Ideas for Profit | Hawkins Cooker: High RoCE business available at reasonable valuations
– Hawkins Cooker has a proven track record of high return ratios
– Second largest player in the market
– Increasing gas penetration to propel demand for pressure cookers
– Weakening metal prices to aid margin
– Trading at a discount to peers with similar return ratios————————————————-
Consumer-centric businesses, which generate consistent high return on capital, have been a favourite among both domestic and international investors as this translates into hefty returns in terms of stock performance over long periods of time. Such companies also offer safer investment proposition in the current scenario as the market volatility appears elevated in light of the upcoming elections and concerns of a global slowdown.
Hawkins Cooker, the manufacturer of pressure cookers and cookware, is one such company that has delivered a return on capital of more than 50 percent in each of the last 10 fiscals. The company merits investor attention as the current valuations are at a steep discount to its closest competitor: TTK Prestige. The recent fall in metal prices augurs well for the company.
Operational performance better than TTK Prestige
TTK Prestige and Hawkins Cookers are two of the largest players in the Indian kitchen appliances market and are extremely popular household names in the country. The former has a much broader product portfolio, which spans pressure cookers to appliances to cook tops and chimneys. In contrast, Hawkins operates in two major business segments: pressure cookers and cookware. The pressure cookers are marketed under the flagship brand Hawkins and also under Futura and Miss Mary. Cookware is sold under the Futura brand name.
Despite being one-third of the size of TTK Prestige, Hawkins scores over its larger peer on most operational parameters. Hawkins has a much higher efficiency in terms of asset and inventory turnover, which translates to a lower cash conversion cycle and high return on capital.
Fall in commodity prices to aid margin
The bull run in metal commodities dented operating margins of most companies in the last 12-18 months. Hawkins, being no exception, also witnessed a 160 basis points (100 bps=1 percentage point) contraction in operating margin from 14.4 percent in FY17 to 12.8 percent in FY18, primarily due to steep rise in aluminium, the key raw material for the company as it constitutes around 17-18 percent of revenue. To mitigate the increase in input costs, the management undertook a price hike of 4-5 percent in both pressure cookers and cookware segments in April.
London Metal Exchange benchmark for aluminium, which touched levels of $ 2,400 per tonne in April 2018, has moved lower during the past 6-9 months and is now trading at around $ 1,800 per tonne. Softening metal prices and price hikes augurs well for the company and should result in an 80-100 bps margin expansion in the coming fiscal.
Increase in household gas penetration
In May 2016, the Centre launched Pradhan Mantri Ujjwala Yojana (PMUY) – which aims at providing free cooking gas to below poverty line (BPL) families. The scheme together with a government push, to replace polluting firewood in kitchens with cleaner fuel, aims to increase complete penetration of LPG among Indian households. The rollout of LPG connections is going ahead as planned, with six crore connections being issued in the first week of 2019 against an initial target of five crore connections planned by March .
In terms of infrastructure, the government envisaged increase in gas coverage through expansion of the city gas distribution (CGD) network. The tenders for the 9th and 10th CGD bidding round are anticipated to cover 86 and 50 geographical areas, respectively.
Roll out of gas connections and increasing gas penetration has the potential to propel demand for pressure cookers in the rural households as the urban market is becoming a replacement market due to high penetration levels.
Subdued topline resulting in stagnant stock performance
Hawkins’ revenue has been fairly stagnant in the past three years. However, operating profit growth of 15 percent (over the same period) has been primarily aided by margin improvement. Slow topline growth has been the primary reason for the rangebound stock performance despite its stellar return ratios. As such, the company trades at a steep discount to other players with similar returns and offers a higher margin of safety relative to peers.
The company is staring at an optimistic future as government initiatives along with new product launches should propel sales higher. Operating margin are also anticipated to improve on the back of weakness in metal prices.
Patient long-term investors can look to add Hawkins as a low-risk portfolio stock as the business has the potential to offer twin benefits to its shareholders — dividend (yield of 2-2.5 percent) and capital appreciation — over the long run.