Hope you all are doing well.
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.