Hawkins Cooker Limited (HAWKINCOOK) is India’s second largest company engaged in pressure cookers and cookwares. The produces a wide range of other house hold and commercial cooking utensils. Its brands include Hawkins, Futura, and Miss Mary.
The key aspects that I like about Hawkins is sells in domestic markets (does not depend upon what happens internationally), low debt, and focus of controlled growth. It is well positioned to cash on growth in disposable income from growing Indian middle class.
The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years i.e. from 2000 to 2008.
- Revenue: Increasing trend since 2003 with average growth of 9% (SDev. 13%). Neutral observation.
- Earnings per share: Increasing trend with average growth of 54% (SDev. 163%). This shows it possibility of negative growth. Neutral observation.
- Net cash flow from operations: Overall, an increasing trend. The net cash flow is more or less greater than reported net profit. Need to keep an eye on the trend because in 2009 reported profit was more than cash generated. Neutral observation.
- Profit/Loss from operations: Consistently increasing trends in profits from its operations since 2003. Very good observation.
- Reported net profit: Overall an increasing trend since 2003. Very good observation.
- Gross margins: Current GM of 11.22% is higher than historical average of 5.7% (stdev. 2.85%). Very good observation.
- Operating margins: Current OM of 11.9% is higher than historical average of 7.3% (stdev. 2.24%). Very good observation.
Quality of Dividends
In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing of profits with common shareholders.
- Dividend per share: Chart 3 shows that growing dividend payments since 2003. Good observation.
- Payout factor: This is ratio of dividends per share divided by EPS. This has been range bound from 45% to 65%. This is higher than my comfort limit of 50%. It leaves less room for dividend growth and makes it highly dependent on the increase profitability. Contrarily, it could be considered good because management shares more profit with the shareholders. Neutral observation.
- Dividend growth rate: The dividends have not grown at sustained year-on-year basis. i.e. there has been a high level of variability. Overall, on the basis of last nine years, the dividends have grown at an average of 31% which is less than overall EPS growth rate of 54%. Neutral observation.
- Ratio of cash from operations to reported net profit: Since 2003, this ratio is consistently more than 1.0. Good observation.
- Ratio of profits from operations to reported net profit: Since 2003, this ratio is consistently more than one. Good observation.
- Ratio of Cash from operations to total debt: This ratio is consistently more than one and increasing. This is an indication that company is relying less and less on debt for growth. Very good observation.
Dividend Cash Flow vs. Risk Free Savings Cash Flow
Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect my cash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 4.8% at current price of Rs. 418; and (2) savings interest rate is 7%.
- Best case scenario: considering average dividend growth rate of 31% for last nine years, the dividend cash flow will be 4.22 times the cash flow from savings interest at the end of 10 years.
- Worst case scenario: considering low end of the expected dividend growth of 8%, the dividend cash follow will be only 0.74 times the cash flow from savings interest at the end of 10 years.
- In order to have equal cash flow (i.e. dividends = savings interest) in 10 years time period, the current yield should be 6.5% with average dividend growth of at least 8.0%. At this yield the buy price is Rs 310.
Projected Beta-based Expected Return
I measured Beta for this stock’s risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.
- The stocks three year Beta value is 0.06. This means this stock is relatively less volatile w.r.t. S&P CNX NIFTY index.
- The expected return is 7.5% relative to market index.
- Now factoring in 7.5% of expected return into the worst case dividend growth of 8% and current yield of 4.8%, the total cash flow is 2.0 times the savings interest rate.
Fair Value Calculation
The next step is to estimate the fair value so that we can understand return characteristics for this investment.
- NPV price based on 15 year DCF: Rs 377.5
- Average high yield price calculated based on past 9 years: Rs 142.6
- Pricing relative to 9 year average PE ratio: Rs 167.7
- Pricing based on PE ratio of 12: Rs 286.5
- Graham number: Rs 164.8
The range of fair value is calculated as Rs 177.4 to Rs 227.8
- The first question that will come to mind is why Hawkins and not TTK Prestige? TTK has much higher revenue, relatively higher market share, and better quality of safety certifications for its products.
- The reason is very simple. TTK management has plans to do delist from the exchanges and go fully for private holdings.
- Hawkins (and TTK for now) are the only two companies that are listed on stock exchanges. Together these two companies have market share of 50%. The remaining market share is vey fragmented with multiple private companies. Therefore, if an investor wants to invest in this sector Hawkins is the only one that remains a viable choice.
- Hawkins has a good brand image, leading market share in northern and eastern part of the country.
- Since 2003, when it completed it growth investments, the company has been showing good performances and growth for the parameters I look for. Company is dividend friendly.
- I expect the company to grow along with the growth in Indian economy. The brand image, safety perception, diversification in cookware, and growing standard of Indian population abodes well for Hawkins Cooker.
- It does not seem to need additional capital for growth. Low debt exposure.
- Risk is slowing down of growth, low barriers to entry for competitors, and numerous other small competitors.
A long position bought at fair valuations in Hawkins is expected to provide a long term capital appreciation and good dividends. It is a well managed company with rational and prudent financial management. Based on what I could read, I like the approach of controlled growth without taking leveraged risk or messing with balance sheet.
The table below shows the return characteristics of the investment scenario for next 10 years (Note: this return characteristic is relative to savings cash flow and index performance).
Hawkins Cooker is a very good long term hedge for riding with the growth of Indian middle class.
Disclosure: I am long on Hawkins Cooker at the time of this writing.
Find a personal banking account that suits your needs.
508486, beta for hawkins cookers, dividend history, good dividend stock, HAWKINCOOK, Hawkins cooker, hawkins stock analysis, high yield dividend stock, indian pressure cooker market, stock for long term, ttk prestige