After investing in HFCs (GRUH, REPCO), I am doing a bit of deep dive into kitchen ware cos. (Hawkins and Prestige). I am not that much comfortable with too much diversification into various products so not that much excited by TTK management startegy. On the other hand, I am quite interested in Hawkins (growth potential, brand moat, low debt, high ROCE, high div. payout) but have few questions in mind. Trying to understand if it is a case of eroding moat or not. It will be really great if you please take some time out and address these:
GROWTH: It is much said that cookers are highly under penetrated in the rural market (20% penetration) so there is whole lot of scope for growth. I am trying to understand if hawkins/prestige has a strong brand association in rural areas so that they can enjoy price premium over other branded/ unbranded players? Or they have to lower their margins to chase this growth. Or they can manage to grow at a rate of 10-15% w/o much penetration in the rural areas by new products, replacement demand etc?
INPUT COST: It is clear that hawkins is easily able to increase prices as raw material costs increase but it seems that they are not able to pass it fully (which leads to a decline in the gross margins that happened in 2015 leading to margin contraction). As we know commodity prices move in cycles so can we ignore the impact of raw material inflation if our investment period is long (say 10 years) or it is an imp. factor to consider?
CO. SPECIFIC ISSUES: Are there chances that the co. can run into the labor problems/ pollution issues again in future leading to supply constraint (and losing market share to competitors) in future, as happened in past?
BAD FY15 RESULTS: From my analysis it seems that the gross margin decline, coupled with higher advertisement spend resulted in decline in profitability in FY15. Is it because the co. is trying to regain market share which it lost in last 2-3 years or it is just due to raw material cost not fully passed on to the customers?
NEW PRODUCTS: It is widely anticipated that the co. is going to launch new products in the next 1-2 years, so does the co. need to raise the debt to spend on the CAPEX for these products or the co. can easily fund it with internally generated cash? I think the co. generates enough cash to internally fund new product development.
Fundoo Hawkins has probably the cleanest management one could wish for. But I have come to the conclusion that Hawkins is steadily losing market share and the expected growth pick up may never happen or remain mooted in single digits.
The reasons being
Competition : Dozens of new companies have entered the scene. Some regional kitchenware retailers are even starting their own brands ! Ex padmashri, videum etc. It has reached a level where these cookers are being handed out as cheap gifts at marriage functions! And IPhone flashing brand lovers are not shying away from using it at their homes.
Decreased brand awareness :With the lack of ads or visibility the present generation is not even aware that such a brand exists. The Hawkins managements is very conservative in their dealings with retailers( little or no credit period). While we may appreciate Hawkins conservativeness in credit issues âŚover a period of time this has resulted in poor visibility. Though Hawkins is still recognized by the older generation its not a âMaruthiâ whose virtues are spoken about at every âcar conversationâ. The younger generation is replacing it with other more âeasily availableâ brand names and no ones stopping them.
To get back on the throne again it has to re position the brand ,promote aggressively and wake up to the present environment of the retailers. Doing so may increase the sales but it will also destroy its beautiful numbers and ratios in the process. At 35 PE it still looks over valued and may cause capital erosion.
I may be wrong . Hawkins âstodgyâ management probably knows the market much better than any one else. I do hope this rare quality conscious company will script a comeback âŚbut not betting my money on it.
( Disclaimer - these are not hard facts. Only through conversations with new home owners ,friends ,family and observations over a period of time i have come to this conclusion. Exited the stock because of the same)
Thanks lynchfan for replying⌠I completely understood your points. Clearly there are some drawbacks with Hawkins that it is not launching new products proactively, had supply issues in the past 2-3 years and also not spending much on brand awareness (3-4% of sales vs. 6% for Prestige), thus losing market share to competitors. This is reflected in the discount it is trading vs. prestige (35x vs. 45x).
But these issues can be very quickly resolved if the management decides to launch new products & increase brand awareness. It can easily build on itâs brand and industry experience. If it happens, I donât see a reason why Hawkins will be trading at a discount vs. prestige.
All I am trying to understand is whether these problems are temporary in nature or has become a permanent issue for the company (i.e. eroding moat). I think in the AGM, management should be providing some answers as they have cut the dividend also. It seems that they are utilizing the funds in developing new products.
I donât think the valuations will go much cheap than the current levels as it is a div. yield play also.
In your hypothesis there is an assumption that moat of Hawkins is existing (in form of brand + distribution). From little bit of scuttlebutt i think there are a lot of local players Varun, Prince etc competing really hard.
So while problem may be temporary, in this period moat could have been reduced.
With due respect, as per my limited knowledge there is a clear quantified evidence that the moat is there as the business is earning > 50% ROCE (EBIT/Capital Employed i.e. FA + WC) for the past years despite all the supply chain issues, losing of market share.
If the co. doesnât have moat then how it can earn such high returns (no debt) and generate such high FCF?
For me, the most imp. thing is whether the co. is able to sustain the moat or not in future and whether the industry in itself will grow in the long run or not. And it is a fact that the management is gold standard and they should be coming up with new products (as they know the business much better than everyone).
I think the price correction is driven by investors impatience (i think it is a 5-10 yrs story). I donât see probability of capital erosion from this point in the long run.
I may be completely wrong here but that is the fun part about investing i.e. diverse view points on the same thing
Fundoo, this company has historically under invested in supply chain and retail side of it. The competition is getting intense from all sides. In the lower range, we have many home grown brands while in upper range Alba, Bergner etc are coming. Ratios look strong since there has been underinvested and equity is trimmed due to dividend payments. Things will be clearer if they start investing back into business by cutting dividend. That will sink stock price further. The company on its part is jacking up advertisement but it will only show up only when overall demand picks up. The fact is even if they launch new product, it will require higher working cap. resulting in weak income statement in the mean time.
Thanks sumi00 for your view. I completely agree with your views. I want to know your opinion on the following scenario?
They have already cut dividends, i can only think of one reason of why they have cut it i.e. to launch the new products. Now if they announce their intention of introducing new products during the AGM in August, also announce that they are going to increase the advertising spend to boost brand and will not increase the dividend for the next 2-3 years. This will mean depressed earnings in the near term say 2-3 years but very good for the long term (given the management pedigree and the brand that they have and high ROCE and FCF generation).
How do you think the stock will react to this information? I think the stock will go up and that too quite sharply.
To me the bad situation will be if they donât announce anything in AGM and remain oblivious of the increasing competition and the reality of the industry dynamics. But I am failing to understand why a sound ethical management will let this do to a wonderful business?
All those who are bullish on Hawkins need to keep in mind that many AGMs have come and gone now but earnings have remained same. Wait for concrete outcomes through earnings rather than announcements/grapevine which will be few and far between. You need to keep in mind why they are not launching new products. Tell me which segment of cookware/home appliances dealers will stock on cash? Eitther Hawkins need to change its ways of doing business or come out with such a massively innovative new product. Take your pick which is more plausible scenario.
My bad. I didnt articulate it well. There is no doubt past returns of capital are clear proof of moat. But, what i am concerned or saying is that this moat might have been eroded with competition (branded+Local) chipping in.
Hence, to extrapolate that this moat is existing might be tricky.
Thanks all for replying⌠Really helpful views⌠Completely agree that it is prudent to wait for the management action/commentary and signs of improvement in results before buying Hawkins. As aptly put by Mr maheshwari,donât buy in anticipation but buy when you see the early signsâŚ
Hawkins has a high RoE and RoCE but due to its high dividend payout, growth is low. Its 10 year average sales growth is just 17%. Further its profit margins are erratic which makes it difficult to predict earnings. However, it is debt free and very little downside risk due to dividend yield protection.
Hawkins has atlast introduced new product,New Ceramic Coated Contura Cooker and website is redesigned a bit too.Home page shows the Product was launched on 1st July,2015.Hoping this will provide much needed kicker to the stock
Does anyone know when they will introduce induction cookers across all the categories ? I understand from the website that currently induction cookers is available only for futura that too in the 3 and 7 ltrs segment - is this important for future sales to kick in or what more does the mgmt need to do from a new product introduction standpoint ? Anyone kindly share your perspectives would be thankful
New products has to be âNew Productsâ and I am not too excited about extending the cooker range with induction/ceramic or whatever. We know that management is very much capable of delivering high RoCE and therefore any âNew Productâ (like a Induction Stove) should significantly contribute to the bottomline and dividend growth.
Annual report is out. The first page is colorful with an image of new products. (3 cookers in mustard yellow, tomato red and apple green colors). This reminds me of iphone innovation with different colors
Disclosure : I do hold for quite sometime and bought more at around the CMP with the expectation to beat FD returns by 2-3 % in the long run .
Key takeaway from Annual Report of 2014-15
: As compared to 2013-2014, company spent an extra amount of around 11 Crores in Advertising (5 Cr.), Dealer Conf (4.5 Cr) and R&D (1.5 Cr.). Also, company expenses R&D to PL statement.Inference drawn from above after considering tax of about 33%, this expense masks an EPS of around 14 rupees.
Please do share your notes in case you made some while going through the AR.
In case anyone is attending the AGM, Please do a favour to update the thread with AGM notes.
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