Portfolio stocks: Annual stock performance against Earnings and Expectations.

Post the NDA win at the center the euphoria has touched upon almost all stocks, with most small and midcaps rallying 50-100%. Here's a quick look at the performance of portfolio & watchlist stocks over the past one year period.

Note: Adjusted EPS is arrived at by adjusting for one off expenses and revenue items. As obtained from screener.in

The stock price growth being a resultant product of earnings growth and expectations growth, some stocks have rallied on the basis of superior earnings growth supported by moderate PE expansion (Ajanta, PI Industries) while in case of others there is huge increase in expectations (Astral, Mayur) with moderate earnings growth. 

Perhaps the showcase example from this lot is that of Kitex Garments, which shows a strong earnings growth(95%) coupled with huge P/E expansion(98%) is the best recipe for success. The stock posted a 1 year trailing returns of 286% !!!

Also, stocks with muted earnings growth and high expectation look expensive but only on a trailing basis. Their low earnings base will help them post superior earnings growth, which at the existing P/E too will yield superior returns. Case in point being Hawkins Cookers.

One might argue that trailing P/E being meaningless as the market tend to discount forward earnings only. However, in cases like Astral Poly - where a lot of expectations are already priced in - significant upside in price terms can only be realized if the company is able to sustain and build upon the already expanded P/E backed by superior earnings.

Pearls of Wisdom: Basant Maheshwari on Hawkins

I received a few negative responses regarding the intent of sharing the Hawkins post on TED. This is to re-iterate, that the whole point of blogging is to better interact with other fellow investors and develop counter arguments and dissections on your investment themes.

Hawkins has been one of the prominent ideas of Sri Basant Maheshwari, a much discussed and well documented stock idea since September 2006 when it was first discussed on TED.

The Hawkins post was necessary to highlight that the company is in a somewhat special situation which calls for a compelling buy based on earnings forecast for the next 12 months. Most investors are skeptic of investing in growth stocks at high price and high P/E multiples (TTM).

Going through the Hawkins thread yields great notes of wisdom from Basantji on these points. Here we look at few of his quotes with respect to stock investments in general (and in few cases Hawkins in particular). I encourage you to go through the complete thread on Hawkins at TED.

No position is too big for a stock that is going up and no position is too small for a stock that is headed down. 

Analyzing the variability of a business can be learnt through experience and that experience is a never ending process, the easiest way to go about it is focus on a few variables like RoE, Moat, entry barriers, Capex, demand drivers, Management etc. One of the more easier ways out is to read as much as you can about the great man called Buffett, personally we are all in the learning mode and will continue to remain so because investing is an art and not science but my thought is that the path less traveled has the maximum fruit. Everyone can get the Eps, Pe, yield, Book value through some free website and that is what makes the other path less traveled.

While analysing companies I try and work out numbers such as sales per rupee of Fixed Assets and Sales per rupee of WC. Once you do that you see that smaller amounts of fixed assets and WC have generated large amounts of sales .

The first thing is forget the past and disassociate yourself from where this stock has come from. Just think that you are not aware that a stock has been a 7 bagger in the last 12 months, that will make your analysis easier.

I normally look forward because TTM (Trailing Twelve Months) is already in the price and if you can identify the difference between the consensus and your estimates in the forward earnings you are on track to make decent money.

The big money is made in foresight and not in hindsight. Everyone knows that forecasting comes with errors but that does not mean that you keep looking at the rear-view mirror only.

So if a stock had moved up hugely over the last one year the real beneficiaries have been the ones who had an element of forecasting because they could have bet hard and heavy but had you bought it as another stock in the portfolio it would have created enough excitement and joy but not wealth.

Also cooker has been a low repeat business ever since it was invented. The key areas to look out for is new customers for existing products(cookers) and new products for existing customers (Non stick cookware) and not just repeat sales to existing customers (which will also come).

Not sure why people were surprised by the dividend a general glance at past annual capex, working cap profile and management strategy would have suggested that this company has no genuine use for cash and hence it will be thrown back. Capital allocation is an offshoot of management bandwidth so we can't draw a straight line across all consumer companies.

Sometimes investors lose the big picture by becoming prey to the paralysis of analysis. I have said many times before that Hawkins is better then competitors because of the sheer cash that it throws back. Very few companies have cash eps higher then eps by 30pc and this is one of them. 

At each price we wanted to buy it 10pc lower somehow this psychological price anchoring has no answer. We should be looking at where this stock is going rather then where it has come from. 

Strong distribution and Marketing cannot provide high pricing power. They can provide volumes. For example a cement company with deep distribution set up cannot sell cement at Rs 20 more per bag just because it has a wide distribution network. Just because the unorganized competitors are weak in terms of marketing power, scale and distribution doesn't enable these companies to make high margins on their products.

As Buffett says "It takes 20 years to build a reputation and  5 minutes to lose it if you think about that you will do things differently".

The P/E is decided by the collective wisdom of the market and it is futile to take any confirmed call on that though we do make educated guesswork on the drivers of Pe and how they influence the valuation but as investors we should be more concerned about earnings than valuations, the former influences the latter and not the other way round. 

 

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.