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."

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.

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.

Monday, 1 September 2014

Notes from the AGM- Cera Sanitaryware Limited

Cera Sanitaryware Limited held its AGM on August 22, 2014 at its registered office cum factory at Kadi (Dist. Mehsana) , around 60 kms from Ahemdabad.

I decided to combine the AGM visit with a vacation in Gujarat. The trip included a visit to Sun Temple@ Modhera [an architectural masterpiece]; the place where the first ray of sunlight falls on the days of the equinoxes [March 21st and September 23rd every year]. It happens because the Tropic of Cancer passes exactly through the site of the temple.

The AGM started with the usual warm up session of a few shareholders sulking and grumbling about the payment of a low dividend. Does the low dividend matter since the management has been conservative with the capital and has been competent in deploying the capital at good rates of return ? Does the low dividend matter since the market has rewarded the shareholders with a considerable valuation jump in the equity of the company? 

Cera has been able to historically deploy capital in the business at 35% [pre tax ROCE] and 40% [pre tax ROE]. The company is growing at its top line at 30% and has a long run way to cover. It needs capital to grow and any dividend pay out is actually a loss making proposition since 17% of dividend goes to the Government as distribution tax. As long as the management is able to enhance the competitive advantage of the company and is able to deploy capital at healthy rates of return, low dividend or no dividend shouldn't bother the shareholders.

The following is the jist of the opening remarks of the management and replies in response to shareholder queries.
  1. The company plans to increase its sanitaryware capacity to 3.2 mn pieces at the current location at Kadi.
  2. Plans are in the pipeline for a new greenfield capacity expansion in sanitaryware. No location has been finalized till now. It depends on the ease of land acquisition, gas linkages etc. Once finalized, the plant will take around 15 months to be commercialized.
  3. In the faucetware business, the company has been able to streamline the manufacturing and distribution process. The division has turned profitable and the EBITDA margins are around 10%. The capacity will be enhanced from 2500 pieces per day to 7500 pieces per day in a phased manner.
  4. The management finds that the real estate sector is still going through a tough time with a lot of builders sitting on a good amount of unsold inventory and massive debt. Builders are facing a cash crunch and hence Cera is cautious about supplying its material to the builders unless it is very sure of the payments.
  5. In order to lower its dependency on the builders, Cera is aggressively scaling up its distribution network and enhancing brand promotion exercises to get more share of the retail sales.
  6. Cera currently sources around 60% of its gas requirement from ONGC /GAIL [@Rs 12 per cubic meter] and 40% of its requirement from Sabarmati Gas [@ Rs 45 per cubic meter].         
Hike in gas price was a big risk to my Cera's investment thesis. After knowing that the company already sources 40% of its gas requirements at imported LNG market rates and that it has been able to pass on the high gas price to the customers, I don't find hike in ONGC/ GAIL gas price as a serious threat to the future earnings of Cera.