Hawkins Cookers - Defensive Stock for mId term investment

Investors can continue to hold Hawkins Cookers’ stock on the back of the company’s strong performance in the past two quarters and a sharp decline in input prices

Beta: 0.52
Institutional Holding: 10.21%
Dividend Yield: 7.05%
P/E: 13.7
M-Cap: Rs 75.04 cr
CMP: Rs 141.90

WE HAD recommended Hawkins Cookers in July this year as a defensive bet with a one-year investment perspective, when it was hovering around Rs 175. At that time, the company had just proposed a dividend of 100% (or Rs 10) on its share after posting robust annual results. Since then, Hawkins Cookers — one of the leaders in the organised sector in the pressure cooker and kitchenware segment — has taken a knock and has corrected to Rs 145, after paying that dividend.

The minor correction has come at a time, when the Bombay Stock Exchange (BSE) Sensex has slipped 33% from the level of 13,500, where it was pegged then. However, on the back of strong performance in the first two quarters of FY09 and the subsequent fall in prices of aluminium — the major raw material used by the company — we continue to hold the same view.

Investors who may have bought the stock earlier can continue to hold it for at least another two quarters.

The company’s main products are pressure cookers and kitchenware products. It operates in the branded segment and is among the largest manufacturers of kitchenware in the country. Its ‘Futura’ brand of non-stick kitchenware has higher margins and is growing at 20-25% per annum.

Even in its bread-and butter pressure cooker segment, the company’s sales volume is growing at 10-13% on a year-toyear (y-o-y) basis. Nearly two-thirds of the production cost is accounted for by aluminium, which the company sources from Hindalco. Hawkins is expected to gain from the recent decline in aluminium prices. At the London Metal Exchange (LME), aluminium is currently trading at $1,800 per tonne, compared to $2,900 per tonne in July this year.

Though a part of this decline has been eaten up by the depreciation in the rupee against the dollar, Hawkins is well placed to lower its raw material costs and improve its operating margins by a few percentage points from December onwards.

Its results for the December ’08 quarter will also reflect the buoyancy of the festive season when kitchenware products normally pick up. Diwali was followed by the wedding season, which also has a positive influence on Hawkins’ earnings growth. Thus, the growth and margins in the second half of FY08 are likely to be higher than those posted by the company in the first half. Meanwhile, the company is in the process of de-bottlenecking its units, to raise capacity, improve efficiency and bring down costs.

The company reported net sales of Rs 60.7 crore in the September ’08 quarter of the current financial. This is up by a healthy 22% against the corresponding quarter of FY08. Its operating profit during the period surged by 48% y-o-y to Rs 7.7 crore. At 12.6% of net sales, operating margin in the second half was better than the trailing four quarters operating margin of 12.1%.

It is almost a zero-debt company as it has debtors of only Rs 8 crore. In Q2 alone, Hawkins posted a net profit of Rs 4.5 crore on a small equity base of Rs 5.3 crore. Its net profit of Rs 8.7 crore for the first half of FY09 translates into earnings per share (EPS) of over 16.5.

The company has indicated that is unlikely to be adversely affect by the global slowdown and financial meltdown. It generates enough cash flows annually to finance its expansion and modernisation plans.

The company also has a good dividend yield of 6.7%. Thus, in view of the anticipated earnings growth in the second half and cost-savings from lower aluminium prices, Hawkins’ stock offers a good investment opportunity for investors.