This Krafty PIGEON is flying high on gas.

StoveKraft Dynamics

Stovekraft is a kitchen appliances company. It has been making pressure cookers, non-stick cookware and gas stoves for years now and has a formidable name in the industry. Recently it has also got into electric chimneys kitchen appliances and even an LED bulb business.

StoveKraft owns noperate the Pigeon and Gilma brand and also is the Licence holder for Black and Decker in India.

Both Gilma and Black and Decker are very small portions of the business and have an even smaller impact on the bottom line, so I’ll just ignore them for the time being.

StoveKraft used to have 4 main businesses

1. Manufacturing gas stoves for HPCL, Indian Oil and BPCL for the last 8 years and this business is more or less done.
2. Manufacturing and supplying to State Govts like the govt of Tamil Nadu for Welfare schemes which has been closed.
3. Manufacturing White Label products for Indian as well as Export markets. Exports were for companies like Walmart, J.C Penny and other Big Box Retailers.
4. Manufacturing and selling under the PIGEON brand for the company itself.

As of now the entire capacity is being used to either manufacture white label products or for own brand retail. The first two businesses are done with.

Though the first two businesses did not make too much money for Stovekraft it did great in terms of its Branding as a trustworthy product because the state govt as well as the OMC companies distributed lakhs of the gas stoves across India and in many ways this can be called the foundation for brand Pigeon in India.

Currently the company has one of the lowest indigenous production costs in the cooker, stoves and the non-stick business. The non-stick business can even compete across the globe in terms of cost and quality.

In any manufacturing concern, the key to healthy profits is to simply operate at levels higher than the break even point. Raju Bhai Gandhi confirms that they are already working at 2X of the BEP which is confirmation that the operating leverage will keep playing out.

The company works on a simple COST + MARGIN model. Any price increase, it simply passes on. Irrespective of which way they sell, the minimum margin is guaranteed before the goods leave the factory. Channel margins are then added accordingly. You never have a case where the company is absorbing a cost, just out of the fear of loosing marketshare or just to maintain relations with the suppliers. Companies like Heritage Foods, would consistently absorb price hikes of milk cost and not pass them on to customers, for a variety of weirdly justified reasons. Thankfully StoveKraft does not indulge in such nonsense.

The company today sells about 90% of its production in India and about 10% is exported to big box retail. Of the sales in India about 30% is online. Though they have such a big business online, the online share will probably not cross 35% simply because the overall pie itself is growing rapidly.

StoveKrafts business model is therefore pretty simple. Produce at the lowest cost and highest quality possible. Sell via its distribution channel and make sure the money comes back efficiently. All this has to be done by making sure they are innovating and upgrading all their products for efficiency and convenience.

Management

There is a lot that can be said about this total go-getter Jugaad genius promoter, but its just better that you watch this video.

I have a particular positive bias towards companies that have been founded on the basis of Jugaad and are making a move towards the organised industry. When the company is again in an industry which itself is moving from the unorganised to the organised, it is a pure and simple DOUBLE DHAMAKA.

The PIGEON brand is probably the cheapest brand in the organised market. Given our demographics the volumes in the poor->middle, the middle and the upper middle-class are simply stupendous. It makes absolute sense to be here.

Recently the founder Raju Bhai Gandhi has been talking a more active role in innovation and R&D and has given the reigns of operations to Rajiv Mehta.

Rajiv is the guy who kinda brought PUMA into India. Big sneaker fans will swear that in the big boy club that comprises of Nike, Adidas and Reebok – PUMA clearly stood apart in terms of cool quotient and value for money. India demands color and Rajiv gets that. I am assuming these cool colors are Rajiv’s influence.

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Industry

The kitchen appliance industry is extremely competitive as well as cost conscious at the same time. The stalwarts in the industry that StoveKraft competes with are TTK Prestige, Hawkins & Butterfly Gandhmati.

Of these companies TTK is the leader and will be the leader in the foreseeable future. Hawkins is not a company that has great corporate governance. Also there are huge rumours in the market about Basant Maheshwari and Hawkins being involved in a massive pump and dump in 2015. Actually I believe it !

Butterfly Gandhimati used to have some family disputes which seem to have been sorted out now and clearly is a formidable player.

The lizard brain would like to hyper analyse which of the two, Butterfly or Stovekraft would do better. Given that the industry itself is growing rapidly and that companies do not really need to gain marketshare from the competition to grow, the answer is simple. Bet on either of them or both of them.

More important than picking which one it is important to understand the following trends.

1. New houses have tinier kitchens as the families are becoming more and more nuclear. Given the small size of the kitchen and ill ventilation, every stove need to have a chimney.
2. One cannot have as many utensils as they want due to lack of space. This is where products that double up as cooking and storing come into play. StoveKraft is quite strong in the multi-use segment.
3. Electric Stoves will only gain popularity as the number of boil and serve products in the market are increasing massively. We used to have Maggi as our only option, now you have Maggi, Upma, Oats, Curris, Pulao and what not. All you need is a electric cooker and a Pan. The Pantry kinda just got a steroid boost.
4. Men are finally beginning to cook. Given how much men like their toys, its not difficult to imagine them ordering stuff to simplify their cooking.
5. Domestic help is becoming expensive as well as undependable. We are probably in the last generation where household help will be at a rock bottom price. Given that every kid over the last 10 years has been going to school, the availability of help is only going to reduce. Their functions have to be replaced with appliances and automation.

Why Unorganised to Organised

This is a simple question with a deep answer. Let’s start with online sales.

To sell on Amazon or Flipkart you need ratings. To get ratings you need volumes. To get volumes you need a brand. To be a brand you have got to be organised, not listed or unlisted, but simply organised.

Ratings seems to be a new kid on the block, but we have been using them all along. Remember the good old ISI mark ? It is nothing but rating. All the ads that use Amitabh Bachan, are in a way nothing but rating. Whats changed basically is the democratisation of rating. Earlier the ratings were institutionalised and now the power has come to the consumers. Ratings on Amazon for me is simply “word of mouth advertising” going digital. It is here to stay and it is powerful.

When you become AMAZONS CHOICE, two massive changes happen

• The propensity for customers to buy goes up several notches as it is a symbol of trust and most lazy customers don’t want to explore.
• Stove Kraft doesnot need to spend on ads to promote. The volume automatically becomes its advertisement and it can use that money to advertise other products.

Another factor is that achieving manufacturing advantage along with brand and distributing advantage simply can no longer be achieved without being an organised player. While there are still quite a few companies which operate strongly in a certain geographical area, their days are simply numbered or at least they will not be able to grow their marketshare for too long.

Ownership

The counter still doesn’t have a any great following. Form informal sources the only Star investors seem to be Unifi Capital. Lucky investment Ashish Kacholia used to have his money in Butterfly.

Even the PE funds – Sequoia has not yet completely sold out its stake in the market.

A long story short, the market is not yet Gungho about this stock.

Financials

I hate bothering about the financials of a company that has just been listed. As a former auditor I know the kind of window dressing that happens in a companies books just before they list.

The main take away for me is that they seem to be at the right end of an operating cycle leverage and have manageable debt.

Valuation

The whole listed kitchen appliance industry itself has a market valuation of about 15,000 cr with the sales of about 4,000 cr. Assume the organised but unlisted does another 4,000 cr, it still seems extremely tiny for a country like India.

I think the organised can itself hit 30,000-35,000 cr M.Cap in the next 3 years and I have a feeling Hawkins will be displaced from its second position.

Stove Kraft seems expensive given that it is still coming out of its sins from the last few years. Once you see a full year i.e Financial year 2021-22 the numbers will look drastically different.

Gut Feeling

Apparently, the sales team at stovekrafl would come with a number and then ask the production team to manufacture. On the surface this makes sense because it leads to lower finished goods inventory, but if any one knows anything about incentives, this procedure is dead wrong. Now Rajiv Mehta has apparently turned this process on its head, and the sales team simply has to sell out the entire manufacturing capacity, that too on a cost + basis and last quarter they did that. Assuming that the last quarter was not an exception, this phoenix will rise from its ashes.

Coming to my gut. After listening to that rather long, Jain biased video that I shared above, I think Gandhi is an Intelligent Fanatic who has come very far. I dont know why but the company reminds of the kind of promoter struggle that even India Mart went thru, years of nothing and then so much.

My gut feel is that this Pigeon will carry a message of profits.

I won’t be too surprised to see a 3,000 cr Market Cap soon.