Investment Advisory Service

Saturday, 27 September 2014

Hawkins Cookers Limited- My journey as an Investor


The first time I came across Hawkins Cookers Limited was in 2006. The stock was selling at 90 and the dividend was Rs 5 per share. Dividend yield was close to 5.5%.
I casually looked at it and left it at that. No particular reason : I just sucked my thumb.The stock didn't wait for me and moved up.

In 2009, a friend of mine : Vibhu Natrajan mentioned Hawkins to me when I met him in Chennai. The stock was quoting at 250 then. My mind became closed to that idea because the stock had already gone up almost 3 times since I first saw it. I had been deprived of the profits which I could have earned : Classic Deprival Super Reaction. I felt bad about  the missed opportunity and decided to not look at the stock. Also, I did not had any clue about the quality of Hawkins or the process to judge the quality of a business per se. I missed Hawkins again.

In 2010, Prof. Sanjay Bakshi and Priyank Sanghavi co-authored an investment note on Hawkins Cookers explaining very well the quality of the business and the management. The stock was quoting at 650 by that time [2.5 times up from 250]. I understood the quality of the business a bit and I liked the management as well. But I was not very sure about the process to gauge the intrinsic value of the business. By the crude methods of EV/ EBITDA  and Mkt Cap/ PBDT, the stock seemed expensive. I didn't buy.

In 2011, Hawkins Cooker announced a dividend of Rs 40 per share. The price around that time was Rs1000 per share. The dividend yield became 4%. Being moderately convinced about the business and the management and stock again with a 4% yield [The Ben Graham in me woke up], I invested a small part of my portfolio in Hawkins. Within a year, the stock was quoting at 1700 while the company experienced twin problems of a stay on production by the Punjab Pollution Control Board and a workers strike in the Jaunpur factory. Feeling unsure about the capability of the company to tide over these crises, I sold my shares at Rs 1700.

In early 2014, I did a thorough work on Hawkins Cookers. After diving deep into the workings of the business, I emerged fully convinced about the quality of the business , the quality of the management [Both were of gold standard in my view] and the unmatched capability of the company to weather any crisis which might come its way. My intrinsic value estimate was around 1600 per share [based on DCF] while the price hovered around 2000 per share. Being used to buying businesses with a margin of safety, I found myself in a difficult position to take such a close call. I again decided not to buy.

As of today : Sep 27th, 2014, the stock is quoting at 3000 . In the last 8 years, the stock has moved up from Rs 90 to Rs 3000 excluding the dividends. And there were multiple opportunities during this time to become a stockholder of this wonderful company. Not buying the stock was a missed opportunity. There were wide gaps in my evaluation of businesses, their managements, the valuations and most importantly my own behavioral biases.

The whole objective of this exercise was to look back, chronicle a particular stock which will help me figure out the gaps in my understanding of businesses and my biases. I am confident that I will be able to plug those gaps by reading, learning, observing and practicing. As investors and students, we should look back at our investments, our mistakes and continue to improve the process.
 
As Charlie Munger says : "Investing is the only thing which you become better at as you grow old."
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I read the latest annual report of Hawkins , the chairman's speech delivered at the AGM and the checked out the latest results.

How is the business ?  

It is one hell of a business. Only 2 organised players in the market [duopoly] , low bargaining power of customers and suppliers, no threat of imports, low threat of new entrants, very strong brand equity in the market, low threat of substitutes. ROCE / ROE of around 80%, low capex requirements and high dividend pay out ratio. Strong tailwinds of nuclear families, higher penetration and a move towards premium products. Volume growth of around 12-13% for the last few years and an annual average price hike of 3-4%. Owing to these factors, it is easy to conclude that the top line and the earnings of the business will continue to increase for  a long time to come.


How is the management?

Fantastic. Absolutely ethical, honest and focused on the business. Very difficult to find such managements . As mentioned in the note earlier, the management is of gold standard. Chairman's speeches delivered at the AGM are again gems of their own kind. I think they should be read by every student of business and otherwise. They are available on the website of Hawkins Cookers Limited. www.hawkinscookers.com

What about the price ?

This is where I am stuck again. My current intrinsic value estimate of the business is close to Rs 2000 per share. The current price is Rs 3000. I like the business, I admire the management but paying a high price for the business would be a mistake. Almost 235 years ago, in this letter Ben Franklin advised : "Don't give too much for the whistle". I agree with Mr. Franklin and have decided to wait for the right price.

Tail piece : The timing and the prices mentioned in the note might be slightly out of place. 8 years is a long time and memories fade. And it will be too much of an effort to go back and check out for the exact timeline and prices.

This is not an investment advice to buy or sell shares of Hawkins Cookers Limited.

14 comments:

Value said...

Nice post! Happens to me all the time! : ) Are you going to post your valuation?

Nishanth said...

Fascinating accounting of your investing mistakes with respect to Hawkins. I can certainly relate to your situation as I myself am split between paying a margin of safety to the intrinsic value of the Business ( more Ben Graham ) or paying up for the quality of the business and management (Buffet/Fisher).According me , unless you get some sort of 2008 situation , you really can't get these companies at Ben Graham prices.Here another way to look at it , as Professor Bakshi described , would be to take your margin of safety from the quality of business and the sustainable moat it has along with the quality and longevity of earnings. For such a business ( very rare and few ) like HDFC, TCS, Pidilite , you wouldn't necessarily need a margin of safety.Of course , it all depends whether our evaluation of the business is correct or not :)

Ankur Jain said...


Thanks Value.

For valuation, I do a simple DCF of the PAT earnings minus any depreciation more than what is already provided for. Assuming earnings grow for 10-12% for the next 10 years and a terminal growth rate of 2-4% depending on the company. And discounting to the present value at a rate of 10%.

Ankur Jain said...


Thanks for your comment Nishanth.

Manish said...

isn't terminal value of 4% a bit on the higher side??

Ankur Jain said...


Manish,

1. I assume this figure in only a few companies where I am almost sure about the growth.

2. I am already conservative in taking the growth of 10-12% for the first 10 years. Companies like Cera etc. have grown at rates of 20%+ in the past and are likely to grow at rates more than 10% for the next decade. A further lower perpetual growth rate figure will depress the actual valuation.

3. Real inflation in the economy is more than 7-8% p.a. [actual inflation experienced by people for quality goods, not the inflation reported by the Govt.]. Such inflation is likely to continue atleast at 4% p.a. So, I believe that earnings for some of my investee companies will continue to grow at atleast 4%.

regards

Ankur

Shreyans said...

Nice one! Can relate to a few instances myself.

Manish said...

Hi Ankur,

Thanks a lot for a detailed reply..

Yes, I was also thinking that you have been extra conservative with your growth estimates of 10-12%... I have normally taken a terminal growth rate of 2%, but as you have rightly pointed out, this normally depresses the overall valuation..

I also think the overall inflation level will hover around 5-6%..at retail level it will be around 8-10%..it is already 22% for fruit inflation, 15% for food inflation, and 10% for fuel inflation..so, companies will grow at 5-6% easily in India..

I hope you would write more and not necessarily on stocks but also on general company analysis...we tend to learn a lot, vicariously :)

Anil Kumar Tulsiram said...

Thanks Ankur for sharing this...

I had my own big miss when I was too rigid on valuation and was focused only on low PB and low PE....

Valuation, am still trying to figure out the best way... But stopped using DCF ... May be I have overused it during my sell side stint...

Ankur Jain said...


Hi Manish,

Will keep your suggestion in mind. If I do some analysis in future which is worth sharing , will surely post it.

Thanks

Ankur

Ankur Jain said...


Thanks Anil.

Vinay said...

Many Thanks Ankur for sharing your experience.

With right to go wrong, I suppose with Companies enjoying strong competitive advantage, operating with easy scalability at low reinvestments levels- Total Market Opportunity * Market Share shall be more apt than DCF to come at valuation levels.

Regards
Vinay

Mukul said...

Hi Anuj,

Hope you are well.

I am Mukul an alum of MDI Gurgaon. I attended Bakshi's sir lectures and also attended one of the sessions where you talked about special situations. I have just started my investing journey and currently in a learning phase and focusing on building a sound investment philosophy. Currently I am taking a deep dive into the Hawkins and like the company. But just trying to understand if it is a case of eroding moat or not. I have following questions and will be really grateful:

1) GROWTH: It is much said that cookers are highly under penetrated in the rural market (20% penetration) so there is whole lot of scope for growth. I am trying to understand if hawkins/prestige has a strong brand association in rural areas so that they can enjoy price premium over other branded/ unbranded players? Or they have to lower their margins to chase this growth. Or they can manage to grow at a rate of 10-15% w/o much penetration in the rural areas by new products, replacement demand etc?

2) INPUT COST: It is clear that hawkins is easily able to increase prices as raw material costs increase but it seems that they are not able to pass it fully (which leads to a decline in the gross margins that happened in 2015 leading to margin contraction). As we know commodity prices move in cycles so can we ignore the impact of raw material inflation if our investment period is long (say 10 years) or it is an imp. factor to consider?

3) CO. SPECIFIC ISSUES: Are there chances that the co. can run into the labor problems/ pollution issues again in future leading to supply constraint (and losing market share to competitors) in future, as happened in past?

4) BAD FY15 RESULTS: From my analysis it seems that the gross margin decline, coupled with higher advertisement spend resulted in decline in profitability in FY15. Is it because the co. is trying to regain market share which it lost in last 2-3 years or it is just due to raw material cost not fully passed on to the customers?

5) NEW PRODUCTS: It is widely anticipated that the co. is going to launch new products in the next 1-2 years, so does the co. need to raise the debt to spend on the CAPEX for these products or the co. can easily fund it with internally generated cash? I think the co. generates enough cash to internally fund new product development.

Thanks

Ankur Jain said...

Hi Mukul,

You have raised some good questions. I would need to go back to my notes and think about the points you have made.

Will get back on them.

Thanks

Ankur