Basant Maheshwari of Basant Top 10 fame is a staunch believer in the philosophy that one should not be wary of investing in stocks quoting at a high P/E because the high growth rate and dividend payout ensures that the stock will continue to remain in demand.
This is the logic based on which Basant Maheshwari has publicly recommended for investment high P/E stocks like Page Industries, HDFC Bank and Hawkins Cooker.
However, what happens to the high P/E stocks if the expected high growth rate and dividend payout does not happen?
Basant has contemplated this scenario. In his bestseller “The Thoughtful Investor” and also in his talks, Basant has explained that in a scenario where the growth appears to be faltering, the high P/E stocks will normally not crash. Instead, the stock price will stagnate and wait for the earnings to catch up. There will be no “price correction” but there will be a “time correction” Basant advised, implying that even in the worst case scenario, investors stand a good chance of getting their money back.
Basant’s theory is proved correct in the case of HDFC Bank. In the past, the Bank used to consistently churn out a 30% growth rate. However, this has dipped to 20-25% over the past several quarters. This low growth appears to be the “new normal”.
The result is that HDFC Bank’s stock price has nearly stagnated while waiting for the earnings to catch up with the high P/BV of 4.86. Over the past one year, HDFC Bank has given a return of about 28%, which is on par with the Bankex’s return of about 25%. However, it has severely underperformed its peers in the private banking space like Kotak Mahindra Bank (63%), IndusInd Bank (62%), Yes Bank (61%), Axis Bank (56%) etc.
Sadly, Basant’s theory has come undone in the case of Hawkins Cookers. The stock price has not just stagnated but has crashed.
Over the past six months, the stock price is down a whopping 40%. The return on a YOY basis is (-) 11% while over two years, the stock has given a miserable return of 1.25%.
Today, the stock slumped nearly 11% in the wake of heavy selling by investors.
The reason for investors’ deep disappointment with Hawkins is that the company not only reported pathetic results but also slashed the dividend percentage from 600% to 450%. So, the dividend yield which has so far insulated the stock and protected the downside is also eroded.
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With the benefit of hindsight, we can say that Basant ought to have known better than to have recommended Hawkins for investment. In fact, in January 2015, when Basant sent out the buy call, the stock was already in the doldrums owing to problems with the labour and the pollution control authorities. It was quite clear that the management had lost its mo-jo. There was no talk of new products being introduced, there was no plans for expansion, there was nothing.
Hawkins’ management is in fact notorious for maintaining a studied silence at all times. Its CMD, Brahm Vasudeva, hates interacting with the press or even the shareholders. They stonewall most questions. In fact, this trait of Hawkins’ management probably irked Dolly Khanna and that is why she dumped the stock.
However, Basant was not deterred by any of the negatives. He recommended the stock on the basis that it is “the classic proxy to the evergreen Indian middle-class boom story”. Basant also dismissed fears that the stock is expensive (then quoting at a P/E of 49x) on the logic that the comparison of its market cap (then Rs. 2000 crore) with the potential consumer base of 125 crore middle class Indians made the stock dirt cheap.
The worrying part is that despite the steep fall, Hawkins is still quoting at a whopping P/E of 37x. Worse, the management is still maintaining a studied silence and there is no commentary on what is going on and what is being done to revive the flagging sales and profitability. Also, the cookers market is extremely competitive with a number of players in it like Prestige, Tefal, Butterfly, Pigeon, Apple, Vijayalakshmi, Pristine, Royal, United, Greenchef, Doniv, Polo, HomeKing, Sunrise, Saral, Ensis, Polo, Virat, Vital, Kumkum etc. So, those days of high margins may be gone.
What one should do in such a situation is not clear. Whether Hawkins will ever go back to its glory days, and if so, when, is the million dollar question.