Stock Focus: Hawkins Cookers - A compelling buy

Here's a quick update on the portfolio front. 

I have been bullish on Whirlpool of India as written here and in the result update too. However, with the limited capital at our disposal one needs to constantly evaluate all possible opportunities on a relative basis and choose the one which offers best future return on current investment. 

 So based on that relative merit basis, I have exited Whirlpool of India and switched the investment to a new stock. Let's see why.

The one stock which looks a compelling buy at present levels in Hawkins Cookers. In their 25th Oct 2012 announcement to BSE the company declares, 

"......we have to advise all concerned that we have received a No Objection Certificate dated October 22, 2012 from the Punjab Pollution Control Board for our Hoshiarpur factory for manufacturing 5,200 pressure cookers and their components per day, as applied for by the Company.

Further to the mention made in our Directors’ Report dated July 02, 2012 we have to report that the Industrial Relations situation in our factory in Jaunpur district has been largely resolved by the signing of a Wage Agreement between the Company and 85% of the workmen and the registration of the said Agreement on October 20, 2012 by the Assistant Labour Commissioner, Varanasi."

 Recall the chairman's speech at AGM 2012, 

"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.  As a consequence, the results for June quarter 2012 are disappointing. 

Had we similarly produced 27% more pressure cookers in the Hoshiarpur Factory in the June quarter 2012 than what was produced by the factory in June quarter 2011, and the factory is quite capable of doing so as its stands today, the Company would have had an extra 154,000 pressure cookers to sell in June quarter 2012.  Our pending orders as of the end of June quarter 2012 were 148,000 pressure cookers.

With the said extra production from Hoshiarpur Factory, we would have been able to reduce the pressure cooker pending orders to about 10,000 units and increase the sales in June quarter 2012 by 138,000 units.  This sales increase would have given us an extra revenue of about Rs 18 crores and an estimated extra net profit of about Rs 3 crores.  On this analysis, our sales for June quarter 2012 would have been over Rs 100 crores and our net profit would have been about Rs 8.3 crores 

So based on that let us focus on what the company can achieve over the next one year.  Remember, we need a benchmark when everything was working fine for the company not the troubled last few quarters. So we take FY10 as the benchmark for this.

UPDATE (12th Nov): Hawkins have a typical seasonality in sales, as pointed from the last 10 years quarterly numbers. We need to incorporate that seasonality in our projections.

TABLE 1: 10 years quarterly sales break up for Hawkins Cookers

	FY12	FY11	FY10	FY09	FY08	FY07	FY06	FY05	FY04	FY03	10 Yr Av	5Yr Av
Mar	28%	31%	28%	31%	30%	34%	33%	29%	32%	34%	31%	30%
Dec	24%	24%	26%	25%	26%	25%	26%	31%	28%	25%	26%	25%
Sep	27%	26%	26%	25%	24%	25%	25%	21%	24%	24%	25%	26%
Jun	21%	19%	19%	18%	20%	16%	15%	19%	16%	17%	18%	19%

 TABLE 2: Projections for next 4 quarter

Quarter	5 Yr Avg	Reported	Constraint	Total	From Annualized
Mar-13	30%			0	156.19
Dec-12	25%			0	132.95
Sep-12	26%	113.84	18	131.84	134.65
Jun-12	19%	82.52	18	100.52	100.52
					524.31

 
So Dec-12 and Mar-13 are projected based on annualized figures on a no-constraint basis. While Jun-13 and Sep-13 are based on 15% annualized growth over no-constraint productions in Jun-12 and Sep-12 respectively.

	FY13	FY14	Growth
Sep-13	100.52	115.60	15%
Jun-13	134.65	154.85	15%

 So we arrive at the next 4 quarters of sales as follows:

Dec-12	Mar-13	Jun-13	Sep-13
132.95	156.19	115.60	154.85

Based on that and achieving near optimum levels of OPM and NPM as compared to FY2010 we have the following:

Quarter	Dec-12	Mar-13	Jun-13	Sep-13	Next 12M	FY 2010
Net Sales Turnover	132.95	156.19	115.60	154.85	559.59	286.22
Other Income	1.09	1.11	1.14	1.16	4.50	3.07
Total Income	134.04	157.30	116.73	156.01	564.09	289.29
Total Expenses	113.01	131.20	95.95	128.53	468.68	230.01
% Expenses	85.00%	84.00%	83.00%	83.00%	83.75%	80.36%
EBITDA	21.03	26.10	20.79	27.48	95.41	59.28
% Operating margin	15.82%	16.71%	17.98%	17.75%	17.05%	20.71%
Depreciation	0.60	0.60	0.61	0.61	2.42	1.71
EBIT	20.44	25.50	20.18	26.87	92.99	57.59
Interest	0.75	0.77	0.80	0.82	3.15	1.69
PBT	19.69	24.73	19.38	26.05	89.84	55.88
Tax	6.38	8.01	6.28	8.44	29.11	19.04
Net Profit	13.31	16.71	13.10	17.61	60.73	36.84
% Net margin	9.93%	10.63%	11.22%	11.29%	10.77%	12.73%
Basic EPS	25.16	31.61	24.78	33.30	114.85	69.67
Current Price	2090
EPS (Next 12M)	114.85
Forward P/E	18.20
EPS (Last 12M)	57.87
Growth (1yr Fwd)	98%
P/E to Growth	0.18

 

So it is clearly evident, on a forward basis, the stock is relatively inexpensive and merits fresh investment with the strong visibility of growth.

Looking at the operating and net margins of the past, it seems there is only Upside risk in the projections and EPS can cross 130+ ( 120-125+) given better quarters. So based on 122+ EPS 115 Rs EPS over the next 4 quarters coupled with a 50 Rs dividend, the stock should yield more than 50% returns from current levels.

Hawkins truly presents an unique combination (most ethical promoters + superb product demand + established brands + robust RoE/RoCE + strong cash flows + scalability + high dividend payout + high growth ahead ) which is rare to find in Indian markets. Hence, don't want to give this opportunity a miss.

Recent article from ET supports this view.

Welcome your comments and response on this.