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Good show amid sluggish market environment…
With peers reporting moderate results in the last few quarters owing to a sluggish demand scenario, Hawkins continues to outperform with steady revenue growth. We believe new product launches and enhanced marketing spends has led Hawkins to steadily increase domestic market share in the cookers segment (second largest player after TTK). Hawkins reported healthy Q3FY20 results with revenues increasing 10.6% YoY to | 193.3 crore. Favourable product mix and benign raw material prices translated into gross margin expansion of 315 bps YoY to 58.9%. Furthermore, a tight leash on operating expenses led to one of its highest ever EBITDA margin of 16.3% (up 494 bps YoY). Absolute EBITDA grew 59% YoY to | 31.5 crore. Lower tax rates further augmented the profitability, with net profit increasing 80.6% YoY to | 22.5 crore.
Product innovation, higher marketing spend to spur revenue growth
With the company reporting moderate revenue growth in FY13-18 (6% CAGR), FY19 was a turnaround year for Hawkins Cookers. The company reported one of its highest topline growth of 18% YoY to | 652.8 crore in FY19. New product launches (five new products launched), coupled with higher marketing spends (up 31% YoY to | 34.7 crore) aided topline growth. Healthy revenue trajectory sustained in YTDFY20, with Hawkins reporting healthy revenue growth of 13% YoY to | 527.9 crore. Furthermore, the company witnessed significant improvement in its margin profile with YTDFY20 EBITDA margins coming in at 16.9% (up 320 bps YoY vs. 13.7%). Subsequently, PAT grew robustly by 55% YoY to | 63.1 crore (partly aided by lower tax rate). While trade channels continued to remain under stress owing to liquidity constraints, Hawkins through its stringent working capital policy has been able to generate healthy operating cashflows in FY20E. To reduce dependency on imports and simultaneously make India a manufacturing hub, the government has increased customs duties on various household appliances (including cookers) from 10% to 20%. Hike in duties would result in a level playing field against cheap imports from Asian countries, leading to market share gains for organised players like Hawkins.
Valuation & Outlook
Revival in revenue growth and significant improvement in margin profile has led to a re-rating for Hawkins Cooker. Furthermore, the recent cut in corporate tax rate has been a big positive for Hawkins as it was hitherto a full tax paying company. Over the years, the company has consistently maintained healthy dividend payouts with average ratio of ~75%. With minimal capex requirements, we expect the benefit of the tax cut to be passed on to shareholders through higher dividend payouts. We continue to remain structurally positive on Hawkins owing to its robust balance sheet and good promoter pedigree. Over the years, the company has maintained balance sheet prudence with controlled working capital cycle (15% of sales), non-leverage balance sheet and generating healthy RoCE of 50%+. We roll over our estimates to FY22E and build in revenue and earnings CAGR of 13% and 27%, respectively, in FY19-22E. Hawkins is trading at 25x, 22x EPS of | 185, | 208 for FY21E, FY22E, respectively. We reiterate our BUY rating on the stock with a revised target price of | 5300 (25x FY22E EPS) (earlier target price: | 4600).
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