A great investment is supposed to be dull and boring, and what could be more boring than a company that manufacturers cookers and cookware? Cookers are supposed to come with a replacement cycle of 10 years, which in today’s world is a generational shift. The use of technology in the product is limited and no one buys cookers on EMIs, which keeps them insulated from interest rate movements. The old quandary of who really buys a cooker is no longer relevant.
Cookers have penetrated only 20% of rural India. More importantly, people do not buy multiple cookers each year but buy one or two once every few years, which is why the propensity of the customer to swing towards the best brand without compromising on quality is high and unparalleled. That brings me to the stock that I have been bullish on for a while — the ₹481-crore Hawkins Cookers brand. The leading producer of cooker and cookware in India, Hawkins promises years of predictable revenue and profit growth, even as it throws back a lot of cash in dividends to its shareholders.
Trouble in paradise
However, the past couple of years have been tough on the company. It got entangled in multiple issues — labour strike at one of its three plants and objections from the state pollution control board against its factory at Hoshiarpur in Punjab. The company’s labour force in Uttar Pradesh went on a sudden strike demanding an unjustified wage hike, while officials of the Punjab government forced the company to close down its plant, alleging that it was polluting the environment. The company chose to fight both these issues through legal and regulatory channels rather than try and ‘settle’ the matter.
Faced with such a situation, any normal businessman would cut corners to set things right but the problem with the Hawkins management is that they are too honest to work in Indian conditions and have never taken the shortcut to success. While Hawkins was fighting its battle legally in court, shareholders couldn’t quite understand what was happening because they feared that going to court was like sacrificing a cow for the sake of a cat.
Fortunately, the rule of law prevailed and the company got its way, both against the Punjab government and against erring workers in Uttar Pradesh. But ethics and morality do not work beyond a point. While shareholders will applaud a management on its ethical practices, they also expect the management to be aggressive and forthcoming when it comes to furthering the company’s prospects.
At a time when the competition (TTK Prestige) was launching new products and spreading itself far and wide, the Hawkins management appeared to be pretty smug, with the company losing market share as a result. As competition flooded the market with Chinese-made cookers, Hawkins chose to let supply fall way below demand.
It resisted the quick-fix solution of getting cookers from China to fill the gap: the risk of supplying inferior grade appliances to make good temporary supply constraints wasn’t on its agenda. Though it took almost eighteen months for the company to resolve its issues, the next round of problems was waiting in the wings.
Customers who can’t get their hands on a product soon shift to the next best alternative and the word-of-mouth publicity starts to work against the company. Not surprising, then, that the company’s misery continued even after it was ready with supplies. It took two to three quarters (Q1FY14 to Q3FY14) for it to convince customers, dealers and distributors about the product’s availability and get the demand back.
Back in business
The results are now out for all to see. So far, in the current fiscal, Hawkins’ revenues have grown faster than TTK Prestige’s, which means that the process of regaining lost market share has started. In H1FY15, Hawkins’ sales grew 20% to #245 crore, while TTK Prestige managed 10% growth to ₹718 crore. A point to be noted is that Hawkins sells its cookers at a rate significantly higher than its competitor (10% to 20% higher than TTK across all product categories); it insists on advance payment and rarely gives credit.
This system of focusing on working capital management has helped the company generate an average RoE of more than 76% over the past five years. The free cash flow nature of the business (₹29 crore in FY14) ensures that the company pays back almost 80% of its profit (₹38 crore in FY14) as dividends (600%/₹60 in FY14).
The big opportunity for the stock is the proposed launch of new products, which has been in the works for more than 18 months now. The management, however, is tightlipped on what’s in the pipeline. The present scale of opportunity that the company operates in is worth around ₹2,000 crore. The launch of new products could possibly double, or even triple, the size of this opportunity. For instance, induction cooktops account for a ₹1,400 crore market of their own, rice cookers are a ₹400 crore market and gas stoves operate in a market of ₹1,700 crore.
While work is currently under way to launch either one or all of these products, the biggest challenge is to put the product on the dealer’s shelves. My repeated interaction with the management with respect to the launch of new products has just one key takeaway: Hawkins will launch a new product only when it is able to create something that is already better than what is being offered in the market. Chairman Brahm Vasudeva believes that the company would be more than happy to be late with new products than be in a hurry to bump up revenues and profits peddling inferior substitutes. It is very clear that the management does not want to take any chances with its brand image.
A matter of prestige
Though Hawkins' conservative approach had put it behind competition in the past, it is beginning to regain its lost momentum
This theory, though music to the ears of a corporate or a marketing strategist, is pure noise to a short-term investor. At a time when the opportunity cost of an investment is high, one has to approach this situation with a little more thought than what is perceived at first glance. Though it is certain that the company will launch one or more of the products mentioned above and maybe something beyond it as well, what is uncertain is the timeline of the launch, though there is a strong possibility that Hawkins would put the products on the shelves by the second quarter of FY16.
But for a long-term investor, the timelines need not be pinpointed with as much accuracy as is commonly attempted. Even without the new products, the company is poised to clock 20% to 25% annualised revenue growth for the next few years with its existing product lines. Profits could grow a little faster as the operating leverage would help the company improve margins both on the Ebitda and net profit level.
Hawkins’ current business has multiple factors working in its favour. Firstly, half of the company’s sales originate from replacement demand. So, whether a cooker needs a replacement in ten years or twelve becomes immaterial as soon as the demand for a replacement starts to pour in. Secondly, the company gains when there is an overall boom in anything related to housing. So, when a young couple buys or rents a home in, say, Bengaluru, away from their ancestral home in Bhagalpur, they look to buy all the things that would go with setting up a new home.
And kitchen appliances feature prominently on that list. Thirdly, the company has itself broken down its products into different sizes and shapes so as to create more demand. Earlier, customers had just one big fat five-litre cooker at home but now they can buy cookers that come in various sizes and shapes; ditto with cookware and pans. Lastly, as gas connections increase across the country, cookers and cookware will remain in demand.
Though the stock market discounts events much ahead of them happening and one may fret and fume about buying stocks that are up several times over the past few years, I believe that the right way to look at companies such as Hawkins is with respect to their market cap in connection with the overall growth, market domination, brand power and the free cash flow nature of the business. In other words, Hawkins is still a good stock to buy.
A small-cap brand worth ₹1,915 crore that has the wherewithal to cater to the needs of 125 crore Indians is, by no yardstick, expensive. Most analysts would do well to look at the PE ratio of Hawkins before dismissing it but the right way to go about evaluating the company’s investment potential is to look at it on a two-fold basis — the relatively small market cap and the high payout ratio. A company that has paid a dividend of ₹75 per share on an estimated EPS of ₹95 for FY15 will be valued on dividend only and its high, growing yield will ensure downside protection for investors during bad times, which was evident when Hawkins was going through a lean patch.
Overall, the stock is poised to grow for quite some time now and the conservative nature of its management ensures that one can sit back with this investment for the next decade, if not more than that. This one is a classic proxy to the evergreen Indian middle-class boom story.
The author is a full-time investor and has an interest in the stock. He is also the author of The Thoughtful Investor — A Journey to Financial Freedom Through Market Investing.