Cheviot

Cheviot is in the business of manufacturing jute sacking products for packaging (e.g. food grains, sugar etc.) and selling of jute yarn to domestic and export markets.

The company has reported stable revenues and profits in the last five years apart from the last financial year, which was abnormally good as a result of higher jute yarn realisations in overseas markets on the back of short supply that lasted only the first six months of the last financial year.  The company has reported average operating profits of about 28cr on revenues of about 180cr in the last five years.

It generated the above results with no net debt and owned liquid securities approximating 100cr in market value as at 31^st March, 2011.

The business is primarily exposed to the risks of cheap imports from Bangladesh and removal of favourable government policies on jute packaging requirements (due to the industry’s large labour force) because of its high price relative to alternative packaging materials.  It is also dependent on the availability and price of raw jute (driven by weather conditions), intermittent labour strife (strikes as well as consistent wage increases) and resulting idle capacity.

Although management does declare somewhat reasonable dividends, it has scope to increase this materially as a result of the abundance of its liquid assets.  In effect, it paid out only about 5-6% of its liquid assets alone (not counting the earnings from its stagnant jute business) and this appears inadequate when considering that around 80% of its liquid assets are in the form of mutual funds,  bonds and debentures that pay out a far greater proportion of resources to the company. 

Minority shareholders should consider encouraging management to increase dividend payouts given that there doesn’t appear to be significant profitable growth opportunities for deployment of capital in the jute business or any other avenue which the shareholders can’t execute themselves.