Saturday, March 8, 2014

Hawkins Cookers


Hawkins Cookers is a company that was founded in 1959 and has been a household name since I was a child in the 1980s. I thought about it while cooking a meal and it turned out that it a great company with >60% ROCE consistently.

1. How good is the moat?

A+ Category moat

Replication or improvement of the product is fairly doable for an experienced engineering company. However, Prestige and Hawkins are the 2 big brands in the cookers space. Replicating the brand trust will be an enormous task. The company claims they have sold over 50 mil pressure cookers worldwide. It has 32% market share in the cookers space in India. Several of the cookers are being used by the 3rd generation of the family and several replacement products are repeat buys. Getting to this kind of market position will be extremely challenging for a new entrant. I estimate through a combination of news paper, TV, online and other advertisement getting a similar market position today will cost at least 2x of the current invested capital of Hawkins (which is slightly over 60 Crores). In addition to this getting to the dealer/distributor network and 700+ service centers will also be a very expensive task. Time taken to build this brand (assuming virtually unlimited capital) will be over 5 years. 

2. Performance during downturns

The demand for pressure cookers and other cookware is likely to rise with a large section of the young population setting up homes due to the demographic position of India. It is likely to be fairly resilient to downturns and recessions.

Indian economic growth has rapidly slowed during the last 3 years (2011, 2012, 2013) but the company has increased sales from 346 Crores in FY 2011 to 447 Crores in FY 2013 - a growth of 13.6% annually and further till Nine months ending in Dec 2013 has clocked growth of 4.5% or so over the previous year.

3. Financials

  • Cash from operations over the last 5 years trails net profit by 12% or so which is a source of risk but not a very big one. Primary reason that seems to me is that trade receivables are rising.

Mar-13 Mar-12 Mar-11 Mar-10 Mar-09
Cash from Operations        22.98        32.65        24.33        37.82        16.40
Net Profit        34.10        30.08        31.77        36.84        19.12
5 year Total CFO     134.18
5 Year Total Net Profit     151.91
CFO Lagging net profit 12%

  • Inventories have hovered around 11% of sales and are not alarming. Inventory valuation is a bit aggressive as Raw materials are only 30% of the inventories and the rest are marked at work in progress or finished goods value - but overall risk from inventories does not seem high.
  • Net after tax Margins have been consistently over 8% which is very good for a manufacturing concern.
  • Return on equity and invested capital is exceptional in this company (>60%). Growth over the past 5 years has been achieved with almost zero cash infused in investing (Net cash used in investing activities over the past 5 years is less than 1.7 Crores - which is less than 2% of total cash from operations over the period)
  • Debt: Very low debt - after counting non-trade liabilities and cash debt can be paid back in less than a month. Only worry is that the borrowing is in the form of fixed deposits and non-bank loans - details of which are not furnished. Interest expense incurred calculation and interest rate is not clear. The risk being transparency on the lender and interest rate paid.
  • Debtors stand at around 10% of sales which means an average credit period of around 35 days which is excellent for any manufacturing concern
  • Working capital is large as a % of invested capital - around half which would be a big problem - but as the return on invested capital is massive and fixed investments to revenue ratio is super healthy - this should not be a source of concern unless the trade receivables are bogus which so far has not been the case as the trade receivables to revenue ratio has been around 10% of sales consistently over the past 5 years and CFO has not lagged Net profit by too much.
  • Dividend percentage of earnings - Over the last 5 years Dividend % of earnings has gone up from 65% to 90%+. Which is good news because we know that the management is not wanting to misuse the earnings - but is bad news because it indicates that the management does not have good enough investment avenues for growth. Massive sales growth is unlikely but given the track record of sales growth without much investment.

4. Soft factors & Growth

  • Promoter shareholding: Has been constant at 56% or so for the past 5 years so no selling and large stake means the promoters have a good amount of skin in the game.
  • Employee relations - have been very strained with strikes and labor unrest. This is likely to be the largest source of RISK. Sales growth despite that shows that the capacity is probably not utilized to its full potential.
  • Growth - Currently sources of growth are likely to be organic through extending the dealer network, exports (which have been growth rapidly) and through consumption at current outlets.

5. Pricing

Now that we have determined that this is a good company to buy with a few risks - lets focus on what price we should be buying at.

A few years ago this was a great buy at around 20 times earnings. Now it is trading at 27 times earnings or so and is a bit rich but as a long term buy I still would have this in my portfolio at 1885 INR/share in March 2014. To make it clear I would hold on to it but not buy it at these levels. Over time this stock has beaten the NIFTY and the Sensex several times over.