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Sunday, 29 April, 2007

Cheviot Company Ltd

Company Website: Cheviot Company Ltd
Company Details: Kotak Securities
Annual Report: Cheviot Company Annual Report 2006

I read about Cheviot on Rohit Chauhan's blog first. Then Prem Sagar talked about it. And since it was on their radar, I had to look at it.

Cheviot is a West Bengal based company into Jute products. It has 100+ years history. 100 years don't guarantee anything. Recently a 1400 year old business succumbed to excess debt.

Company is into two businesses - Jute goods and Captive power generation. Annual Report 2006 says that power generation contributes less than 10% of revenues and hence is not covered in the annual report. Jute goods include Jute Yarn, Sacking Bag and Canvas Bags.

Its products are used extensively in packaging. In India, GOI has made it mandatory to pack sugar and some other food items to be packed in jute bags. However more than 70% of revenues come from exports and even if these regulations are taken away by GOI, there would not be a major impact on earnings.

Since the entire jute industry has been facing losses, small competitors and most of the players in the unorganized sector have been forced to shut shops. Cheviot remains the lowest cost producer and one of the few companies left making money in the industry.


1.Company deploys excess cash in mutual funds and other companies. Subsequently company is sitting on Rs 212 cash per share (and this is at cost of investments – with market giving 46% return last year, the market value could be much much higher).

2.Current trading price is about 238. With 212 per share in cash, Cheviot can be effectively bought at Rs. 26 per share.

3.Promoter group holds about 73% of outstaying shares – may be a reason for their love of giving out generous dividends! It would have been interesting to know the dividend payout if promotes had only 27% holding in the company.

1.Jute industry has been given sops by GOI and in absence of these sops, profitability might come down. Most of the revenues come from exports and in case sops for packaging are taken away, Cheviot would still be unaffected.

2.There is no catalyst that might initiate the value unlock process. In case of Venkys, people just had to start eating chicken again. Here there is no such natural catalyst.

3.Labour issues in West Bengal are very sensitive. Strikes happen on whims and fancies of the union and might have some effect on operations of the company.

1. Jute – prices and availability of raw jute.
2. Annual report mentions about petroleum prices being an input.

Dividend History
2007 - 80% interim
2006 - 100% final

Numbers as on April 27, 2007
Market Cap: 108 Crores
Current Market Price: 238
Face Value per share: 10

Numbers of shares outstanding: 3007500

52 week low: 214 on 02 April 2007
52 week high: 492 on 04 May 2006

All time low: 10 on 06 Dec 1996
All time high: 492 on 04 May 2006

EPS: 78 (as per 2006 annual report)
PE Ratio: 3 (as Rohit and Prem say ... market is pricing Cheviot for bankruptcy!!)

To be read more
1. Mention of bonus shares in 2006 report. What happened to it?

2. Read about Jute industry, mandatory packaging of food grains in Jute bags in India, products from Bangladesh and China etc.

3. Use of petroleum in manufacturing jute bags.

4. Operational cost margins to be considered. With 58 crores in bank, the real figures of ROE and ROI have to be better.

Please point out mistakes and errors ... !

Investing Checklist - Set of questions to be asked before investing

I am trying to come with a string of questions that I would ask before I am comfortable investing in a company.

Following are the questions ...

1.What is the quality of management? Are they shareholder friendly? Is the company paying taxes? Do the promoters attend shareholder meetings?

2.Why is stock a pick? How did it become a value stock? Is it a special situation? Does it have huge growth potential in future? Does it have hidden value in terms of cash or cash equivalents?

3.What is the potential downside?

4.If it’s a special situation, is there a catalyst that would unlock the value? How much time would it take for the catalyst to unlock value? what happens in absence of the catalyst? Is there a sign of emerging catalyst?

5.If it’s a growth story, has Mr. Market factored in the growth potential already (by reflecting the optimism for future years in the current prices)? In other words does the stock has high PE multiple?

6.What can change the value proposition? Environmental changes? Regulatory changes? Competitive scenario?

7.If the equation might change, how can the company cope with it? What will be the new downside? Will the company still be a value play?

8.How long will the money be kept blocked? Can the money be freed in case of emergency before the stock appreciates to expected levels?

9.What is the expected return?

Right now I don’t have anything that considers competition, prevalent mood of Mr. Market, Interest rates, return from other avenues. I know there are other things also that I have missed.

Also the list is very big. I ideally want to have not more than 5 questions.

I will keep updating this list as and when I learn more. If someone reads this, please point flaws and omissions.

Wednesday, 25 April, 2007

Pseudosocial Stockbook

Pseudosocial Stockbook is another effort towards capturing information and details at one place.

Even though human mind has unlimited potential, but there are limits to even the unlimited. We are mere mortals and Pseudosocial stockbook is is a collection of news, views, thoughts, comments, links etc about companies in one place. This would be our own TOP SECRET file on a particular company.

Some of these views would be positive, some negative and most only a collection of facts. But it's a place where we would store our thoughts in a chronological order and this shall help us revisit these companies as and when scenario changes.

Tuesday, 17 April, 2007

The Great Hargeisa Goat Bubble

Julian Gough came up with this piece about The Great Hargeisa Goat Bubble in one of his novels in 2003.

This is a must read for someone who wants to understand the way markets become irrational. A journey from discovery of a new market to its boom to its subsequent bust. This short 4 pager covers it all. Very highly recommended.

Here is an extract ...

"By this time the goat craze had become a mania. A severe shortage of goats, and infinite demand, led to excesses. The price of goats became ludicrous, and many animals were led to the town market which were loudly proclaimed to be goats but which on closer inspection proved to be dogs, dressed up. They were purchased anyway, the frightful animals, at grotesque prices.

"The sheer length of the boom was now leading to increased confidence. There was a loosening in credit. It seemed madness not to lend to a man who could pay you back handsomely the next day. And as a creditor, once you'd borrowed and repaid with interest a couple of times, the banks began to persuade you to borrow more.

"Soon the shortage of actual goats led to a booming market in goat futures, goat options and increasingly arcane goat derivative products. This trade in young, unborn, and even theoretical goats allowed yet more money into a market whose only bottleneck or brake up to this time had been the physical shortage of actual goats.

Link to Julian Gough's website
Link to The Great Hargeisa Goat Bubble

Tuesday, 10 April, 2007

How to (Actually) Invest Like Warren Buffett… and Charlie Munger

I found this on JoeCit

Some excerpts ...


When Buffett claims to understand something, he means he understands it almost 100% and can say with virtual certainty what the company will look like in ten or twenty years. It’s not that Buffett is out of touch and doesn’t know what a computer or a prescription drug is. He may have you think that in jest, but, as Bill Gates has said, he knows their businesses, opportunities, and challenges quite well. Yet, and here’s the key, he does not have any advantage or insight into how the will perform in ten years due to the fickleness of their industries.

On Munger
I personally believe Munger’s influence at Berkshire and on Buffett’s thinking goes, regrettably, unsung. Very unsung. If Munger hadn’t been around, Buffett arguably would not have gained an appreciation of buying great businesses rather than cigar butts. Munger helped make Berkshire’s returns phenomenal, while allowing for scalability that could not have otherwise been achieved. In other words, Berkshire could never have been scaled to its huge size by purchasing cigar butts — there aren’t enough of them, and the returns are not “continuing” (i.e. when they reach fair value, there’s no further upside. You must sell it and move on). Berkshire, therefore, needed to invest in great businesses that it could hold on to.

There is more but the article is best read from the original source (link).

Above passages were copy-pasted from JoeCit.

Thursday, 5 April, 2007

Revathi Equipment Ltd

Company Website: Revathi Equipment Ltd.
Company Details: Kotak Securities

Revathi Equipment Ltd. is a part of Mr. Abhishek Dalmia's Renaissance Group. Revathi are manufacturers of drilling equipments and accessories for Mining, Construction and Water Well / Exploration Drilling applications.

Revathi Equipment Ltd came into our radar some time September or October 2006. We thought the company is overpriced. But we loved Mr. Dalmia's letters to his shareholders and with our investment, we just wanted to be among the legitimate recipient of his letters.

As Ben said, price changes everything, the price had to be correct. The price was hovering between 600 and 700. It was still out of our comfort zone. But one fine day the company started share buy back. The company was buying it's shares for prices between 600 - 700 with some shares being bought for 699 as well.

We thought we would follow smart money and put our money and faith with Mr. Dalmia. Though our reasons for buying were very rudimentary (no valuations, no price decline, not sure about 52 week lows) but we bought some shares. We just wanted to be with someone who is so much like WEB in his writing and most probably in his thinking.

Talking about the letters, Mr. Abhishek Dalmia issues Letters to the shareholders (FY0304, FY0405, FY0506) annually. These are must read for anyone looking out for words of wisdom. Similarities between Warren Buffet's Letters to shareholders of Berkshire Hathaway can be easily observed.

These letters tell a lot about intent and motivation of the Chairman and the probable direction the company would go in.

Parting Notes
We dont have access to annual reports for Revathi. If someones got a copy, please drop in a line.

P.S.: We own Revathi. Even if we try real hard, out views would be biased. Satisficing .... ?

Tuesday, 3 April, 2007

Balmer Lawrie Investment Ltd

Balmer Lawrie Investment Ltd: Special Situation ...?

Company Details: Kotak Securities

Balmer Lawrie Investment (BLI) holds 1,00,64,700 shares of Balmer Lawrie & Company (BL) and is available at 50% discount to market cap.

Some facts to start with...

Balmer Lawrie & Company (BL) Numbers

Total number of shares outstanding: 1,62,86,081
Price per share (as on 03APR07): 405.10
Total Market Cap: 643 crores

reports that Balmer Lawrie Investment holds 1,00,64,700 shares of Balmer Lawrie & Company (or about 60% of outstanding shares).

60% of 643 crores is roughly 397 crores. Ideally, Balmer Lawrie Investment should be worth 397 crores give or take few crores.

Numbers for Balmer Lawrie Investment Ltd however, show a different picture.
Total number of shares outstanding: 2,21,97,269
Price per share (as on 03APR07): 89.45
Total Market Cap: 196 crores

Put simply, for some reason Mr. Market has decided to price a company worth 397 crores at 196 crores. A whopping 50% discount or 100% potential profit.

Now the obvious question. Should we or should not we?

I would not buy Balmer Lawrie Investments because ...

1. Since it is only a holding company (BLI was created when govt. decided to divest stake in IBP and needed another vehicle to hold BL shares), it is very unlikely that they will liquidate their position in Balmer Lawrie. The value in Balmer Lawrie Investments will stay locked. My money would also get locked in the vehicle.

The annual report says "Your Company is not engaged in any other business activity except to hold the Equity shares of Balmer Lawrie & Co. Ltd. and accordingly matters to be covered under 'Management Discussion and Analysis Report' are not applicable for your Company."

2. The stock price of Balmer Lawrie Investments can move up if Mr. Market suddenly sees opportunity or BLI starts making more investments in other companies. So far neither of the two has happened and I don't know when it would happen in future. I am happy loosing my shirt by betting on probability but I am not happy winning a bet on uncertainty.

Further the annual report says "Your Company as you are aware is prohibited by the Reserve Bank of India to do any sort of non-banking business. Dividend received from Balmer Lawrie & Co. Ltd., is the only major income of your Company. Estimated surplus money instead of keeping in the Current Account is deployed in the Fixed Deposits Schemes of the Banks. As of 31 March 2006 the total amount of deployment in the Fixed Deposit Schemes of the Banks stood at Rs. 733.56 lakhs. Your Company during the financial year ended on 31 March 2006, out of such deployment in Fixed Deposits earned to the tune of Rs. 35.28 lakhs."

3. The business Balmer Lawrie is in (its a govt. company all right) might also go down and subsequently the book value and price of BLI might go down. I don't know if this would happen but this is another aspect that has to be kept under consideration.

4. Then there are other things like low trading quantities that make the stock unattractive.

On the other hand, I would buy Balmer Lawrie Investments because
1. Its trading at close to 52 week low (of course... this is a bad strategy but I have used it earlier and reaped rewards .. am not scared to use it again

2. A lot of mutual funds, institutional investors hold positions in BLI. Proponents of follow-smart-money theory (including me) might argue that they seek safety in crowds and if MFs and FIIs are putting money here, their money is also safe. (assuming that institutional investors ARE smart !!)

3. This is like one of those opportunities where you don't know how long would it take to reward the shareholder. Tomorrow all of a sudden, govt. might announce the merger of two entities, buy back or something else. At this time, we don't know.

More Links
Google Finance Profile for Balmer Lawrie & Company
Kotak Securities Profile for Balmer Lawrie & Company

Thanks to Mohit for idea and numbers!