hawkins fundoo
TRANSCRIPT
A Whistle Blower
Wednesday 14 July 2010
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Prof. Sanjay Bakshi
Management Development Institute
Wednesday 14 July 2010
The Man Behind Hawkins’ Transformation
Hawkins Cookers is a fifty year
old company which
manufactures and sells
cookware — primarily whistling
pressure cookers. Over the last
six years, Subhadip Dutta, who
is now CEO, has transformed
Hawkins from a mediocre
business to a great one.
The Transformation of Hawkins
For years before Mr. Dutta became Head of Marketing at Hawkins in August 2004, the
company’s stock price underperformed broad market indices. See chart below:
However, things changed from August 2004. This can be seen from the chart below which
shows how the company’s stock performed as compared to the broad market index. Hawkins’
stock price soared by a whopping 5,700% as compared to a rise of a mere 214% in Nifty. By
any measure this kind of performance is stupendous. How did this happen?
Our thesis is that when you combine a mediocre business which has the potential to become a
great one, with a brilliant manager who is capable of achieving that transition, then the
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outcome for owners over the long term is going to be very good. The chart below certainly
shows this outcome for Hawkins’s stockholders.
It is our belief that this kind of stupendous stock market performance, reflects, over the long
term, the fundamental improvements in underlying company’s operations.
That there were major improvements in Hawkins’ performance is something we will now
demonstrate with facts and figures. We will also show that this fundamental improvement in
coincided with the increase in Mr. Dutta’s influence over Hawkins. We will then speculate
that these two events i.e. (1) the increase in Mr. Dutta’s influence over Hawkins; and (2) the
fundamental improvement in company’s performance, are not coincidental and that one
caused the other.
That Hawkins has become a great business under the leadership of Mr. Dutta can be seen
from the chart below which shows how operating cash flow on capital employed has soared:
This outstanding result was caused due to a combination of (1) higher operating cash flow
margins; and (2) higher efficiency of capital invested in the business.
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Higher Operating Cash Flow Margins
The chart below depicts how, under the leadership of Mr. Dutta, the operating profit margins
of the company have risen over the last few years.
How was he able to accomplish
this feat?
There are two key reasons: raw
material costs and advertising
costs. The table on the left shows
that both have fallen quite
consistently over the years and
explain most of the jump in the
operating profit margins.
One reason why both costs fell as
compared to revenue is pricing
power inherent in the “Hawkins”
brand.
Our analysis shows that Mr Dutta
increased prices of Hawkins
Pressure Cookers and other
Cookware products soon after he
was appointed as Head of
Marketing in August 2004.
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Operating
Profit
Margin
Raw Material
as % of
Revenue
Advertising
as % of
Revenue
FY97 6.6% 48.2% 8.5%
FY98 5.4% 45.4% 9.7%
FY99 5.1% 42.8% 9.1%
FY00 4.8% 42.2% 8.1%
FY01 2.4% 44.8% 9.2%
FY02 -3.4% 41.0% 12.3%
FY03 -8.8% 32.7% 10.2%
FY04 0.9% 35.5% 7.0%
FY05 3.0% 39.9% 7.1%
FY06 4.8% 34.2% 5.2%
FY07 7.3% 39.7% 4.5%
FY08 9.5% 39.1% 4.8%
FY09 13.2% 37.7% 4.4%
FY10 21.4% 33.3% 4.4%
See table below:
FY97 to FY04 FY05 to FY09
Price Inflation in Pressure Cookers 2.3% p.a. 5.1% p.a.
Price Inflation in Other Cookware 0.7% p.a. 7.1.% p.a.
We will later show that these prices increases were accompanied by a rise in volume of sales in
both categories — which demonstrates the pricing power of the “Hawkins” brand recognized
and put to good use by Mr. Dutta as the figures in the above table demonstrate.
Rising product prices combined with falling cost of raw materials which was not passed on to
customers, resulted in
margin expansion.
However, as mention
earlier, another major
contributor to margin
expansion was the
significant drop in
advertising costs as
compared to revenues. See
table on the left.
Notice that the company
spent about the same
money in Rupees on
advertising in FY01 that it
did in FY09. However,
revenues in FY09 were
more than twice the
revenues in FY01.
This astonishing fact is
even more remarkable
given that Hawkins is a
company which sells consumer products for which demand is largely driven by advertising.
Clearly, Mr Dutta knows how to get the best bang for his buck from advertising…
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Advertising
Cost (Rs Mil)
Revenues
(Rs Mil)
Advertising cost
as % of Revenues
FY97 76 892 8.5%
FY98 93 949 9.7%
FY99 92 1,005 9.1%
FY00 87 1,080 8.1%
FY01 97 1,060 9.2%
FY02 116 945 12.3%
FY03 91 891 10.2%
FY04 68 968 7.0%
FY05 76 1,080 7.1%
FY06 65 1,246 5.2%
FY07 72 1,586 4.5%
FY08 89 1,876 4.8%
FY09 97 2,219 4.4%
FY10 115 2,613 4.4%
Capital Efficiency
Another astonishing fact about the performance of Hawkins under the leadership of Mr.
Dutta is that revenues increased while capital employed in the business decreased as the table
below demonstrates:
How did this happen?
There are two reasons.
One, the company had
ample unitized capacity
to increase production
without any significant
investment in plant and
machinery. Even at
present the company’s
factories, in aggregate,
are operating at less than
50% of installed
capacity. Increase in
business volume was
therefore accomplished
without any new net
investment in fixed
assets.
Two, the company has
managed its working capital brilliantly as the chart below depicts:
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Revenues
(Rs mil)
Average Capital
Employed (Rs Mil)
Capital Turnover
(Times)
FY98 949 375 2.9
FY99 1,005 430 2.7
FY00 1,080 446 2.8
FY01 1,060 495 2.6
FY02 945 549 2.1
FY03 891 464 2.3
FY04 968 362 3.1
FY05 1,080 348 3.6
FY06 1,246 317 4.6
FY07 1,586 228 8.1
FY08 1,876 212 10.3
FY09 2,219 255 10.0
FY10 2,613 98 30.1
Growth in Business Volumes
Mr Dutta’s astute distribution and marketing strategies have resulted in significant rise in
business volumes in both pressure cookers and cookware segments. This increased has been
achieved despite price rises, as mentioned earlier. See charts below:
Hawkins’ business volumes have grown at more than twice the rate at which the industry has
grown. How, and why did this happen?
There are only two national brands in pressure cookers and cookware in India. One, of course
is “Hawkins” and the other one is “Prestige.” Both these brands enjoy a combined market
share of about 50% with the remaining market share distributed amongst a large number of
regional players none of which have the scale economics enjoyed by Hawkins and Prestige and
none of which can match the quality of the products produced by these two companies. Both
companies have about 25% market share and both have been growing faster than the market
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which is growing at about 8% a year. Clearly, both have been successful in taking market share
from the smaller players. We believe this trend will continue for many years to come.
Consider this. If the market continues to grow at 8% a year and both Hawkins and Prestige
continue to grow at 15% a year, then in five years the market would have grown by 47%, but
both these large players would have growth by 100%, while their aggregate market share
would have risen from 50% at present to 68%. We think, this long-term trend is highly likely
to happen as increasingly prosperous Indians move away from cheaper unbranded cookware
to these two well-recognized brands.
Another reason for the rise in business volumes for Hawkins is the increase in export sales
over the years. Amazon.com sells Hawkins Futura Pressure Cookers. Over the last few years
exports sales have grown. Before Mr Dutta became Head of Marketing, export sales were non
existent. Today the company exports about 5% of its production to an increasingly large
segment of Non-Resident Indians as well as non-Indians. See some reviews below:
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The reviewer at Amazon.com who called the Hawkins Futura Pressure Cooker “a work of art”
was right because a Hawkins pressure cooker is the only one ever displayed as an art piece at
Museum of Modern Art, New York.
The Psychology of the Whistle
A whistling pressure cooker is a very Indian idea, one to which many Indians become
accustomed to as children. A whistling pressure cooker is found in most Indian kitchens
because it offers a very healthy, efficient, and cheap form of cooking. The author knows of no
person in India who owns a microwave owen or a grill but does not also own a whistling
pressure cooker.
The whistle in the pressure cooker has many important psychological attributes. One, it
invokes pavlovian association in the form of salivation in expectation of food getting ready to
be served. Two, the whistle acts a feedback timing device. Its very common to express time to
be taken to cook a recipe in the “number of whistles.” The cook in the kitchen knows how
many whistles it would take to cook “chicken curry” for example. Moreover, “four whistles”
in a Hawkins pressure cooker is not the same as “four whistles” in a Prestige one. This results
in stickiness of demand. One reason why Prestige is dominant in South India and Hawkins in
North India is because of this stickiness. Three, the sound of whistling cooker is often
associated with prosperous households in rural India where income levels are low but rising,
thereby making Indian branded whistling cookers more affordable.
We think given these psychological factors, combined with (1) the absence of any real
competition; (2) the increase in the prosperity of India over the next few decades; and (3) the
able management of Mr. Subhadip Dutta, it is overwhelmingly likely that Hawkins would be
selling far more whistling pressure cookers ten or twenty years from now, than it sells at
present.
Valuation
Hawkins Cookers Limited has 5.3 million shares outstanding. At the current stock price of Rs
1,200 per share, the market is valuing this debt-free company at Rs 6.4 billion.
In FY10, the company delivered a pre-tax operating cash flow of Rs 576 million. Given the
trajectory of growth at which the company’s business happens to be, this valuation does not
capture expected future growth in earnings.
Consider this: At present pre-tax AAA bond yields are 10% p.a. If Hawkins business was a
AAA bond, and it paid Rs 576 million a year in perpetuity, then the value of this non growing
perpetuity alone, at present interest rates, would be Rs 5.8 billion. One can therefore see that
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of the total market value of Rs 6.4 billion, Rs 5.8 billion relates to the present value of future
earnings if they were to not grow from here. The balance Rs 0.6 billion relates to the growth
component of value.
Looked another way, one can estimate the market’s expectation about Hawkins Cookers’
earnings at its current stock price of Rs 1,200 per share. This comes to only 1% p.a. We know
this because when we estimate the present value of an earning stream which grows at 1% p.a,
has a starting value of Rs 576 million, then, at 9%p.a. (AAA bond yield of 10% p.a. less
perpetual growth rate of 1% p.a.), we arrive at a value of Rs 6.4 billion, which happens to be
the current market value of Hawkins at this time.
In other words, at its current market value, the market expects Hawkins to grow its earnings at
only 1% p.a. over the long term. Our analysis, however, shows, that its overwhelmingly likely
that Hawkins will continue to grow its earrings at a much higher rate of growth for many years
to come.
Our conclusion is that at its current market value, the very fine business of Hawkins Cookers
is an attractive investment for long-term investors because the growth component of this high
growth company is virtually free.
Acknowledgement
The author would like to thank Mr. Priyank Sanghavi, an Investment Manager in Mumbai, for
bringing the Hawkins story to his attention.
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