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 30^th for the FY13 AGM and FY14 Q1 results. Happy Investing!!!

Disclosure : Invested with highest allocation to Hawkins in portfolio.