October 9, 2007

Hawkins Cooker Ltd
Stable business, Limited growth opportunities Investment Rating: Buy and Hold Price: Rs. 127.75 NIFTY: 5327.25 Sensex: 18280.24 (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 BSE Target Price: Rs. 176.85

Market Capitalization Equity Market Cap: Rs. 67.58 crores Enterprise Value: Rs. 75.56 crores Share Outstanding: 4.031 crores

Stock Data 52 week range: Rs. 147.8 – Rs. 78.6 12-month stock performance: 31.91% 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 Sales Sales Growth PAT EPS Dividends per Share -6.91 0.0 0.8 1.51 1.0 3.11 5.88 3.0 4.03 7.62 5.0 7.49 14.16 7.0 98.75 -1.3% FY04 105.55 6.9% FY05 117.77 11.6% FY06 136.37 15.8% FY07 173.25 27.0%

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 managed 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. the to company diversify has its

Management:
Designation Director Director Director Director Chairman Name J M Mukhi Gerson Da Cunha V N Sharma B K Khare Brahm 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

Vasudeva Vice Chairman, S Dutta MD & CEO Executive Director (Operation) Executive Director (Fin.&Admn) Director Company Secretary Choudhury MA Teckchandani K Sundararagha van Shishir K Diwanji Hutoxi 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 t Di % EP S Rs . P ric e Mkt. Cap. on 28/09/20 07 Hawkins Cookers TTK Prestige 173.5 5 281.4 11.8 4 30 9. 9 7.49 70 13 13 4 13 7 155.95 70.65 1 0.3 1 3.9 4 .25 2 .99 1.36 1.49 as P/E P D to Equi ty 0.86 1.22 Current Ratio

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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.