October 9, 2007

Hawkins Cooker Ltd

Stable business, Limited growth opportunities

Investment Rating: Buy and Hold

Price: Rs. 127.75 NIFTY: 5327.25 BSE Sensex: 18280.24 Target Price: Rs. 176.85 (Potential upside: 33%, time frame: 1-2 year)

Industry to grow at 12-15% in the next 4 years Well Established brand name Huge capacity available to meet the increase in demand Increase in free cash flows and rising reserves

Market Capitalization Stock DataEquity Market Cap: Rs. 67.58 crores 52 week range: Rs. 147.8 – Rs. 78.6Enterprise Value: Rs. 75.56 crores 12-month stock performance: 31.91%Share Outstanding: 4.031 crores Dividend Yield: 5.48%

Company Quick View:

Location: Mumbai, Maharashtra.

Industry: Pressure Cookers, Cookware

Key Brands: Hawkins, Futura, Miss Mary

Company website: http://www.hawkinscookers.com/

Company Description:

Hawkins Cookers is a manufacturer of pressure cookers and cookwares incorporated in 1959 as a private

company and converted into a public limited company on 1st Feb. 1975. In fiscal 2007, it reported sales

of Rs. 173 crore. Hawkins is the number one brand in the pressure cooker market of India.

The company produces a wide range of other household and commercial cooking utensils. Hawkins sells

its products under the brand name of Hawkins, Futura and Miss Mary. Hawkins brand has traditional

pressure cookers like Hawkins Classic, Hawkins Bigboy, Hawkins Contura , Hawkins Ventura and Hawkins

stainless Steel. Futura brand has both cookers and cookware. Miss Mary brand has pressure cookers

which give trouble free service, totally safe and don’t leak.

Hawkins Cookers is headquartered in Mumbai, India. It has manufacturing units in Janpur, Thane and

Hoshiarpur. Hawkins primarily caters to the domestic market with domestic sales contributing to about

96% of the total sales. Specific areas in which R&D efforts have been carried out: Qualify improvement

of existing products and design of new products. The company has 68 valid patents and design

registrations in force in 7 countries. Hawkins Cookers has not imported any technology in last 5 years.

FY03 FY04 FY05 FY06 FY07

Sales 98.75 105.55 117.77 136.37 173.25

Sales Growth -1.3% 6.9% 11.6% 15.8% 27.0%

PAT -6.91 0.8 3.11 4.03 7.49

EPS - 1.51 5.88 7.62 14.16

Dividends per

Share

0.0 1.0 3.0 5.0 7.0

Sales of the company has grown by

27% for FY07 and an average Pressure

cookers are the primary sales

contributor with over 80% of gross

sales contributed by the segment.

However the company has managed to

diversify its business from pressure

cookers segment to Cookware

segment.

The company has low capacity

utilization with utilization of 25% in FY2007 and an average utilization of 20% in the last 5 years. No

future capital expenses are seen for Hawkins in Pressure Cooker segment.

Management:

Promoters of the company have the majority stake in the

company and the company has not gone for any public

issue till date. Last bonus issue was in FY 94 and last rights

issue was in FY98.

The strengths of Hawkins lie in its brand and its marketing

and distribution activities which were revamped after the

company suffered losses in FY01 and FY02. However inspite of the diversification, Pressure cooker

Designation Name

Director J M Mukhi

Director Gerson Da Cunha

Director V N Sharma

Director B K Khare

Chairman Brahm Vasudeva

Vice Chairman, MD

& CEO

S Dutta

Choudhury

Executive Director

(Operation)

M A

Teckchandani

Executive Director

(Fin.&Admn)

K

Sundararaghavan

Director Shishir K Diwanji

Company Secretary Hutoxi Bhesania

segment contributes more than 80% of the revenue. The segment is a mature segment and the urban

markets are growing at a very low rate. The opportunities for Hawkins lie in the rural area and other

Kitchen appliances like mixer grinders which is a Rs. 700 crore segment. Hawkins faces tough

competition from regional and unorganized players along with national companies like TTK Prestige. The

company has also suffered because of high tax rates and inflation in the past.

Industry Analysis

Size of Pressure Cooker industry in India is projected at Rs.575 crore and cookware is projected as

Rs.125 crore. The pressure cooker industry is growing at a rate of 10% YOY for last 5 years.

The pressure cooker industry suffers from low entry barriers. As a result the market has regional and

unorganized players along with national companies like Hawkins and TTK Prestige. There are about 250

brands of pressure cookers in the market.

Pressure cookers are used only in 61 per cent of Indian households. The figure shows of the percentage

of households using pressure cooker in the urban and rural areas. Clearly huge potential lies in the rural

areas. However the penetration of cookers is not expected to increase in the near future. It is predicted

to

be 66% by the end of 2011.

The growth in demand for domestic home appliance products especially, the kitchen ware production

continues to rise in tandem with the increase in income and living standards of the people both in the

urban and rural areas of the country. The current market size of pressure cooker industry in the country

is estimated at Rs 500 crore. Hawkins Cooker (brand Hawkins) and TTK Prestige (brand Prestige), are the

two large players in the segment, and together cornering over 50% share in the domestic pressure

cooker market. The growth rate of the industry is likely to be around the 14% mark in the coming years.

Primary raw materials used in the process of manufacturing are brass, stainless steel and aluminum. The

raw material is procured from the domestic market and the performance of the sector is largely

dependent on the price of the raw material.

The key factors effecting the growth of the segment are the tax rates and the inflation. The decline in

the performance of Cookers segment in FY02 and FY03 was primarily due to the increase in excise duty

from 8% to 16%. The inflation influenced the cost of raw material procured and since the market is

highly competitive the companies can’t pass on the increase to the customers.

The key organised sector players in the industry are TTK Prestige and Hawkins Cookers Ltd. The

comparison between the firms is given below.

Sales Net

Profit

Div

%

EP

S

Rs.

Pric

e

Mkt. Cap.

as on

28/09/2007

P/E P/

BV

Debt

to

Equit

y

Current

Ratio

Hawkins

Cookers

173.55 7.49 70 13 134 70.65 10.3 4.25 0.86 1.22

TTK

Prestige

281.4 11.84 30 9.9 137 155.95 13.9 2.99 1.36 1.49

Risk Analysis:

Industry Risks:

Inflation risk: Pressure cooker industry has suffered on account of rise of input costs as not all costs are

transferable to the customers.

Saturation of market: The growth rate of the industry is dependent on the ability of players to tap the

rural market. However if this doesn’t materialize then the industry may experience a flat sales growth

rate.

Excise Duty: Increase or decrease in excise duty has a big impact on the bottom line of the Pressure

cooker companies. The companies in the past have lobbied against the increase in excise duty rates on

the pressure cookers. However the increase in excise duty on pressure cookers can’t be ruled out in the

near future.

Company Risks:

Non-Diversified Business: Pressure cookers contribute to over 80% of Hawkins topline. Any downturn in

the industry can cause the sales to drop substantially.

Competition: Market share of Hawkins is under continuous threat as new players come in the market.

Hawkins faces tough competiton from regional, unorganized and national players. The low entry barriers

enable small players to enter the market.

Financial Performance Projections

Operating Activities

We expect the company’s sales to grow at a rate of 14% till FY12 which is consistent with the expected

industry growth rate of 13-15 %. Industry forecasted to grow at the rate of 14% in the coming 3-4 years.

The company sales has grown at a rate of 18% for last three years (on an average). Hence we feel that

for the next 5 years the growth of 14% is sustainable considering the inflation and consumption pattern

remain the same of the economy. However post FY 12 we expect the growth rate to reduce to 8% as the

market is expected to mature by that time and will result in lower growth. For terminal value calculation

we have taken a growth rate of 5%. In terms of expenditure, we have assumed the operating expense to

be 92% of sales as observed in the past. Hawkins has managed to reduce its operating expense from as

high as 104% of sales to 91.7% of sales. Hawkins is expected to have a dividend payout ratio of 60% for

the coming years. We expect a continuous rise in free cash flow of the company. However the free cash

flow to equity will be negative for the FY08 but will rise in the coming years.

Capital Expenditure

The company is operating at a capacity of 25%. Hence we don’t predict any substantial capital

expenditure in the coming years. Operating working capital is assumed as 13.1% of sales based on the

previous three years weighted average.

Valuations:

PE multiple for FY07 was 6.41. Expected PE ratio for FY08E and FY09E is 5.86 and 5.12. on the other hand

its competitor Prestige TTK ltd had a PE ratio of 12.42 in FY07. A target PE of 10 for FY08 and FY09 would

result in a price of Rs. 154.7 and Rs. 177.2. Based on the FCF and FCFE analysis the resultant share price

of the firm is estimated to be Rs. 176.85.