StoveKraft - Kitchen Appliances Company

The company was incorporated as Stove Kraft Private Limited in 1999 and converted into a public limited company in 2018.

Industry Overview

The kitchen appliances market comprises instruments or devices designed for smooth functioning of kitchen activities. Kitchen appliances are used mainly for food preparation, cooking, storage and cleaning functions. The Global Kitchen Appliances Market is expected to touch $253.4 billion by 2020, registering a CAGR of 6.4% during the forecast period 2014-2020. The kitchen appliances market can be segmented based on product structure into two categories - ‘Large/Major appliances’ which include refrigerator, dishwasher, microwaves, cooktops, ovens, hobs, and kitchen chimneys; and ‘Small/Minor appliances’ which include food processors, mixer grinders, blenders and juicers, coffee machines, kettles, grills and fryers.

In India, the kitchen appliances industry has traditionally been skewed toward unorganized players while a handful of organized players have dominated major regions and key urban markets. Urban markets account for a major share of total revenues in the consumer durables sector in India whereas rural markets have only now begun to contribute recently. The key ‘Large’ and ‘Small’ cooking appliances categories, the current market value is estimated at about INR 148.5 billion, which is set to reach INR 238.0 billion by end 2022, growing at a CAGR of about 9.9%. Major players currently operating in the Indian kitchen appliances market include TTK Prestige, Stove Kraft Limited, Gandhimathi Appliances Ltd, Hawkins, Bajaj Electricals, Preethi Industries Ltd., Glen, Faber, Kaff Appliances, Inalsa, IFB, Panasonic, and Phillips, etc.

Business

Stove Kraft claims to be one of the leading brands for kitchen appliances in India, and one of the dominant players for pressure cookers and amongst the market leaders in the sale of free-standing hobs and cooktops. It is engaged in the manufacture and retail of a wide and diverse suite of kitchen solutions under Pigeon and Gilma brands, and proposes to commence manufacturing of kitchen solutions under the BLACK + DECKER brand (under brand licensing arrangement with Stanley Black & Decker Inc.), covering the entire range of value, semi-premium and premium kitchen solutions, respectively. Its kitchen solutions comprise of cookware and cooking appliances across our brands, and its home solutions comprise various household utilities, including consumer lighting, which not only enables it to be a one stop shop for kitchen and home solutions, but also offer products at different pricing points to meet diverse customer requirements and aspirations.

Key milestones in the company’s journey are shown below:

The company has two manufacturing facilities, one at Bengaluru and one at Baddi in Himachal Pradesh. 80% of the products sold under the Pigeon & Gilma brands are manufactured in-house, with the rest being sourced from outside. Company has been gradually increasing the share of in-house production and this number is expected to go up even further in future. Both the manufacturing facilities are ISO 9001:2015 certified. The facilities also have a high level of backward integration, with ability to manufacture bakelite handles, critical components, and mould & die in-house. The Bengaluru facility is larger of the two with almost 2/3rd of it available for future expansion. It is an integrated facility comprising of 12 manufacturing units, tailored to manufacture cookware, cooktops, pressure cookers, mixer grinders, non-stick cookware, LED bulbs, floor mops, handy vegetable chopper, IR thermometer and induction cooktops. The installed capacities for each of the products are given in the RHP attached below.

In 2016, the company entered a new segment by launching the Pigeon brand of LED products. Presently, the products sold under the Pigeon LED brand include LED bulbs, battens, and downlights.

Product portfolio

Pressure cookers, mixers & small appliances and non-stick cookware such as frying pans constitute the main sources of revenues for the company. For the half year ended 30-Sep-2022, the revenue of Rs.577 crores was distributed as follows:

Pigeon – targeted at the value / mass market segment - is the flagship brand of the company, comprising around 80% of its total revenue. Product portfolio under the Pigeon brand is given below:

Gilma focuses on the semi-premium customer segment, and is sold exclusively through Gilma branded stores. Gilma portfolio comprises of chimneys, hobs, kitchen sinks and cooktops across price ranges and design offerings. It constitutes around 3% of the company revenues. BLACK + DECKER is a renowned name internationally in the field of, inter alia, kitchen appliances and constitutes another 3 % of the revenues.

Distribution Network

The company sells Pigeon and Black & Decker products through network of distributors and dealers whereas the Gilma products are sold through its own franchisees. The number of retail outlets as on 30-Sep-2020 where the products are available are given below:

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As of 30-Sep-2021, the number of outlets has increased from 45,540 as on 30-Sep-2020 to 63,428.

Almost 30% of the company’s sales come from online ecommerce channels.

The company also has a dedicated service team and service franchisees to address service calls.

Further, the Pigeon products are also sold in over 10 countries internationally, including the U.S., U.K. and Mexico. Around 9 % of the company’s revenues come from exports.

Management & Promoter Group

The founder of the Company, Rajendra Gandhi, is a first-generation entrepreneur with over 21 years of experience in the kitchen appliances and home appliances industry. Wholetime director and CEO, Rajiv Mehta was the managing director of Puma Sports India Private Limited and has previously worked with Arvind Limited.

As on March 31, 2021, the Company had 3,312 employees on its payroll.

Financial Information

The company showed losses till 2018 but has staged a smart turnaround thereafter. Brief financials of the business are given below:

EBIDTA margins for H1 FY22 were 11.4% but the company has been maintaining that around 13-14% margins are achievable in the long run.

Due to the past history of accumulated losses, company had a tax shield till Q1 FY22. For the full year FY22, company states profits above Rs.40 crores will become taxable, giving an effective tax rate of around 14% for the year (estimated). From FY23 onwards, the company will be liable for the full corporate tax rate of 25%.

Operating efficiency has been good, and consistently improving. Working capital days have reduced to just 23 days as of end-Sep 22, and outstanding debt is just a little over Rs.50 crore from more than Rs.300 crore a year or two earlier. Part of the debt reduction was on account of conversion of CCDs into equity, however. Company will soon become debt free. Company uses channel funding programme to manage its working capital, without recourse to the company.

The company claims a ROCE of 33.6 % and an ROE of 21.6 %.

Deloitte Haskins & Sells are the statutory auditors.

Risk Factors

In general, kitchen appliances is a very competitive field since the products are low on technological sophistication and does not require heavy capital investment. Hence margins are low and companies need to constantly innovate and bring out newer and newer products into the market. Companies also need to spend a lot on advertising, promotions and brand building.

The primary raw materials for the company are steel and aluminium, and is to that extent exposed to commodity price risk. Cost of Goods Sold comprises of around 65% of revenues for the last 12 months.

Besides the usual business risk factors, we find that the company has an ongoing dispute with Pigeon Appliances Pvt Ltd (PAPL), an associate company where the promoter Mr. Rajendra Gandhi is a Director. PAPL is a defunct company which has not filed its financials with the RoC for several years, and is facing the risk of being struck off the government’s company database. It has one more director besides Mr. Gandhi, who is not co-operating due to which there is an impasse. If the matter is eventually decided against Mr. Gandhi, he runs the risk of becoming ineligible to occupy the post of Director in any company, which will adversely affect Stove Kraft. The matter is currently deadlocked and stuck in litigation. Details of the case are given in the RHP.

Under its brand license agreement with Black & Decker, the company is required to achieve a certain minimum number of sales, failing which B & D may terminate the agreement. However, details of how much these sales are is not clear.

New initiatives

Recently, company has announced an entry into electric switches and accessories segment through acquisition of business of Bengaluru-based Skava Electric Pvt Limited through slump sale for a consideration of Rs.4 crores. This will help the company foray into the business of manufacturing low voltage switchgear solutions like electrical switches, sockets, distribution boxes, switch boards, M.C.B, bulb holders, etc. For FY21, Skava recorded revenues of Rs.10 crores.

Company has also announced foray into Branded Modular Kitchen Segment. In a press release, the company said a Pigeon Ready-to-assemble (RTA) kitchen with plywood kitchen cabinets, granite top, kitchen sink, chimney, cooktop & accessories shall be available to the customer from April 2022 at an all delivered starting price of Rs.69,990/-.

Listing and thereafter

In Jan 2021, the company made IPO of 1.07 crore equity Shares at Rs.385 per Equity Share of the face value of Rs. 10 each which includes a fresh issue of 24.68 lac shares and an Offer For Sale of 82.50 lac shares. The stock listed on 5-Feb-2021 at Rs.498 on the NSE and is currently trading at Rs.980.05 as on date of writing 13-Jan-2021.

Valuation

Due to the tax shield available to the company (as explained earlier) in the current year, profits are presently overstated. I have therefore ignored the P/E ratio and done comparative valuation based on Price to Sales and EV / EBIDTA which is given below:

Based on the above, stock is trading at less than 3 X Price to Sales and 25 X EV / EBIDTA which is middle of the range compared to peers.

Sources of information: RHP, Annual Reports, Company Presentation, Quarterly results, Analyst Concalls

Links:

Red Herring Prospectus
Annual Report for FY2021
Company Website
Skava Business Acquisition
Foray into branded Modular Kitchen segment

Disclosure: Analyzing, no positions at the moment.

23 Likes

Excellent writeup.

Also to note
a. company has acquired "SKAVA Electric Private Ltd” to enter into Electric Switches & Accessories segment
b. It is also planning to foray into modular kitchen segment as well.

These two are recent significant development - if nurtured well and managed, would open up a wider growth area for the company.

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Excellent Writeup.
Any Number about the cost of Capital Figure?

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From entry point of view it seems to have already shot up a lot in last 2 years

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As per recent concall ,skava was doing business of 30 crore few years back and due to COVID related disruption it came down to 10 cr. Company is paying around 4 cr to acquire it . Pigeon led bulbs are gathering market share in a gradual way , company claims to have leadership in induction cooktops

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Generally when a company ventures out of its core competence, it should be viewed negatively. Why it needs to go in LED bulbs where there are too many market players including MNCs like Philips.

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Imo kitchen and home appliances market is already saturated and compared to others like prestige, Hawkins their growth rate is higher (Ventura research report) . other players are also diversifying like Asian paints into modular kitchen , kajaria into plywood . Only time will tell if these diversified business earns revenue or not . One more observation is that piegeon products are priced less than competitor’s and that one reason for gaining market share . Stovekraft mentioned that their modular kitchen starts from 69000 which is comparatively cheaper

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@kumar_m_kiran Thanks. Both these points are mentioned in the ‘New Initiatives’ section.

@Harshad_Bhagwan No idea. Cost of capital can only be assumed, not calculated. It is more of an academic concept with little practical utility, IMHO.

@Ashusharma All these are low tech products, there is no core competency in making gas stoves, toasters or light bulbs. This whole appliance business is primarily a marketing & distribution game. Moreover, launching new products require minimal capital investment. Unrelated diversifications are dangerous when you are betting the house on it. But not here. In fact, these companies have to keep launching new products all the time. Whatever sells remains, what doesn’t sell is discarded. On the other hand, there is some buying synergy even with light bulbs. When one moves into a new house, he also buys bulbs along with gas stoves and mixer grinders. LED bulbs seem okay to me, not totally out of place.

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Bet on Stovekraft is bet on Rajendra Gandhi. Would help to know / understand how he thinks and capital allocation etc.

I have been invested since IPO and tracking story over last few quarters,

Strengths

  • Sequoia backed from early days, though they did exit being a PE
  • Pigeon is backbone of current success - has been early adopter of e-Commerce success
  • Company gets 30% + revenue from e-Commerce, much higher in times of Corona impact
  • Has been a Gross margin driven mindset and go to market- anything they do has to have 32-35% GM - with this philosophy and in house production control gets them typically 13-15% EBDITA in normal times, per mgmt they are very competitive at this profile hence continued succes in existing and new categories
  • Cost leadership via Manufacturing is their core strength and any new product ( initially launched as trading), on success gets to backward integration, aided by distribution strength across channels( online, modern, traditional)
  • Getting rid of Low margin biz ( low margin cooktop biz with oil mktg companies) and focus on core
  • 10% + revenues from branded+white label products exports - marquee customers such as Wal-Mart, margin profile similar as core biz
  • Aggressive promoter, demonstrated success in many new launches recently ( kettle, electrical appliances, LED under PLI etc), capital efficiency focus in new launches
  • Conscious on working capital and innovative ways such as channel financing
  • Aggressive channel expansion in last year - esp non south geo - 40K to 60K outlets reach increase- should help in coming times
  • Have been guiding 25% + growth for med term and last few quarters have delivered it, mkt as well rerated it - still discount to peer groups
  • Large land parcel in Blr (55 acre+) makes Capex lighter for new expansion thus healthy RoCE
  • Though have appointed a CEO, promoter is very hands on and relatively young(in late 40s)
  • Promoter daughter also involved in marketing
  • Increasing focus on brand building- higher spend on Advertising in coming times
  • Huge market segment opened with foray into Switches and Modular kitchen with each being 12-15K cr and they aim to get 2-3% mkt share/ 20% of revenue in 3-4 years - all of it per mgmt doesn’t require debt and small capacities addition with internal accruals
  • Strong balance sheet and return ratios
  • So far clean communication and governance - discloures, con calls, interviews, ESOP framework, promoter pay very reasonable ( though this is a recent listing so need more history)
  • Good growth in FY21 a covid impacted year, momentum continues in FY22

Areas to watch out

  • EBDITA and Gross margin trajectory per Guidance- slight dip in Q2 , per mgmt delayed price hike( could be Conscious choice to gain mkt share) and should get back as multiple price hike taken
  • scale up of Gilma and B&D is very different game than pegion
  • Mgmt bandwidth after recent acquisition ( Switches, Modular kitchen), though mgmt explained in call with investors, mkt may like to see
  • Aggression on new segments vs core areas focus( cookware, small kitchen appliances etc)
  • Not clear on CEO contributions/value adds - doesn’t stand out in calls etc., appears more focused on mktg and channel expansion.

Good consolidation on charts after good upmoves post listing ( nearly 2.5X), Q3 usually best qtr , believe opportunity size has increased multi fold after recent forays( execution to be seen)

Invested

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TAIYO GREATER INDIA FUND LTD is a new investor under Foreign Portfolio Investors with ownership of 1.45%.
Taiyo Greater India Fund is a buyout fund managed by Taiyo Pacific Partners. The fund is based in Kirkland, Washington and invests in India, and is managed by Sarath Sathkumara.

Sarath Sathkumara Seasoned global emerging markets investor with over 30 years of experience in international capital markets and investing.

https://www.linkedin.com/in/sarath-sathkumara-864b55bb/

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Seems the mentioned CIO has moved on to another fund from Oct 21 onwards, Stovekraft stake was picked in Q3, nevertheless fund indeed looks interesting and primary focus seems Japan and India.
Here is their philosophy- Japan vs India view is interesting wherein they could focus on enhancing the Reputation Value,

this fund do own good consumer and some pharma names in India.

At 3K cr mkt cap, stovekraft is at a good size to be on radar for fund houses and still can grow mutifold from here, promoter has been vocal about 25% med term growth (peers like butterfly etc growing at similar rates as well) and recent acquisition opens up new Optionalities of equal/bigger sizes. Interesting times ahead.

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Asian paint Q3 modular kitchen biz update - not same segment as Stovekraft which will be more lower price point. Gives an idea that strong growth trajectory for organized players given a small base.

In November, TTK Prestige also announced a foray into Modular Kitchen business. Looks like the space is really heating up…

https://www.bseindia.com/xml-data/corpfiling/AttachHis/9b6f6b3e-5f52-4496-9c7c-2b68f2855375.pdf

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Some pre cursor based on larger peer performance on what to expect in Q3 and Q4 given high base in FY 21 and some omicron supply chain impact. Explains subdued performance by stovekraft as well in current leg of mkt rally.

Key watch out would be ebdita margin normalization from Q2 to Q3 for stovekraft, management indicated delay in price hikes in Q2 impacted Q2 margins. They have guided for 33-35% GM range and 13-15% EBDITA in normal operations.

Bonus would be if they can do a decent top line growth YoY as last year seems high base for peers.

There is a sizable valuations Discount for stovekraft to ttk prestige - as execution picks up there is room for some catch up, stovekraft has advantage of smaller base and better asset turn ratios. Ttk is relatively established and well discovered.

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Q3 was severely impacted by margin compression, volume drops across categories.

  • Instance of mgmt not walking the talk - Q2 concall and media interaction which was midway in Qtr, mgmt commentary was to implement price hike and getting GM and EBDITA margins back to normal. Having a bad Qtr is okay but consistency in communication matters - will try and ask in call

  • Q3 presentation has been selectively clipped, no details on Return metrics, working capital etc.

  • Peer Butterfly also had similar issues and blamed subdued performance on Festival purchase preponed to Q2

  • Snapshot of peer comparisons, if any solace- stovekraft performance didn’t deteriorate as much as Butterfly,in YoY and QoQ( likely bcoz of some non common categories LED etc degrowth wasn’t much)

It appears as all players saw demand dwindling in compared to Q3 20, hence no one took price hikes given subdued sentiment ( also Q3 20 base was helped by pent up demand and low price inventory ) , 2 yr CAGR Noone is talking about but visible that average growth on Q3 2019 base.

Diversification by Stovekraft and ttk prestige also seems pre cursor to this space getting crowded. Interesting juncture as a industry seem to be seeing subdued demand on one side and RM inflation that one can’t seem to pass on.

On lighter note - Butterfly jumped by 10%+ post subdued performance reporting few days back - no explanations except that market was really baking worse :slight_smile: …need to see how stovekraft reacts.

Mgmt commentary in concall and pricing power key monitorable.

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Two companies, same sector, similar headwinds on inflation, similar performance detoriation, similar justifications for missing performance - post result Divergence quite stark - one is up 15% and within 10% of ATH, one is down 15% and 20% from 52 wk low

Market reaction post results

Dont know what else could reason be, Promoter perception matters, Esp,when stovekraft has recently announced foray into multiple new businesses - thus more the reasons to be nervous about

Q3 call not much to talk about

  • Mgmt as usual reassuring with next Qtr to be better pitch
  • Numbers keep moving- GM 32% and EBDITA 11-13%, slightly below from earlier quarters
  • Two facts shared - Lost 26 cr in eComm sales due to cloudtail destockin ( reorg), unable to ship export orders due to freight issues( likely low margin hence unviable)
  • Q4 and future Guidance communication still appears casual
  • Less substance more excuses
  • Pricing power is clearly an issue, though mgmt kept saying demand is healthy

With third qtr of underperformance mkt has punished( severely compared to peers), Q4 is likely a tough one as not many of headwinds are going away, trust deficit visible in mkt reactions to concall.

It appears that no point disagreeing with Mr Market till performance comes back on track.

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The current quarter has been a complete washout with respect to margins. The company claims the following.

  1. Installed Solar rooftop saving on recurring electricity expenses.
  2. Have inhouse manufacturing of glass lids and gaskets.
  3. Increased retail outreach.

With so many intitiatives, such a huge hit on bottom-end is surprising. The market has completely struck Stovekraft in the last two sessions. Clearly, the investors do not have much faith in Mr. Gandhi at this juncture. The point to be noted is that even before the IPO Stovekraft was under heavy debt which should be a question mark on Mr. Gandhi’s cash flow ability for the business.

I would also be interested in the position of Sequoia Capital. The have been invested in Stovekraft for long. Although they cashed out their principal with profits recently, their current stake stands at 9.91%. Do they get a board seat?

The management of Stove Kraft will need to do a lot more than just pushing the margins and Top line from here to enthuse investors.

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Article talks about mis managing expectations when we compared it with Butterfly Gandhimati.

Disclosure: Invested and added in crash.

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This is most likely the reason for Butterfly’s strength. The info would’ve been doing the rounds in some circles and those folks would’ve taken position here. For sure these people will come under SEBI scanner. On reported numbers,Butterfly rallying this big makes no sense at all especially in a very weak market where even stocks of companies with good earnings,outlook and valuations were falling.

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Lot of people got carried away with the sudden turn around in the company’s profitability especially the jump from 3 crores to 81 crores in FY2021. The FY2021 PAT is very high because of previous years’ losses to adjusts for taxes (0% taxes) and FY2022 may be flat or even negative in terms of profits. Plus this company’s margins is heavily dependent on metal prices. Investors (or rather speculators or people having FOMO) ignored the above points and drove the prices up to unsustainable valuation. A 40-45 PE for a company where margins are not very stable and having a low barrier of entry is unsustainable. I have been tracking this company since July 2021 and felt it was overvalued and hence refrained from investing and continued tracking.

Regarding your point on debt, this sector is capital intensive and has low barrier of entry. The only way to survive is branding. The company ran on losses for years in order to increase volumes and brand recognition. It didn’t have the profits to fund its growth and hence the debt. The company needed the debt. I don’t understand how it is raises a question mark on company’s cash flow management ability.

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