Hawkins Cookers Limited was started by H. D. Vasudeva, in 1959 as a private limited company with a share capital of Rs 20,000. The Company went public in 1978 at Rs 12.50 per share and had a total market capitalization of about 1 crore. On 23rd May 2014 the company had a market capitalization of 1,136.88 crore. The company has compounded shareholders wealth at 20.94% for 37 years. At this rate of compounding Rs 1 would have become Rs 1,135.24.
Hawkins Cookers Limited is based in Mumbai, India and it manufactures pressure cookers and cookware. The company has three manufacturing plants at Thane (Maharashtra), Hoshiarpur (Punjab) and Jaunpur (Uttar Pradesh). Its pressure cookers comes in three different brands – Hawkins, Futura and Miss Mary. Its sells cookware under the brand name – Futura Cookware. Around 84% of total revenue comes from selling pressure cookers and 14% comes from cookware. The company has 804 employees. It has Pan-India presence and sells its products through wholesalers and a large number of retailers all over the country directly. It also has a network of 700 authorized service centers.
1. Is this a good business?
In FY2013 the company generated 76.97% on the capital employed. Also from 2005 to 2013 the compounded growth rate of capital employed is 7.77%. During the same period sales grew by 15.31% and profits grew by 35.60%. What does this tell you? It tells me that the company does not need a lot of capital for growing its sales and profits. In a world of inflation not many businesses can do this. Hence this is a terrific business. Even Buffett would agree with this. From his 2007 letter read the section “Businesses – The Great, the Good and the Gruesome”.
2. Why are the profit margins declining?
In the last four years revenue grew by only 10.39% and the profits after tax went down by -1.91%. From the chart we can clearly see that the profit margins are declining. Why did this happen? In order to answer this question we need to know what does it take to manufacture pressure cookers. For making pressure cookers the company needs (1) Factories; it has three of them (2) Raw materials; aluminum is the major component (3) Employees. All of them had issues and let us look at each one of them in detail.
Hoshiarpur Factory Issue: Hoshiarpur factory is the largest in terms of capacity and it contributes to almost 45% of total sales. On October 13th 2011, Punjab Pollution Control Board (PPCB) instructed the Hoshiarpur Factory to cease operations in view of their allegation that it was producing effluents with pollutants beyond permissible limits. The company handled this situation really well. Given below is the excerpt from the 2012 AGM speech given by chairman Brahm Vasudeva.
As regards our Hoshiarpur Factory, following the judgment of the Honorable High Court of Punjab and Haryana at Chandigarh delivered on April 16, 2012, the Company applied afresh on May 19, 2012, to PPCB for the required Consents. The Company received a show cause notice from PPCB dated July 2, 2012, which was replied by the Company on July 13, 2012. A personal hearing called by the Chief Environmental Engineer of PPCB has taken place on July 17, 2012. A record of the proceedings of the personal hearing issued by PPCB dated July 25, 2012, is being acted upon. The Environmental Engineer of PPCB has been directed by PPCB to visit our Hoshiarpur Factory immediately after August 15, 2012, to verify the facts and to submit a detailed report along with his recommendations. PPCB has declared that they shall decide the matter on merit based upon the report of the Environmental Engineer. Meanwhile, the Company is continuing its operation in its Hoshiarpur factory on the same restricted basis as it has been producing for the last eight months.
Aluminum price soars and Rupee falls: From the chart given below we can clearly see that the cost of raw materials went up a lot in the last four years. For making cookers you need a lot of aluminum. The currency used for purchasing aluminum is USD. From 2010 to 2011 the price of aluminum went up a lot. But after 2011 the price of aluminum came down but the rupee depreciated a lot against USD and hence the price of aluminum stayed high throughout. Excerpt from 2013 annual report.
While the US Dollar price of aluminum on the London Metal Exchange is 3.3% down in the first half of June 2013 as compared with the corresponding period in 2012, this advantage is more than nullified by the depreciation by 3.3% of the Indian Rupee versus the US Dollar in the same period as well as a 6.4% increase in the pricing formula by our supplier of aluminum, Hindalco. Management continues to diligently watch cost trends and seeks effective cost controls and necessary adjustment in prices as needed from time to time.
Jaunpur Labor Issues: From March 2011 labor relations deteriorated between management and workers in Jaunpur factory. Because of this supply of pressure cookers got hindered even though the demand was high. More than 15 rounds of negotiations took place between management and workers and no settlement was reached until July 2012.
In 2013 both Hoshiarpur and Jaunpur issues have come under control. Hoshiarpur factory’s production in the period January to May, 2013, is 24% more than the corresponding five months in the previous year. Also production of pressure cookers in Jaunpur factory in 2012-13 was 35% more than in the previous year. The company cannot control the price of aluminum nor rupee depreciation. To a certain extent the company can pass the price increase to its customers due to its brand power. Thus all three issues have been resolved by the company.
3. How many cookers does it sell every year?
In FY2013 the company sold 35.37 lakhs pressure cookers. On a volume basis, sales grew by 13.98% and on value basis it grew by 19.39%. The company was able to sell more by increasing the price. This shows that it has some pricing power with this customers because of its brand appeal. It sells a cooker on average for Rs 1,026 and makes an after tax profit of Rs 81.46
Capitalism guarantees that competitors will emerge like bees to honey and will try to take away your market share. Moats are structural characteristics of the business that will create barriers for the competitors to enter into your turf. Let us do a Porters five force analysis on Hawkins.
Threat of New Entrants – In order to sell pressure cookers all over India you need to have (1) Factories (2) Retail distribution network (3) Service center network (4) Brand awareness. All of these requires enormous amounts of time and capital. Even having all of them will not guarantee success. Hawkins and TTK Prestige are the only two companies that sell branded cookers all over India. They together control 50% of the pressure cooker market. The remaining 50% is fragmented and controlled by regional and other unbranded players. Hence the threat of new entrants is low.
Bargaining power of suppliers – Hindalco is the major supplier of aluminum and it has complete control over pricing. Also the company gets affected if the rupee depreciates a lot against the dollar. Another key supplier are the workers in the factories. The labor issues in Jaunpur factory shows that they can create problems and cause hinderance to the supply. Hence the bargaining power of supplier is high.
Bargaining power of buyers – Hawkins is known for its better product design, better product quality and better consumer service. Because of this it has built a brand appeal in consumers mind. Also the consumer income is growing rapidly and hence they are willing to pay up for better brands. Brand is a terrific moat only if the customers are willing to pay a premium price. Did they pay more? Given below are the excerpts from 2011, 2012, and 2013 annual reports. In all three years the company was able to increase the price and still grow its sales. Hence the bargaining power of buyers is low.
 The reduction in margins is mainly because of increase in prices of materials by 16% during the year led by an increase in the average price of aluminum of 18%. Consequent to the increase in input costs, we have effected two price increases in our products of about 6% each during the financial year.
 The reduction in margins is because of low sales growth on account of restricted supply and increase in material costs. The total material cost increased by 12% during the year led by an increase in the cost of aluminum of 13%. Consequent to the increase in input costs, we have effected a price increase in our products of about 8% on February 16, 2012.
 Consequent to the increase in input costs, we have taken a price increase of about 7% in our products on April 1, 2013.
Threat of substitues – Microwave cookers might become a substitute for pressure cookers in the future. I live in the United States and my spouse uses microwave for cooking a lot of items. But when it comes to cooking rice, dal, and other Indian receipes, she uses Hawkins pressure cooker. There are several benefits of pressure cooking which you can read here and people do not change (status-quo) that easily. Hence I see this trend of using pressure cooker to continue for a long time. Hence the threat of substitutes is low.
Rivalry among existing competitors – Hawkins and TTK Prestige are the only two companies that sell branded cookers all over India. They together control 50% of the pressure cooker market by forming a duopoly. Hence the major competitor is Prestige. Let us compare both these companies by looking at several metrics. Given below is the Return On Equity (ROE) for both Hawkins and Prestige. From this chart we can clearly see that ROE of Hawkins averages 77.71% and Prestige averages 46.98%. From this can I conclude that Hawkins is a better business? Not so fast.
We need to look at the components of ROE. Let us use Dupont ratio to dissect the components. What do you see? Hawkins is turning over its assets faster than Prestige. Also it has more leverage than Prestige and hence it is getting a good boast in ROE. When it comes to profit margins Prestige is doing a better job than Hawkins. From this can we conclude that Hawkins is a better business than Prestige? Not so fast.
Hawkins net worth grew from 38.91 crores to 54.76 crores in four years. This represents a growth rate of 8.92%. Prestige net worth grew from 122.02 crores to 395.46 crores in four years. This represents a growth rate of 34.17%. Prestige is retaining most of its earnings and generating a high return on its bigger base. Hence Prestige ROE is superior than Hawkins. Why did Hawkins not grow its net worth that much? Remember the issues that we discussed above? Also Hawkins returned most of its earnings as dividends to the shareholders instead of retaining it back in the business.
My biggest concern is the chart given below. Hawkins attracts customers by giving more discounts. But Prestige spends more money on advertisements and builds its brand for the long term. Also in absolute terms Prestige spends 6.5 times more money on advertisements compared to Hawkins. In FY2013 Prestige spent 71.49 crores on ads compared to Hawkins 12.04 crores. In FY2013 both these companies together sold 90.77 lakh cookers. Of which Prestige sold 61% (55 lakhs) of them and Hawkins sold 39% (35.37 lakhs) of them. While Hawkins was fighting to solve its internal problems Prestige grew rapidly.
The market rewarded the shareholders of Prestige more than Hawkins in the last five years. From all this I have concluded that threat of competition is very high.
Hawkins management is known for its excellent quality. Prof Sanjay Bakshi in his writings classified Hawkins management as Owner-Operator-1 type owner manager. Given below is an excerpt from his writings
Hawkins Cookers, on the other hand, is a low-profile, and highly proﬁtable branded pressure cookers manufacturer run by promoters who have not only practice conservatism while running the business, they also refused to give in to “unwarranted pressure from certain authorities” who tried to blackmail the company. Many years ago, the Chairman of Hawkins Cookers delivered a talk titled “The Seven Strands of the DNA of Hawkins” to his company’s shareholders.
One of the best ways to evaluate the management is to look at what they did with the excess cash generated by the business. From FY2010 to FY2013 the owner earnings generated from the business is 125.46 crores. It returned 85.19 crores (67.90%) as dividends and retained 40.27 crores (32.10%). It did not dilute any equity during this time. Also during this period the company faced hard times and it managed it really well. I would strongly recommend reading the speech by Brahm Vasudeva. He was completely transparent about the issues faced by the business and how the management was tackling it. From all the this I concluded that the management is able, honest, and shareholder friendly.
I can safely assume that for the next 10 years people will cook and they will need pressure cookers and cookware. Also the manufacturing process of cookers will stay the same and you will require aluminum, factories, and people. Around 50% of the pressure cooker market is still owned by regional and unorganized players. Hence branded players like Hawkins have tremendous opportunity to grow by grabbing the market share from unorganized players. Also with growth in urbanization and increase in disposable income, the demand for cookers and cookware will increase and there by the overall pie will grow. This is good for Hawkins.
I did a reverse DCF to see what growth is already implied in the current price. In order to justify the current price, Hawkins should grow its earnings at 17% for the next 10 years. Will it be able to do? Maybe. But for that to happen it should maintain its margins, stop Prestige from taking away its market share, and also maintain its labor relations. There are several clauses that needs to go right. Hence I would require a decent margin of safety as things can go wrong. I would interested in this stock if it trades at around Rs 1500. Will it happen? I do not know but I am willing to wait.