Stovekraft Ltd.               

4 October 2024

By Majid Ahamed

About the Company

The company, established in 1999 by Mr. Rajendra Gandhi, is a leading manufacturer and retailer of kitchen solutions in India, with a fast-growing presence in the kitchenware industry. It offers a wide range of products, particularly in the home appliance segment, classified into pressure cookers, cookware, and small appliances.

In 2021, the company launched its Initial Public Offering (IPO). This financial year (FY24) marked a significant milestone with the opening of its first store in North India, expanding its reach and deepening connections with customers.

The company operates under three brands: its flagship brand “Pigeon,” along with “Gilma” and “Black & Decker.” Its product range includes:

• Pressure Cookers
• LED products
• Induction Cooktops
• Gas Cooktops
• Nonstick Cookware
• Small Appliances

Investment Rationale:

1. Capital Expenditure (Capex) Near Completion, is well-positioned to benefit from stronger financial performance in the coming years.
2. The company is set to capitalize on growing demand in rural markets, serving as a proxy for the increasing brand consciousness in these areas.
3. Key Levers of Growth: E-commerce and Export Contribution
4. The company’s forward valuation looks appealing, indicating strong potential for future growth.

History of the Company:

Source: Investor Presentation

Business Segments:

Pressure Cookers
The pressure cooker segment is a major contributor to the top line, accounting for around 21% of the overall revenue. This quarter, the company achieved a positive volume growth of 40 basis points (bps) and a value growth of 2% on a year-over-year (YoY) basis.

LED
The LED segment, sold under the “Pigeon LED” brand, is an emerging segment for the company, contributing about 3% of the top line.

Induction Cooktops
The induction cooktop segment contributes 8% of the top line. The company recorded a slight dip in value growth of 10 bps, along with a volume increase of approximately 8.2%.

Gas Cooktops
Gas cooktops contribute 7% of the overall top line. The company reported a decrease in both volume and value growth, with declines of 3.4% and 0.5% for the current quarter, respectively.

Non-stick Cookware
Non-stick cookware is one of the largest contributors to the top line, accounting for around 25% of the overall revenue. The segment experienced volume growth of 17.6% and value growth of 0.9%.

Small Appliances
Small appliances represent the fastest-growing segment and are currently the largest contributor to the firm’s top line, making up around 36% of overall revenue. This segment saw a value growth of 11.6% and a volume growth of 25.7%.

Geographical Classification

In terms of geographical classification, the majority of the revenue comes from India, nearly 90% of the revenue, and around 10% comes from exports.

Management

The company’s management is led by Mr. Rajendra Gandhi, the Managing Director (MD) and CEO, who has nearly 20 years of experience in the industry. Mrs. Sunita Gandhi, the wife of the CEO, is currently a Non-Executive Director of the company. She previously served as a Director from 2004 to 2016.

Ms. Subba Rao Mayya, the Chairperson and an Independent Director, is a qualified Chartered Accountant with extensive experience in the banking and financial services industry. Other independent directors, with strong financial and legal expertise, ensure that the company maintains robust internal controls and systems.

The promoters hold a 55.88% stake in the business, which is considered reasonable given the size of the company.

Deep-Dive on the Investment Rationale

Capex Nearing Completion, Positioning the Company for Future Growth

The company is nearing the completion of its capex cycle and is well-positioned to achieve growth in the coming years. Since its IPO, the company has made significant capital investments, with nearly ₹300 crores of capex over the years to expand capacity. The plant and machinery gross block has grown 2.5 times over the past four years, reflecting the company’s aggressive expansion strategy.

With the capex expected to be completed this financial year, the company will have a competitive advantage over its peers in terms of scaling its product offerings. In comparison, competitors in the segment have seen much lower growth in their gross block. For instance, Butterfly Gandhimathi’s gross block has actually declined by 2%, while TTK Prestige has managed a 25% increase in the same period.

The company is strategically positioned to capitalize on growing rural consumption, making it a strong proxy for this trend.

According to CPI (Consumer Price Index) data, which measures changes over time in the general level of prices for goods and services that households acquire for consumption, there has been a notable decrease in inflation. From June 2024 to August 2024, the inflation rate dropped from 5.5% to around 4.4%, a decline of 110 basis points. This moderation in inflation is expected to continue, leading to increased consumption, especially in the consumer durables sector, which is likely to benefit the most.

Companies like Stovekraft, whose target customers are in the value segment, stand to directly benefit from this uptick in rural consumption. Given the company’s high operating leverage of 2 times, where a 1% increase in sales results in a 2% increase in EBIT—the expected rise in sales growth from improved rural demand could significantly boost profitability.

Key Levers of Growth: E-commerce and Export Contribution

The company’s strong presence in e-commerce has been a major growth driver, enabling a 17% CAGR in sales over the past three years. In contrast, competitors have struggled to achieve similar growth: Butterfly Gandhimathi reported flat (0%) sales growth over the same period, while TTK Prestige managed a 7% CAGR. The company’s increasing market share in the Small Appliances segment, which has seen double-digit growth in both sales and volume, has been supported by its strong presence on major e-commerce platforms like Amazon and Flipkart. The company has also achieved “Best Seller” status across several product categories on these platforms.

In addition to success in small appliances, the company has seen similar achievements in other product lines, such as bottles, where it has earned the “Flipkart’s Choice” designation. This recognition is based on a combination of quality, ratings, and competitive pricing, further boosting its visibility and sales performance online.

The company’s strategic focus on offering high-quality products at reasonable prices has been pivotal to this success. Furthermore, its growing emphasis on export markets has been another key lever of growth. Export sales have increased from 10% of total revenue in FY21 to nearly 20% in Q1 FY25. This rising export contribution is expected to drive both sales growth and margin improvement in the coming years, as international markets offer higher profitability.

Attractive Forward Valuation and Growth Prospects

As of October 4, the company’s trailing twelve months (TTM) P/E ratio stands at 84.9, and its EV/EBITDA is at 25 times. This is attractive compared to competitors, with TTK Prestige trading at 35 times EV/EBITDA and Butterfly Gandhimathi at 75 times. The company’s prospects are further supported by expected growth in rural consumption and demand for small appliances, along with increasing export contributions.

This growth is expected to drive earnings in the range of 35-40% CAGR, which would translate to 2.5 to 3 times the current earnings over the next three years. This implies that by FY27, the P/E ratio could be in the range of 25-30, making it a compelling investment for medium- to long-term investors (3-5 years).

Risk/Threat

Raw Material Price Risk: Another risk the company faces is fluctuating raw material prices which makes it difficult at times when the raw material prices significantly, as the company is predominantly in the value segment, this makes it harder to pass on the higher raw material cost to the customer and this will deeply affect the operating margin and the profitability, where the material cost on a quarterly has been fluctuating as high as 70% as low as 62%.

High Competitive Intensity
The company operates in the highly competitive B2C space, particularly in the value segment, where it faces competition from both unorganized players and major brands like TTK Prestige and Butterfly Gandhimathi. The intense competition poses a significant risk if the company is unable to differentiate itself, add value, and maintain its leadership in the value segment.

Susceptibility to Consumer Demand
The company’s performance is directly correlated with consumption trends. Any slowdown in consumer demand, as seen in the past two years, can severely impact margins due to the company’s high operating leverage. A decline in sales growth can disproportionately affect EBITDA and net profit, making the business highly sensitive to shifts in consumer demand.

Financial Analysis & Valuation

If we can see the ROE of the company, the company’s ROE has the declining end, at the time of IPO in FY21, they had a very good financial with an increase in the Net Profit Margin at 9%, since then Net Profit Margin has been in decline and is one of the key reason the ROE has been low from 26.9% in FY21 to 7.8% in FY24, the company has high financial leverage where the company increased its leverage from 53 crores to 256 crores in FY24 which had led to the increase the Financial Leverage for the company and the Asset Turnover has been in the declining trend primarily due to the massive expansion in the Fixed Assets but relatively less growth in Sales led to a muted growth in the asset turnover.

Ratio Analysis

In the Ratio Analysis, the company’s inventory turnover has been less due to the fact the company had an issue with the muted sales and volume growth with the increased price of inventory made the inventory turnover less, in the following 2 Financial years, due to which it had led to decreasing in the Fixed and Total Asset Turnover and the Debt to Equity has gone significantly due to increasing capex that the company had made in the last 3 years, which indicates the company has a slow sales growth comparative to the incremental capex and increased COGS has impacted the profitability and liquidity of the company

Valuation

As of October 4th, the company’s market capitalization stands at ₹2,900 Crores, with a trailing twelve months (TTM) P/E ratio of 80. However, valuing the company solely based on its P/E ratio may not be appropriate, given the higher depreciation costs. A better metric for this business is EV/EBITDA, which is commonly used in the industry. The company’s current EV/EBITDA stands at 25 times, which is reasonable for a consumer durables business, where the industry median typically ranges between 35 and 40 times.

The company’s strategic focus on backward integration, along with an increasing contribution from exports, is expected to drive margin expansion in the coming years. Additionally, growing rural demand, the company’s expansion into North Indian markets, and a strong e-commerce presence should contribute to sales growth of around 15-20% annually over the next few years. With margin improvements and higher operating leverage, the business could see earnings growth in the range of 35-40% CAGR, making the current valuation compelling over the next 3-5 years.

However, investors should be cautious about the impact of raw material prices, as the company operates in a value segment where passing on increased costs to consumers can be challenging. Additionally, competitive intensity in the market is a factor that investors need to monitor closely. Despite these challenges, including rising raw material prices over the last two years, the company has demonstrated double-digit sales growth during what has been a difficult period for the kitchenware industry.

Moreover, the company’s expansion as an OEM supplier to major retailers like Walmart is likely to boost growth further. Given the current valuation and the company’s growth prospects, it presents an interesting investment opportunity for the long term.