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 Data

Equity Market Cap: Rs. 67.58 crores 52 week range: Rs. 147.8 – Rs. 78.6
Enterprise 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 -1.3% 6.9% 11.6% 15.8% 27.0%

Growth

PAT -6.91 0.8 3.11 4.03 7.49

EPS - 1.51 5.88 7.62 14.16

Dividends 0.0 1.0 3.0 5.0 7.0

per Share
 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:

Designation Name
Director J M Mukhi
Director Gerson Da
Cunha
Director V N Sharma
Director B K Khare
Chairman Brahm
Vasudeva Promoters of the company have the majority
Vice Chairman, S Dutta stake in the company and the company has not
MD & CEO Choudhury gone for any public issue till date. Last bonus
Executive MA
issue was in FY 94 and last rights issue was in
Director Teckchandani
FY98.
(Operation)
Executive K
The strengths of Hawkins lie in its brand and its
Director Sundararagha
marketing and distribution activities which were
(Fin.&Admn) van
Director Shishir K
Diwanji
Company Hutoxi
Secretary Bhesania
revamped after the company suffered losses in FY01 and FY02. However inspite of
the diversification, Pressure cooker 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 Di EP P Mkt. P/E P D Current

Profi v S ric Cap. as /BV ebt Ratio
t % Rs e on to
. 28/09/20 Equi
07 ty

Hawkins 173.5 7.49 70 13 13 70.65 1 4 0.86 1.22

Cookers 5 4 0.3 .25

TTK 281.4 11.8 30 9. 13 155.95 1 2 1.36 1.49

Prestige 4 9 7 3.9 .99
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.