Hawkins Cooker: Stock for Long Term Investment
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.
Trend Analysis
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.
- Hawkins Trend Analysis
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
Qualitative Analysis
- 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.
Summary…
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 Return Characteristics
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.
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Hello TIP Guy,
Will it be possible for you to post your fair value calculation xls along with the post? Actually it helps in knowing your discount rates and average PE.
Thanks
One thing i have noticed in your analysis is that fair values come very low and hence one cannot buy. in this example, you already bought hawkins, i think, and later on publshed the analysis. Won’t it be good to present at the time of buying so other readers can get the benefit….
regards,
Hello Priyanka,
In an ideal scenario yes. But it is not always possible to write before you buy.
Best Wishes,
As per your fair value calculations, this is not the right time to buy this scrip.
What about selling? What would be the right time to sell this.
PS: I have a small portion invested at 208/-
Hello Nikhil,
Make your decision based on your objectives. When you bought the stock, what was you objective.
-If it has met your buying objective, then yes, selling is good idea.
-If it has not met your buying objective, then re-evaluate and see whether it is on track. If it is on track, then continue to hold. If not on track and something has changed, then you may sell it.
Sorry, I cannot be specific.
Best Wishes,
Hi Tip guy,
From the day you have mentioned about this stocks and the other long term investment stocks, I have been Following the stock, and waiting to buy the same, But the stock never comes down, Allmost never. weather the market is going up or down this stock has touched its lifetime high, do you still think that we can buy this stock keeping a long term view?
Thanks
Vik
Hello Vikrant,
First, I will not be able to advise you what/when to buy stocks. You will have to make your own decision.
Second, the fact that it is at lifetime high, I will never buy it. I do not think you have got the gist or focus of topics discussed on this blog. Although the company is good, I attempt to figure out a price I am willing to pay. If it is at that price range, its good and I buy depending upon my allocation. In some extreme cases, I buy up to 10% premium, I have done that once. If not in my price range, I will put it on my watch list and move on. Look for something else. I am more than happy to keep cash, rather than pay premium to buy my stocks.
In my portfolio management, market has no role to pay. I do not change my thoughts based on what market does.
Sorry, I cannot be direct.
Best Wishes,
Tip Guy,
Thanks,
Dont be sorry sir, You answered my question. Thanks agian.
Sir,
Going through your posts in more detail.
For Hawkins,you mentioned
Pricing based on PE ratio of 12: Rs 286.5.
I think this estimate was probably taken from the gone financial 2008-2009 yr.I was scanning the P&L sheet,where for 08-09 the full year EPS was 36.15.
For the half yr ending Sept09 it has already shown EPS of 32.5!!So it is indeed growing rapidly.
So Pricing (if we consider forward 2010 earnings would be twice of 32.15 ideally –> around 64) with average PE of 12 would then be Rs 770 .It is already in that range of 680-700.
And according to your pricing criteria ,is this fair value to buy or should I calculate using the trailing EPS.Then it would be
trailing EPS(36) * PE (12)= Rs432
Could you please elaborate on this.
Thanks
Sorry.
I saw one more of your posts titled “Estimation of Stock’s Fair Value Price Range”.So you are taking trailing 3 years average EPS and multiplying by 12 for Hawkins.
So we have
2007 EPS: 14.17
2008 EPS: 21.30
2009 EPS: 36.15
Average : 23.87
So Fair value : 23.87 *12 = 286.5
Now if we assume 2010 EPS to be 64 then
2008 EPS: 21.30
2009 EPS: 36.15
2010 EPS: 64
EPS(average) = 40.5
So fair value when we need to check back in another 3-4 months would be 485.
Its trying to break above 700.So have to see how market prices it after annual results.
I hope this is correct calculations Sir.
Thanks
Hello Tipguy,
Very good analysis. Thank you.
Below is the business analysis on Hawkins that I did a couple days ago. I am not yet putting a value on the business. Right now, I am just concentrating on the business’ strengths and weaknesses.
Business strengths:
1. Simple and defensive business – consumers are going to continue to use pressure cookers.
2. Good brand recall – Hawkins, Futura and Miss Mary.
3. I believe that the demand for pressure cookers is going to increase in India. As India progresses, more people will move up the poverty line and start using pressure cookers. As the current middle class progresses, they will start using branded cookers and non-stick cookware. We have a large young population willing to migrate for job opportunities. They will eventually marry and setup home away from their parents. Increasing trend of nuclear families shall also help boost demand.
4. Management has not diversified into electric rice cookers and other electrical home appliances. They have concentrated on their core strength. This is, in fact, an advantage since they are saved from competition from cheap Chinese imports.
5. Most important – very honest and capable management. Read the chairman’s message – honest reflection on the companies business during the past 50 years – http://hawkinscookers.com/agmspeech09.html
6. Not only high ROCE but an increasing trend from ~18 in ’05 to ~95 in ’09.
7. Good RONW of ~80 on low leverage: d/e 0.4.
8. Top line CAGR of ~19% from ’05 to ’09. EPS CAGR of ~55% for the same period.
9. Better RONW and ROCE performance than TTK Prestige in each of the past five years. Other competitors among branded players are National, Butterfly, Nirlep and Jaipan – Except Prestige, all are significantly minor players.
Business Risks and What could get Hawkins into trouble:
I am analyzing the business from the long term perspective i.e. 5-10+ yrs period. The biggest risk from this angle could be that the company perishes from any number of unforeseen circumstances. The biggest among them could be:
1. Company’s products become obsolete.
2. Fierce competition develops and the company is unable to cope with it.
3. Management risk – company is run by a corrupt and/or dumb management who drive the company to a downward path.
To avoid risk of type one, I have precisely selected technologically low changing business like pressure cookers and non-stick cookware. While the material used in manufacturing pressure cookers have changed over the years and so have the coating methods in non-stick cookware, the broad usage of the product still remains the same. End consumers and/or restaurants (whoever cooks the food in the future) are going to need these products. While electric rice cookers and microwaves can be used as a replacement; the common consumer observation is that the food cooked in these devices just don’t taste the same to those cooked in pressure cookers.
Risk of type two CAN turn out to be more real than anticipated. In fact, the pressure cooker industry, being a mass market product, is fiercely competitive. There are several regional manufacturers whose products are priced competitively to Hawkins and yet the company has survived for the past 50 years with low PAT% (~2 to 7%) but reasonable ROCE. I think the USP of Hawkins is its pan India presence, nationally recognized brands and quality products. It is also exporting its products to many countries.
For point three – I had never heard of the chairman Mr. Brahm Vasudeva (56% ownership) before. But a single glance at his speech reflecting on the past 50 years of the company’s existence gave me a feeling that he is a person one could entrust one’s money with. The company is run by professional management though – leaving aside risk of disruption during family succession.
Risks like increase in raw material prices, labour cost, energy cost etc will affect all the industry players to a smaller or bigger extent. I believe that Hawkins being a major manufacturer can better withstand this.
Thanks,
Priyank
Hello Priyank,
Good to know your qualitative analysis is positive. So what value would you put on per share basis?
Best Wishes,
one interesting thing which came out in outlook profit was that jhunjhunwala had a 5% stake in hawkins and had bought it around 35 rs in 2001…then he sold out in 2005 for 78…and now the stock has run up to 1k!!!…
patience sure does pay for such high quality companies
Hello Saif,
well patience does pay, but then one has to look little more holistically. It is possible that RJ sold early, and missed the big upturn. However, it is also possible that he invested that capital in something else and got even more returns! That is other side of the coin which we probably missed? Let us be optimistic or positive !!
Best Wishes,