April 13, 2007

Comments on the Post of Cheviot company

I received a few comments on my analysis of Cheviot company. Thought of posting it on the blog as they add to the analysis of the company.

Prem Sagar said...

Do you know what the mgmt intends to do with the huge investment portion?
from their last 5 yrs, I see no huge capex and I dont think the mgmt has any plans to invest huge sums into the same business to increase sales or to enter into new avenues to explore new possibilities. So as of now, the investment portion is just sitting on their books without any plan for it, but merely compounding it.
do you think they would do better if they disburse a part of it to shareholders or buy their own shares back?and the industry itself is struck severly by strikes and I can see several instances of strikes for this co alone. and the whole industry doesnt look enticing.
Assuming that the investments are discounted, would you be willing to buy such a co at 2 times?
4/11/2007 12:25:00 AM

Rohit Chauhan said...
Hi prem

very valid concerns. as far as strikes are concerned, i would not be too worried as the company has been able to manage the financial impact of such strikes in the past. unless the company has some very serious labor issues in the future which shuts down the plants for a very long time, i dont think these labor issues should harm the long term economics of the company
the capex needs of the company are low and hence i expect the cash to increase. i have seen no evidence of the management wasting the cash till date. they have given a bonus, decent dividends and seem to be accumulating cash. need to see how the cash gets used. buyback is unlikely as the no. of shares is low (0.45 crs).
cheviot is a graham play and a portfolio of such companies should do well ..although individually a few of them may do badly
4/11/2007 04:06:00 PM

khali_pili_lafda said...
Hi Rohit,

First off great effort on this blog. My observations on Cheviot are below.
1. Jute prices are on the decline on a global scale and may exert pressure on profit margins for Cheviot over the next few years given that export orientation of company has increased.
2. Historically the P/E has always been below 6. Cannot figure out why the markets are unwilling to give Cheviot credit for performance.
3. Company has a lot of cash on hand (Rs543M) with only 4.5M shares outstanding. May be diversifying into Tea - read this online? Saw a spike in Capex in 2003.
4. Labor issues have already been highlighted by you but given that Cheviot operates in West Bengal, labor laws and strikes can be particularly harmful and unpredictable.
5. With only 4.5M shares outstanding - it raises a liquidity red flag since trading may be controlled by a select syndicate. On Apr 12th only 485 shares changed hands although Mkt cap is over 100 crores.
4/12/2007 02:35:00 PM

Rohit Chauhan said...
Hi niraj

great comments.my thoughts on the points raised by you
1. i also noticed that jute prices (raw material) is decreasing. i think that is a plus for the company as it improves the net margins for the company (the company sells valued added jute products)
2. i think the historical PE is low because of the various factors in your and prem's comment. small cap, illiquid stock in an unglamorous industry with labor issues
3. i am not sure that the company has diversified into tea. the 2003 increase in gross asset was a revaluation which was reversed in 2004. i checked this in annual report. the capex for last 5 years has been roughly equal to the depreciation
4.agree with you. however i feel that labor does not represent a threat to the long term economics of the company. it can cause short profits to suffer. although a serious labor trouble could impact my assumption. frankly it would be difficult to evaluate this risk objectively
5. this could be the reason for the low valuation


khali_pili_lafda said...

Couple of more items.

1. Do you know what % of shares are openly traded by non-promoters or institutions? Many a times the grahamian value buys create traps for small caps that either never get unleashed or take years. Shareholder activism remains moot since these groups tightly control the market for these shares.

2. Maybe getting ahead of myself here. Can I share with you a financial model that I created to discover intrinsic value? Would love to get your thoughts when you have the time. My fair price comes in at Rs 285 with very conservative estimates as you will see giving it a good 25% margin of safety. I'm waiting to see their 2007 annual report before investing.

Rohit Chauhan said...


i typically do not check trading volumes for stock when investing. In general for the small to midcap stocks the volumes tend to be low till some event or catalyst unlocks value and the volume go up around that time. i have not checked the volume of trading in this stock.
Factors which could unlock the value could be another bonus issue, increase in dividends . In addition mid and small caps are in a bear makret now. A swing in sentiment can also improve valuations of the company.

my own estimates of intrinsic value is around 600rs per share although i dont expect the share to approach the intrinsic value and expect it to sell at a discount to it.

you can send me the financial model to my email id rohitc99@indiatimes.com