In this article, I want to talk about a business which will be any value investors’ delight. It would surely be a favorite of Warren Buffet. The company in question is Hawkins Cookers and any investor in India would have surely heard of it. This is a well-known story with a narrative which is familiar to most. If not let me lay it out briefly at the outset and then go into the details.
Hawkins is engaged in manufacturing and marketing pressure cookers and other cookware for Indian households. They have built a reputation for manufacturing high quality products and is a well-known brand in India. In terms of revenue composition, Hawkins derives 84% of its revenues from pressure cookers and the remaining from cookware.
Please refer an excerpt about the pressure cooker market in India from the FY2017 annual report of TTK Prestige – who is one of the major competitors of Hawkins:
The market for Pressure Cookers is shared amongst organized national branded players, regional players and unorganized players. Over the years, the share of the unorganized players has been gradually coming down as there has been a shift in the consumer preference to reliable branded products. The market for organized brands is estimated at about 60% of the total market. The share of unorganized players is greater for cookware as compared to pressure cookers.
In terms of industry structure, there are only two national branded players in the pressure cooker and cookware market – Hawkins and TTK Prestige. Of course, there are many regional players as well as unorganized players. Growth in the future in this industry will come from the following:
- Increase in population and the consequent increase in demand for cookware
- Increase in penetration of pressure cookers
- Shift from unorganized to organized sector players
- Consumer preference for branded products
Hawkins will be a beneficiary of all of these trends. As we can see it is a classic consumption story, which is expected to be beneficiary of secular, long-term favorable trends as outlined above.
But before we get carried away by euphoria, let me also point out the negatives of the cookware industry. An average household buys one pressure cooker probably once every 4-5 years. Cookware purchase are probably little more frequent. Hence the product itself is not as attractive as some other brands which I have talked about before like Coca-Cola or Colgate or Jockey – which people buy on a more frequent basis. Over a period of time, people get used to these brands so much so that buying them becomes like a habit. Cookware purchases are much less frequent. As a result, majority of the customers of Coke (and other such habit forming brands) are repeat buyers. While, majority of the customers of Hawkins will be new buyers. Hence, at the time of cookware purchase, the customer will in general do a cost benefit analysis amongst the various alternatives each time.
Hence, cookware industry is not an inherently attractive industry. Companies need to constantly stay relevant to the needs of the customers. They do this through constant innovation in terms of introduction of new products as well as improvement in design of existing products, relentless pursuit of quality, and advertising and distribution.
As we will see in this article, Hawkins has managed to do all this. They have managed to stay relevant to the consumers by producing well designed products with excellent quality. By doing this consistently over many decades, they have managed to build up good brand equity in the mind of their consumers. They have also supplemented their manufacturing and design excellence along with their strength in advertising and distribution. As a result, they have managed to get loyal customers who swear by the quality of the Hawkins brand. The Brand has come to symbolize quality in the minds of customers.
The management of Hawkins has demonstrated extreme discipline in capital allocation. They have refused to diversify beyond cookware so far. As a result, they have grown their revenues at a rate of 9%, 13%, 11% and 9% over the last 5, 10, 15 and 20 years respectively. One thing which they can and have been accused is excess conservatism. Their conservatism presents itself in multiple ways – their commitment to fair and honest dealing with all their stakeholders even if it takes longer to resolve conflicts, launching products only after extensive research and testing even if it takes longer to launch new products as so on. Their insistence on doing things the right way has negatively impacted their short-term results in the past. Additionally, their competitors have grown at a faster rate by diversifying beyond cookware. For example, TTK Prestige has grown at a faster pace than Hawkins by launching products in categories adjacent to cookware including Kitchen Electrical Appliances, Gas Stoves and Other Home Appliances. Hawkins have been content with a slower growth by focusing only within their circle of competence.
Because of their conservatism, the management of Hawkins has been called many names including old, out of touch with reality, not ready to adapt to changing times etc. However, they have stuck to their values. What are these values? They have been summarized by the Chairman in his annual speech of FY2009 – The Seven Strands of the DNA of Hawkins. The speech is a must read to understand the culture and ethos of Hawkins.
History of Hawkins
Hawkins is a company with a long and storied history. The company was started in 1959 by Mr. H.D. Vasudeva. His son Brahm Vasudeva joined the company in 1968. The company came out with a public issue in 1978 which was combined with an offer for sale by the Vasudeva family. As a result, the family’s shareholding came down to 51%. Currently the family’s shareholding in Hawkins is 49% as of March 2017.
Mr. Brahm Vasudeva became the CEO of the company in 1968, and he continued in this role for 38 years till 2006. He stepped aside in 2004 to take on the role of Non-Executive Chairman, a role in which he continues to this date. After Mr. Vasudeva, Mr. Subhadeep Dutta Chaudhary became the new CEO of the company and remains the current CEO. Mr. Dutta Chaudhary joined the company in 1992 as Management Trainee and worked in various sales roles till 2000. He moved to marketing as Vice President in 2000 and was appointed as the CEO in 2006. Mr. Dutta Chaudhary is not part of the Vasudeva family. Two other members of the Vasudeva family work in the business as well – Mr. Neil Vasudeva (son of Mr. Bhahm Vasudeva) is the Chief Marketing Officer of the company and Mr. Sudeep Yadav (son-in law of Mr. Brahm Vasudeva) is the Chief Financial Officer of the company and is also represented on the board.
Hawkins is a very important asset for the Vasudeva family and they have managed it keeping the best interest of all shareholders in mind. They do this by making the customer the focus of everything they do. This is clearly articulated in the mission of the company:
We have one overarching goal: to win over customers, to truly please them by delivering products and service beyond their expectations, to earn their friendship and build relationships that will endure.
We offer products that are needed, well-designed, well-made and reasonably priced. We continually strive to improve our products and customer service.
Pleasing customers is our livelihood and our vocation. It is the best way we have of fulfilling the expectations of shareholders, employees, vendors and other associates. Our single-minded determination to please customers drives the kind of people we employ and promote, the investments we make and the results we produce.
Pleasing customers is a matter of who we are, of being true to our roots.
The company started by selling pressure cookers only. Over the years they have diversified into cookware as well. They started marketing cookware in the year 1989-90. They have been very conservative and have not diversified beyond cookware. In the speech mentioned above, Brahm Vasudeva talked about the six strands of DNA of Hawkins. One of the strands is Hot Focus, which explains why they have not diversified beyond cookware. Quoting from the speech:
Hot Focus. We are a stay-close-to-the-knitting kind of company. It was not always so. Before he started Hawkins in 1959, my father, who was 54 years of age at that time, was already a serial entrepreneur: he had started a general insurance company, a pan-Indian distribution business for imported radios and refrigerators and a company that aimed to manufacture cold storage units. By 1959, he had disposed off his other businesses and was uncharacteristically concentrating solely on pressure cookers. By the time I joined in 1968, there was within our company a division trying to manufacture optical-medical instruments – which we closed down after a few years. Nevertheless, we produced and marketed Four Seasons, a quarterly magazine in four languages, four types of spices specially formulated for pressure cooking and two types of electrical kitchen appliances, the Inframatic and the Simmermatic. All these products were not commercially viable and were closed down almost 25 years ago. Since then, we have diversified only into cookware which is an area where the technology and distribution channels are closely allied to our original business of pressure cookers. I am glad to say that the cookware diversification is successful. Today, we know as much or more than any other manufacturer in the world about pressure cookers and cookware. Our products compare favorably with pressure cookers and cookware manufactured anywhere in the world.
Hawkins offers 73 different pressure cooker models in twelve different types. Hawkins sells pressure cookers across a number of brands with varying price-points including Classic, Contura, Stainless Steel, Hevibase, Bigboy, Futura, Miss Mary etc. Additionally, they market the cookware under the brand name Futura only.
In the figure below, I have shown the revenues and the corresponding CAGR starting from 1969. It is really good and reassuring to see businesses which have such long running histories and track records to show. As we can see from the figure that the company has managed to grow its revenues at a double-digit rate in each of the periods except two. One, during 2000-2005 period where the revenues de-grew by 1% pa and second 2015-17 period when revenues growth was 8% pa. We will understand the reason for this later in the article. Additionally, this is a business which manufactures and markets cookware and is hence simple to understand. Finally, the product themselves are unlikely to get disrupted by the advent of technology in the near future. It seems likely that this business will continue to sell the same products or may be add a few to their portfolio of products over the next 50 years.
Figure 1. Annual revenue of Hawkins Cookers and the corresponding CAGR
Before going any further, let us look at the financials of Hawkins for the past 20 years. Major highlights are presented in Figure 2 and 3 below.
Figure 2: Financials FY1996-2006
Figure 3: Financials FY2007-2017
Let us first try to understand the business of Hawkins from the perspective of Warren Buffet. Buffet generally divides businesses into three categories-
Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return. Unfortunately, the first type of business is very hard to find: Most high-return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.
So Buffett has used two variables to categorize companies – capital intensity and return on capital. In terms of attractiveness of a business, they can be listed in decreasing order of attractiveness as below:
- High capital intensity, high rates of return – as per Buffett, this is the best type of business to own. However, business of this type are very hard to find. Warren Buffett during his long and illustrious career has been able to find a few businesses with high capital intensity and reasonable rates of return such as his investments in the public utility sector. Companies of this type if you are lucky enough to find them will grow at a scorching pace. This is because they generate high returns on invested capital. At the same time, they are able to utilize the cash generated in the business to further reinvest in the business at the same high rates of return. This is a virtuous cycle, with more capital being employed at high rates of return leading to more capital and so on. This does seem like too good to be true and that is why it is rare to find businesses in this category.
- Low capital intensity, high rates of return – most of the businesses which Berkshire acquired over the years fit into this category including Sees Candies, Scott Fetzer, GEICO, Coca Cola, Gillette etc. Hawkins firmly falls into this category as well. Companies in this category generate huge amounts of cash flows because of their high return. But unlike the companies in the first category, these businesses have limited capital requirements and hence have little need for the cash generated by the business. Hence, in these businesses it becomes especially important to have management which is responsible and good capital allocators. The cash in these businesses will build up over time and can be utilized in two ways – either it can be returned to shareholders in form of dividend or share buyback or allowed to accumulate or used for diversification into other businesses. The core businesses in this case will usually grow at a reasonable rate, unlike the fast pace of growth of the first category.
- Low capital intensity, low rates of return
- High capital intensity, low rates of return
These two businesses are not good as they produce low rates of return. The former is still better than the latter. The latter business will need to raise external sources of money to invest in the core business since the business is capital intensive and doesn’t generate enough cash internally. It will have to raise increasing amounts of money either in the form of equity or debt to grow the business. While the former is a mediocre business, the latter is doomed.
Hawkins return on equity during the last 3 years has been an astonishing 54%, 66% and 42%. Very few businesses are able to generate return on equity comparable to these levels. What is more remarkable is that Hawkins has generated these returns without resorting to excessive leverage. Also, the performance is not fluke or some stroke of luck. Hawkins has been able to sustain returns at these high levels for more than a decade now.
Return on equity is the single most important determinant of competitive advantage. To have demonstrated such high returns, Hawkins must possess a strong competitive advantage or moat as it is referred to by Warren Buffett. Let us try to get a better handle on the components of its competitive advantage and also get a perspective on its sustainability.
The table below will help us in our quest. I have shown below the cumulative cash flows of Hawkins and its closest competitors – TTK Prestige.
Figure 4: Comparative Analysis – TTK Prestige and Hawkins
The table shows the cumulative cash inflows as well as cash outflows during the period FY2008-2017. The period from FY2008-2011 was a period of high growth. Therefore I have also considered a period FY2012-17, during which the earning growth for Indian corporates decelerated.
The first thing that jumps out from the above table is just how capital light the business of Hawkins is. During the past 22 years, Hawkins has spent only INR 60cr for capital expenditure. As we can see clearly, they only use the funds that can be productively utilized in the core business and return the remaining to the shareholders in the form of dividend. They have been extremely prudent with their capital allocation over the years. It is one of their seven strands of DNA as discussed earlier in the article:
Principle No. Five: Be Prudent. This principle applies to our financial operations as well as general expectations. We are conservative to the point of being stodgy. We do not issue “detailed guidance” to investors. We do not seek out analysts or journalists. We don’t “Bet the Company” on anything, no matter how exciting the prospect is. We believe in vigorous preparation and planning and we never forget the importance of the unforeseen and the contingent.
And hence true to this principle, they have done what most managements find extremely difficult to do – return most of the profits back to the shareholder in the form of dividends. In general, the profits for any company can be utilized in one of the three ways – organic growth by reinvesting in core business, inorganic growth through acquisitions, debt reduction, or return back to shareholders. They have used a small portion of the profits for reinvesting for organic growth and the remaining they have returned to shareholders.
Let us compare this record to that of TTK. As opposed to Hawkins, TTK has used a majority of the cash inflows in the form of capex and other investments. TTK has used 54% for organic growth, 17% for inorganic growth (acquisition of a UK houseware company), 7% for interest on debt and 22% for dividends. Hawkins in contrast, has used 12% for organic growth, 8% for interest charges and 80% as dividends.
As a result, TTK has grown their revenues at a rate of 20% pa during FY2008-17 as opposed to 12% pa for Hawkins. However, the revenue growth has come because they have invested significant amount of money both in their core business as well as for inorganic growth. Let us compare the increase in revenue per unit of invested capital. For TTK, revenue has increased from INR 327cr to INR 1,751cr or an increase of 1,424cr during FY2008-17. During the same period, TTK spent INR 580cr on capex and acquisition. Hence TTK revenue increased by a factor of 2.5 for every rupee of investment. The same number for Hawkins was 10.5. This is also clearly demonstrated in the average ROE of TTK and Hawkins, at 28% and 68% respectively.
Finally, one of the best judges of the quality of a business is its performance during an economic recession or downturn. The earnings growth has been lackluster for the past 5 years starting FY2012. During this period, the total revenue CAGR for TTK has been 10% as opposed to Hawkins at 9%. However, the higher revenue growth for TTK has been in part because of the diversification and sales of new products as well. On an apples-to-apples comparison, Hawkins fares better. Hawkins sales have increased at a CAGR of 10% and 11% for cookers and cookware respectively for the lean years FY2012-17. During the same period, the TTK’s sales have increased at a CAGR of 8% and 5% for cookers and cookware respectively. Hence, their higher revenue growth has come from other products including Kitchen Electrical Appliances, Gas Stoves and Home Appliances. This despite the fact that Hawkins has faced massive challenges during this period beginning in FY2012 as we will see.
Admittedly, the management of Hawkins is conservative to the point of being stodgy. They are more interested in organic growth at a sustainable rate through incremental improvements in the existing products. They have been very reluctant to enter or diversify into new businesses. They understand that their expertise lies in cookware space and they have stuck to that. The management of Hawkins believes in the power of incremental improvements. While the improvement might not be visible from year to year, but they add up over time. Every year, Hawkins launches new products which are displayed prominently on the front cover of their annual report. These are either new products or improvement in design over existing products. In terms of manufacturing, their capacity has increased from producing ~1.7 million cookers in the beginning of the decade to more than 4 million in FY2016. In terms of distribution, the company faced issues in 2002-03 period with regard to distribution which we will discuss later. Due to its bad experience, the company increased their focus on direct distributors of their products. They increased the number of direct distributors from 1589 in FY02 to 2487 in FY03 and thereafter to 4815 in FY10.
The character of a company can also be judged by how they have navigated the downturns. In the last couple of decades, Hawkins has faced two major issues – first one related to distribution (FY2001-FY2003) and the second one related to labor problems (FY2012-FY20xx). The management has discussed the issues in its speech of FY2012 – http://www.hawkinscookers.com/download/AGM-Speech-2012.pdf
One thing hopefully would have become quite clear about the management of Hawkins. Their first priority is always the long-term sustainability of the business. They understand that they have a valuable brand in Hawkins which they have built gradually and painfully over many decades. And they are extremely loath to jeopardize that for any short-term advantages. This explains why they have stuck to cookers and cookware when others have been diversifying because of the slow growth in these categories. It is also demonstrated in the way they have dealt with problems in the past. Management at Hawkins instinctively understand that they are the stewards of a business which is growing stronger. They do not think in terms of quarterly results. They understand that it is their obligation to pass on the business to the next generation in better shape than they inherited. They are in effect playing an infinite game rather than a finite game. I was reminded of the below passage about such management teams from one of my favorite investors – Chris Begg of East Coast Asset Management.
We find that most companies are either playing a finite game or an infinite game. James Carse wrote a wonderful book on this very topic called Finite and Infinite Games. The infinite game is where the time horizon is very long, if not eternal, for the way the business is being run. It’s being run for the next generation, versus some quarterly or five- year objective. Certainly, there is a plan and there are goals, but there’s a big difference both in the culture and how they think about the business when the business is run for the infinite game. Think Berkshire, Colgate, and Danaher. There’s something very different about those businesses than what you’ll find where the leaders are trying to solve something over a shorter horizon. That’s what we’re looking for in the compounder category.
I think we can reasonably say that Hawkins has a competitive advantage over its competitors. It is demonstrated in their superior performance in terms of returns on capital. Their moat results from a number of things including the quality of their products both in terms of design and effectiveness, the Hawkins brand, the strength of their distribution etc. However, the most important component of their moat is their management. Hawkins in my opinion will continue to grow at a reasonable rate in the foreseeable future. There will be problems, just like in the past. But they will navigate the problems with confidence and honesty. The business will be stronger and the moat deeper 10 years down the line.