile (JGT) in roads, particularly in rural areas. JMDC has
entered into a MoU with the National Rural Roads Development Agency
(NRRDA), to undertake a Pilot Project in rural roads under PMGSY with Jute
Geotextiles. The Pilot Project will cover at lease two stretches each in 6
states totaling to around 50 km. Successful completion of the project is
expected to bring a new future to the Jute Industry.
•
The National Jute Policy 2005 of the UPA Government is targeting a 15% CAGR
in quantity terms for jute and jute products. In value terms, the targets
are even more optimistic and are expected at Rs.5000 crores by 2010 as
against Rs.1000 crores in 2005.

4 .BUSINESS PROFILE
:
•
Let us now evaluate Cheviot’s performance in light of the grim industry
outlook painted above.
Cheviot has thrived in spite of the poor business environment.
•
Exports as a percentage of total sales have been rising and stood at 72.25%
in FY05. Margins in the export market are much higher than those in the
domestic markets. Cheviot exports fine yarns to Belgium, U.K., Germany,
U.S.A., Holland and other countries.
•
The company has increased its focus on value added items of jute and jute
blends thereby improving its product mix.
•
Cheviot is a niche player and one of the lowest cost producers of jute in
the country. Cheviot enjoyed the highest pre-tax profitability margin in
the industry at 12.27% in 2003-04 as against the industry average of 1.73%.
To put things in perspective, Birla Jute (division of Birla Corporation
Ltd.), which is the largest listed player, had a profitability of just
3.35%.
Profitability for Cheviot has improved to 14.89% in 2004-05 and
15.38% for the 9 months ended December 31, 2005 (after excluding Rs.6.27
crores of one-time income that was included in the net sales for the
period)
It would only be fair to say that Cheviot is an exception to the otherwise
ailing jute industry.

FINANCIALS
:
•
Summarised below are the financials for the last 5 years:
(Rs. in million)
FY05
FY04
FY03
FY02
FY01
Income :
Operating Income
1,492.93 1,416.13 1,317.03 1,215.49 1,041.40
Expenses
Material Consumed
672.08
553.28
585.30
617.89
477.66
Manufacturing Expenses
94.60
235.55
115.57
101.51
90.22
Personnel Expenses
257.60
232.82
237.00
215.08
210.62
Selling Expenses
108.99
89.04
76.65
71.43
103.05
Administrative Expenses
74.52
67.35
55.00
65.16
48.32
Cost Of Sales
1,207.78 1,178.04 1,069.50 1,071.06
929.86
Operating Profit
285.15
238.08
247.53
144.43
111.55

5
FY05
FY04
FY03
FY02
FY01
Other Recurring Income
1.86
2.68
3.35
14.11
3.22
Adjusted PBDIT
287.02
240.76
250.87
158.53
114.76
Financial Expenses
1.61
7.56
3.63
1.65
4.68
Depreciation
70.14
72.77
40.97
36.26
38.85
Other Write offs
0.00
0.54
0.54
0.54
0.54
Adjusted PBT
215.27
159.90
205.74
120.09
70.70
Tax Charges
31.29
7.66
27.72
13.70
11.00
Adjusted PAT
183.98
152.24
178.02
106.39
59.70
Non Recurring Items
6.91
13.83
-0.34
3.29
1.67
Other Non Cash adjustments
0.01
1.46
48.34
-1.19
6.43
Reported Net Profit
190.90
166.07
177.68
109.68
61.37
Earnings Before Appropriation
206.08
182.33
236.80
115.39
75.21
Equity Dividend
30.08
24.06
15.07
9.04
7.54
Retained Earnings
171.73
155.19
219.80
106.34
66.90
Operating income and material consumed for FY01, FY02 and FY03 are
inclusive of inter-unit sales.
•
It is clear from the above statistics that
Cheviot’s operating profits
have grown at a CAGR of 20.6% over the last 5 years, which by any
standards is commendable.
•
The topline has grown at a CAGR of 10% during the same period (on a
normalized basis), which shows that the growth has been led by cost
cutting and improvement in sales realisations brought about as a result
of moving up the value chain.
•
The performance for the 9 months period ended December 31, 2005 along
with comparatives is shown below:
Description
YTD FY06
YTD FY05
Net Sales
1,184.5 1,074.9
Other Income
19.7 8.1
Total Income
1,204.1 1,083.0
Expenditure
(918.3) (851.7)
Operating Profit
285.9 231.3
Interest
(0.6) (1.4)
Gross Profit
285.3 229.9
Depreciation
(50.1) (51.3)
Profit before Tax
235.2 178.7
Tax
(36.9) (26.8)
Profit after Tax
198.3 151.9
EPS
65.91
50.48
Value (Rs. in million)

6. The bottom line growth of 30.6% on a topline growth of 10.2% is
commendable. EBITDA margins rose by 170 bps to 22.5% from 20.8% in the
year ago period. This is despite substantial reduction in export market
assistance (EMA) w.e.f. April 05 and higher raw material and fuel
prices.
•
As on March 31, 2005, Cheviot had cash and liquid investments of
Rs.361.4 million (Rs.120 per share), thereby providing a margin of
safety to investors.
•
The table below shows the key financial ratios of the company for the
last 5 years, which makes it evident that
Cheviot is in the pink of
financial health.
Key Performance Indicators
FY05
FY04
FY03
FY02
FY01
PER SHARE RATIOS
Adjusted E P S (Rs.)
61.17
50.62
59.05
35.29
19.80
Adjusted Cash EPS (Rs.)
84.49
74.99
72.82
47.50
32.87
Reported EPS (Rs.)
63.47
55.22
58.94
36.38
20.36
Reported Cash EPS (Rs.)
86.79
79.59
72.71
48.59
33.42
Dividend Per Share
10.00
8.00
5.00
3.00
2.50
Operating Profit Per Share (Rs.)
94.81
79.16
82.11
47.91
37.00
Book Value Per Share (Rs.)
480.43 431.75 591.33 382.89 341.29
Free Reserves Per Share (Rs.)
333.09 281.04 233.22 163.71 119.12
PROFITABILITY RATIOS
OPM (%)
19.10
16.81
18.79
11.88
10.71
GPM (%)
14.40
11.67
15.68
8.89
6.98
NPM (%)
12.77
11.70
13.45
8.92
5.87
Adjusted Cash Margin (%)
17.00
15.89
16.62
11.64
9.48
Adjusted RONW (%)
17.81
17.37
24.24
20.28
15.30
•
Other listed companies engaged in jute manufacture are Birla Corporation
Ltd., Champdany Inds. Ltd. & Willard India Ltd. While Birla Corp. &
Willard are diversified companies, Champdany is a dedicated jute
manufacturer. All 3 companies have suspended operations at most or all
of their jute mills since the last few years due to illegal strikes
and/or unviability of operations. Cheviot is the only company to
increase capacity in recent times.

7. INVESTMENT RATIONALE
:
•
The Cheviot stock has nearly quadrupled since I initiated coverage of
the stock at Rs.140 per share in November 03. In spite of this, the
stock remains grossly undervalued.
I believe that the re-rating on the stock is far from over.
Its valuation parameters are discussed below:
Cheviot trades at a price to book of just 1.07 times based on its FY05 book
value of Rs.480 per share and below its expected book value of Rs.550 per
share for FY06.
Cheviot’s PE Ratio based on projected FY06 EPS of Rs.80 stands at 6.4
times. Champdany Industries trades at a PE ratio of 29.7 times its
annualized EPS for H1FY06.
Cheviot’s dividend payout has been increasing steadily and the company is
expected to pay Rs.12 per share for FY06.
The company’s margins, on the operating, gross & net levels have been
increasing steadily.
Cheviot’s reserves have been swelling at a rapid pace and it is a likely
bonus candidate.
Cheviot’s cash position has been improving for the last 5 consecutive
years.
Cheviot is sitting on sizeable real estate assets (Rs.85 crores as at FY05,
as revalued as on FY03). The market value of these assets would have
appreciated significantly and given that the company has already amended
its objects clause to include real estate development, any concrete moves
in this direction could provide additional triggers.
•
The jute industry is perceived as substitute to cotton in certain areas
and with rising cotton prices, jute manufacturers will also see their
margins increasing.
•
The industry’s future hinges on introduction of new innovative
applications for jute products and Cheviot with its strong cash flows is
well placed to invest in R&D.

8. In September 2004, Indian jute exporters in general and
Cheviot in
particular got a shot in the arm, with the lifting of anti-dumping
duties in Brazil.
After a protracted legal battle by the Jute Manufacturers Development
Council (JMDC) which lasted for 7 years, the Brazilian Government has
lifted the Anti-Dumping Duty on import of jute bags into Brazil for 5
Indian jute companies, including Cheviot. (USD 0.77 per kg)
This augured well for penetrating into the vast Brazilian market for
food-grade jute bags for packaging coffee and cocoa beans.
•
The continuation of the compulsory jute packaging for food grains &
sugar to the extent of 100% & 90% respectively has been a big positive
as far as demand for jute packaging material is concerned. In fact, Mr.
Budhadev Bhattacharyya, CM,
West Bengal, has been pushing for 100% jute
packaging for both. The JMDC has been lobbying for compulsory jute
packaging on similar lines for all industrial products too. Jute is an
eco-friendly substitute for plastic.
Even in an eventuality where compulsory packaging is phased out, Cheviot
will be least affected, given that its sales predominantly come from
exports and it manufactures high value non-traditional diversified jute
yarns and fabrics.
•
The world’s no.1 retailer Walmart’s recent decision to source $5 billion
from India by 2010 could benefit the jute industry in the longer term.
•
In the post-2005 free trade environment, with removal of QRs on all
products, efficient exporters such as Cheviot could benefit.
•
Given these positives, the stock is likely to outperform in the medium
term. Accordingly,
a conservative 12-month price target of Rs.800/- is
set on the counter. At this price, the stock would trade at just
10xFY06-projected earnings, which is very reasonable, given its
prospects.



The company distributed dividend of 13 rs for the year 2011-12.


Notes:
Essay on development of jute textile industry In India

Swot Analysis of Indian Jute Industry at www.indiantextilejournal.com

Jutecomm.gov.in/indostry_intro.htm