Saturday, July 13, 2013

Stock Update : Hawkins Cookers - Revisiting FY14 and FY15 growth ahead & Excerpts from AR 2013

We talked about Hawkins earlier in November, 2012 here. Post the resolution of pollution issues in Hoshiarpur factory and labor problems in Jaunpur factory, the optimism has not quite played out in the subsequent two quarters (Dec-12 and Mar-13) yet, however we believe that for FY14 and FY15 Hawkins remains amongst the top picks. Let's see.

Here’s a quick take on the FY13 AR and we try to look at projections for FY14 and FY15 in light of the inputs from AR. 

Salient pointers from AR

·         Jaunpur factory: The labor problem is not fully resolved yet. The agreement with 85% workers were validated as late as January 2013. On the production front, produce was up 35% YoY from this plant.
·         Hoshiarpur factory: The NOC and Consents were received by the Company through PPCB’s Orders dated October 22, 2012, and February13, 2013. So a full stream operation can be expected from Mar ’13 onwards only. Production is up 24% for Jan – May ’13 (compared to same period YoY).
·         Focus back on growth: Post resolution of above issues management can now once again focus on brand-building and growth through introduction of new products as well as the growth of existing products.
·         New product launches: Pressure cooker contributed 81% of sales for FY13. The AR introduces a new induction pressure cooker at 2300 Rs per unit, launched in July 2013. The contribution of new products in overall sales remains to be seen, however this can be a margin lever going forwards.
o   9 new product launches contributed to 3.2 lakh units of sales in FY13 compared to
    5 new product launches contributing to 1.4 lakh units of sales in FY12.
·         RM price volatility: Management clearly indicates that 3.3% price reduction in Aluminium is more than offset by a higher depreciation in INR vs. USD. In addition, Hindalco, the key supplier have increased Aluminum prices by 6.4%. To nullify this, management has taken a price rise of 7% from April 1, 2013.
·         Growth in exports: On the other operations, Exports have grown 57% YoY to 23.27 Cr in FY13 as compared to 14.83 Cr in last year. Exports now contribute 5.21% of sales.
·         Increased dividends, more of a signaling effect: After almost 3 years, management increased dividends even at the cost of payout rising to 78%. The AR reads, “Our recommendation takes into account the profitability, circumstances and requirements of the business.”
·         Management compensation: With increased profit sharing for CEO and other executive directors the management compensation is now at 6% of PAT
Executive Directors
in Rs Cr
S. Dutta Choudhury
1.42
M. A. Teckchandani
0.99
K. K. Kaul
0.90
Non- Executive Directors
0.64
Total Management Compensation
3.95
As percentage of PAT
6.1%
·         Advanced payments from Customers: Advanced from Customers under Note 9 shows a YoY decline to 3.85 Cr from 8.65 Cr.
·         Inventory: Inventory break up shows a significant rise in Cookware (up from 1.43 Cr to 4.37 Cr) pointing towards some sluggishness in Cookware sales, while there's a reduction in RM held in inventory (down from 17.48 Cr to 13.26 Cr).
·         Weakening demand pull: Increase in receivables from 31.19 Cr to 41.24 Cr shows a 32% rise as compared to a miniscule 4.8% rise in trade payabales, shows weakening demand pull amidst competition.
·         Poor cookware demand: Sales mix changed for pressure cooker and cookware to 81%: 14% (FY13) as compared to 79%:14% (FY12). While pressure cooker sales grew 19.4% YoY to 363 Cr, cookware sells grew only 10% to 61 Cr. This coupled with inventory buildup in cookware (which is an outsourced production as compared to manufacture of pressure cookers in-house) shows sluggish demand.
·         Increased Cost, Reduced margins: From other expenses (Note 23) some important aspects which emerges are:
o   Increase in subcontracting cost by 19% from 25.33 Cr to 30.09 Cr mainly due to supply side constraints for the greater part of FY13.
o   While overall sales have grown by 16%, increase in discounts offers by 19% from 32.34 Cr to 38.63 Cr points towards pressure on profit margins.
o   Expenses on dealer conferences increased 5 fold from 1.65 Cr to 8.01 Cr. Company is expected to increase dealer network now that supply side constraints are taken care of.
·         Increased service reach: Increased reach of authorized service center networks to 706 units with a pan India presences.

Projecting Sales for FY14 and FY15 

The sales growth of 19% in cookers comprised with 80% weightage in sales comprised of a 10% pass through of RM price rise, the rest from additional value growth (improved sales mix of high end cookers) and volume growth for last quarter (Mar 2013).

As indicated by a 34% growth from Jaunpur, 24% growth from Hoshiarpur we assume an overall 20% volume growth in cookers for FY14. The 7% price hike is mostly a pass through of higher costs and RM price hike from Hindalco. 

Assuming further price hikes and launch of higher margin cookers, we assume a 5% value growth. So in total we assume a 25% sales growth in cookers, with 80% weightage, points towards a 20% sales growth.

Particulars (Rs Cr.)
FY12
FY13
 YoY (%)
FY14
 YoY (%)
FY15
 YoY (%)
Sales (incl. Excise)
384
447
16%
542
21%
662
22%
Pressure Cookers
304
363
19%
454
25%
567
25%
Cookware
56
61
10%
67
10%
74
10%
Others
16
15
-5%
14
-5%
14
-5%
Other Op Income
8
8
-6%
7
-5%
7
-5%
Contribution







Pressure Cookers
79%
81%

84%

86%

Cookware
14%
14%

12%

11%

Others
4%
3%

3%

2%

Other Op Income
2%
2%

1%

1%

Particulars (Rs Cr.)







Net Sales (excl. Excise)
368
425
16%
515
21%
628
22%
Other Incomes
4
5
27%
6
25%
7
25%
Total Income
371
430
16%
521
21%
636
22%

Projecting the sales growth, with typical seasonality in annual sales, as observed in the last 10 years, we arrive at the following figures

Particulars
Jun
Sep
Dec
Mar
Annual
Dividends
10 Years Average Annual Sales Contribution (%)
18%
25%
26%
31%
100%
FY 14E





Total Income (Cr)
95.20
131.02
135.93
159.20
521.35
Net Profits (Cr)
7.10
13.13
10.13
15.90
46.26
Earnings Per Share (Rs)
13.43
24.82
19.16
30.06
87.42
60.00
FY 15E





Total Income (Cr)
116.14
159.81
165.80
194.17
635.92
Net Profits (Cr)
9.76
17.47
13.87
21.15
62.24
Earnings Per Share
18.45
33.03
26.22
39.99
117.70
80.00

So in effect, the better sales growth and improved operating leverage with an increased product mix results in a better growth in bottom line.
FY13
FY14E
FY15E
Sales Growth
16%
21%
22%
PAT Growth
13%
36%
35%
EPS Growth
13%
36%
35%
Current Market Price
2,200
35x trailing P/E
2257
3,060
4,119
Dividends
50
110
190
Price with dividends

3,170
4,309
Returns (CAGR)

44%
40%
Return on Date

Jul-14
Jul-15

Since as of writing this (14th July, 2013) the stock is trading cum dividend (Rs 50) we have added that in price with dividends as well future payouts for 1 and 2 year timeframes. Also, paying 35x trailing for a 35% grower seems to be on the higher side of expectations. Hence, we look at a P/E de-rating scenario too.

Keeping everything else unchanged, a P/E de-rating to 26x or lower significantly reduces the upsides.

Trailing P/E (x)
Returns (CAGR)

Jul-14
Jul-15
23x
-4%
15%
26x
8%
22%
29x
20%
28%
32x
32%
34%
35x
44%
40%

As pointed out earlier,  there are some sluggish pointers to growth such as slowing cookware sales with cookware inventory buildup, reduced advances, higher discounted sales etc. However if the production recoveries are anything to go by there’s significant upside for the next two years.

Given the extremely high P/E assigned by market @CMP coupled with extremely low liquidity investors are advised to consider the bear case and plan an exit strategy as well, if things do not go as per expectations.

Let’s look forward to July 30th for the FY13 AGM and FY14 Q1 results. Happy Investing!!!

Disclosure : Invested with highest allocation to Hawkins in portfolio. 

5 comments:

  1. Hi Rudra, Prestige did a good job in Non-south market. Do you think Hawkins is going to do well in Northen market for June Quarter?

    ReplyDelete
    Replies
    1. Norther market is primarily Hawkin's stronghold. Now with supply side issues I am assuming growth to resume as highlighted above.

      Delete
  2. Hi,

    Would you be attending the Hawkins AGM ?

    Regards

    Ashok

    ReplyDelete
    Replies
    1. No, I would have loved to, but certain social commitments won't allow me.

      Will pass on a few queries to fellow investor friends and get a feedback post AGM.

      Delete
  3. Looking at the actual q1 no's it seems TTK has taken away a lot of mkt share in northern mkts. Not a good sign for Hawkins. Also given that induction cooker sales are down for TTK & other players it's unlikely that this new product will change it's fortunes. It will take a major effort from Hawkins to even grow revenues 10-12% IMO.

    ReplyDelete