There are a few things that I really like from the chairman's speech at the agm-2012:
"Every individual, every family, every company, from time to time, goes through hard times.The hard times may be self-inflicted or imposed by external circumstances.In my experience and to my way of thinking, it hardly matters whether the hard times are the result of a fault of character or whether they are a result of the forces of history or an Act of God.What matters is how the individual or the company deals with the hard times.Whether one is overwhelmed by the misfortune or whether one survives and emerges stronger from the experience, to a great extent, depends upon how one deals with the hard times."
"If youare not going to act on the basis of fear and if you are not just going to do the expedient thing, you will have to work out your policy and strategy on the basis of your principles, your beliefs, your values.What is true?What is fair?What is legal?What is ethical?What is beneficial in the long haul?These are not easy questions to answer in difficult circumstances â but there is no way of avoiding them.In Hawkins, we donât know of any other way of managing our business."
"Finally, put in your best efforts and continue to do so no matter how bleak the outlook appears to be.Have faith in God.Seek His guidance and grace in prayer.Sleep well, enjoy your work, enjoy life.You, and the outcome of your efforts, are in the hands of God."
And they really need to walk the talk on this one:
"Theneed for Communication.Whether you deal with government or with customers, whether you deal with militant labour or a court of law â communicate, communicate, communicate.Spend time on internal consultations and on speaking and writing as clearly, as comprehensively and as concisely as you can.And then, do it again.Repeat as often as it is needed"
There are all sorts of risks associated with this investment: single product category risk, key man risk, valuation risk, environment risk, labor issues and what have you.
Hawkins is a company with high brand recall, pricing power, high quality products, decent free cash flow as % of sales, high return ratios, about 50cr cash on books vs mcap of 800cr, almost debt free, high dividend payout and what seems to be like able and ethical management. It has created enormous wealth for those who have been holding at much lower levels. An investor with cost price per share of 80-400 has not only achieved a multibagger in terms of price appreciation but has a dividend yield of 10-50%! Most of the shares are with long term investors including promoters, MFs, early movers, believers and a minority is those who got stuck at 1500-2100 levels. As such, those with multibagger returns and high yield are keeping quiet and continue to believe in a better future. They have little incentive to sell. For them search costs are high, and there is a high opportunity cost given things may turnaround (unknown and unknowable, as such, potentially high returns). Only a small percentage of the recent entrants seem to believe that Hawkins will generate better than market returns, and a majority of recent entrants are impatient and possibly waiting for lower levels to average their holding cost or higher levels for a cash out. However, if this goes down to 1200 or below, there will be lots of people in queue buying, and unmet demand will take the price higher. Additionally, history suggests that at lower levels or at times of panic, only strong take a step forward. So, unlikely that those who are impatient and dissatisfied now, will change behavior. If the price goes up, it will be the effect of some positive trigger and it might not give others sufficient time to join the bandwagon without losing out on some returns and putting himself at risk of potential capital loss.
Market pays for the future and majority of shareholders in Hawkins seem to believe that future will be better than today.
A great investor once said, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative"
My accounting professor taught me that relevant cashflows are cashflows that will occur in the future.Considering the risks associated with this opportunity at current levels and relevant cashflows, I think it neither "promises" safety of principal nor an adequate return. As such, this is a speculative operation. As such, I need to take a guess about the possibilities and associated probabilities if I want to pursue this further. I will take the following guess about returns in 3 years and associated probabilities:
1). 0x - 0%
2). 0.5x - 30%
3). 1x - 30%
4). 2x - 30%
5). 3x - 10%
expected returns: 1.35x, which is lower than 1.38x, what the company is offering for FD.
(there will be some dividends coming in as well because of which probability of 0x is 0%. But lets just assume that 3years of dividends will not be more than 10% of current price, and as such, not significant.)
But what happens if I take a longer term view, say, 10 years. This time, the dividends at 40/share every year will take care of about 0.3x. If the stock compounds at 25%, it will become 9x in 10 years, which doesnt seem unachievable. 15% compounding will give around 4x, 35% will give 20x. Probabilities:
1). 0x - 0%
2). 1x - 10%
3). 4x - 50%
4). 10x - 30%
5). 20x - 10%
expected returns: 7.1x, a CAGR of 21.6%, which is 10% higher than 11.5% CAGR offered by the company for a 3 years FD.
Should I take this bet? Yes, of course. How? Allocate capital in parts and increase with performance of the company.
These are just some of the scenarios, I am sure there are more scenarios possible. But at the end of the day, if you really want to grow a part of your capital at 21.6% CAGR, why not consider other opportunities which can offer similar/higher returns with lower risk of loss of capital? Shouldn't you consider not investing in HDFC Bank an opportunity loss of 25% CAGR? As such, shouldn't your required rate of return for investing in other stocks be more than 25%?
Will you still think about investing in Hawkins today? Why?