Hawkins v/s TTK Prestige: A comparison

Hawkins and TTK Prestige. Both biggies of the cookware industry and both possessors of strong brand names. In the stock markets though, TTK Prestige has managed to endear itself more to shareholders than its staunch competitor, Hawkins. What else could explain the fact that while the former trades at an earnings multiple of close to 30 times its trailing twelve month earnings, Hawkins has to make do with a lot less 24 times? This is not all. When one compares the FY11 earnings, the PE that TTK gets of nearly 36 times is way ahead of Hawkins that gets a multiple of close to 20x times for the same period.

Is this premium for TTK Prestige justified? Let us try and find out. When it comes to topline growth between the period FY06 and FY11, TTK has certainly fared much better. Its standalone topline has grown by around 3.3 times while that of Hawkins has witnessed a lesser growth of around 2.4 times.

But sales alone do not tell the complete story. It is important to know what kind of resources have gone into bringing about the growth in sales as well as the cash that both the companies have managed to extract from a given level of sales.

On the EBITDA margin front, it is Hawkins that comes out ahead. Its average operating margins for the five years ending FY11 has stood at 13% whereas the same for TTK has stood at 11%. Thus, although TTK's topline growth rate has been higher, Hawkins has been able to eke out higher profits per rupee of sales registered.

We believe that the real test of a company's value is not its profits and net profit margin. But rather the free cash flow. Thus, the surplus cash that remains once the company has invested in plant and equipment and has also satisfied its working capital needs, is the true indicator of the value that the company adds to its shareholders we believe. As mentioned, this number we call as the free cash flow of the company (FCF) and is arrived at by adding net profits to depreciation and subtracting working capital investment as well as capex.

And how do the cash flow margins of the two companies compare? Well, here too, Hawkins has the edge as per the numbers. Its FCF margins average around 6.5% of sales for the five years ended FY11. Whereas the same for TTK Prestige has come in slightly lower at 5.9% of sales. This is not the end of story though. It is clear that TTK Prestige has put in more resources but has it brought about the required growth in terms of sales? It certainly has we believe. By putting in an extra 0.6% of sales (the difference in the above two numbers), TTK has managed to grow its sales 3.3 fold in the five year period as opposed to 2.4 times for Hawkins.

And the stock market has indeed rewarded TTK Prestige for its better use of resources. Between 2008 and 2011, the stock of the company went up nearly 13x as opposed 7x for Hawkins.

However, what about the future? It is clear that TTK Prestige cannot possibly keep on growing at the same rate as it has done in the past. Thus, it will have to grow slower and pay out the rest of the money as dividends or it will have to look for new avenues of growth and the same could lower its capital efficiency. It is the answer to this question that will determine the fate of these two stocks over the next five years we believe.