The Hawkins-Unitech Puzzle

What’s this got to do with the chart below?

And what’s this got to do with the chart below?

Is there is a co-relation or am I just making it up?

24 thoughts on “The Hawkins-Unitech Puzzle”

  1. Thanks for Sharing Sir! Good Observation, Chairman’s message can surely guide individual investor where the company is headed in future.

  2. The following comment from one of Warren Buffett’s talk made a huge impression on me and is probably apt in this case.

    “I would like to talk for just one minute to the students about your future when you leave here. Because you will learn a tremendous amount about investments, you all have the ability to do well; you all have the IQ to do well. You all have the energy and initiative to do well or you wouldn’t be here. Most of you will succeed in meeting your aspirations. But in determining whether you succeed there is more to it than intellect and energy. I would like to talk just a second about that. In fact, there was a guy, Pete Kiewit in Omaha, who used to say, he looked for three things in hiring people: integrity, intelligence and energy. And he said if the person did not have the first two, the latter two would kill him, because if they don’t have integrity, you want them dumb and lazy.

    We want to talk about the first two because we know you have the last two. You are all second-year MBA students, so you have gotten to know your classmates. Think for a moment that I granted you the right–you can buy 10% of one of your classmate’s earnings for the rest of their lifetime. You can’t pick someone with a rich father; you have to pick someone who is going to do it on his or her own merit. And I gave you an hour to think about it. Will you give them an IQ test and pick the one with the highest IQ? I doubt it.

    Will you pick the one with the best grades? The most energetic? You will start looking for qualitative factors, in addition to (the quantitative) because everyone has enough brains and energy. You would probably pick the one you responded the best to, the one who has the leadership qualities, the one who is able to get other people to carry out their interests. That would be the person who is generous, honest and who gave credit to other people for their own ideas. All types of qualities. Whomever you admire the most in the class. Then I would throw in a hooker. In addition to this person you had to go short one of your classmates.

    That is more fun. Who do I want to go short? You wouldn’t pick the person with the lowest IQ, you would think about the person who turned you off, the person who is egotistical, who is greedy, who cuts corners, who is slightly dishonest. As you look at those qualities on the left and right hand side, there is one interesting thing about them, it is not the ability to throw a football 60 yards, it is not the ability the run the 100 yard dash in 9.3 seconds, it is not being the best looking person in the class, they are all qualities that if you really want to have the ones on the left hand side, you can have them.

    They are qualities of behaviour, temperament, character that are achievable, they are not forbidden to anybody in this group. And if you look at the qualities on the right hand side the ones that turn you off in other people, there is not a quality there that you have to have. You can get rid of it. You can get rid of it a lot easier at your age than at my age, because most behaviours are habitual. The chains of habit are too light to be felt until they are too heavy to be broken. There is no question about it. I see people with these self-destructive behaviour patterns at my age or even twenty years younger and they really are entrapped by them.

    They go around and do things that turn off other people right and left. They don’t need to be that way but by a certain point they get so they can hardly change it. But at your age you can have any habits, any patterns of behaviour that you wish. It is simply a question of which you decide. If you did this… Ben Graham looked around at the people he admired and Ben Franklin did this before him. Ben Graham did this in his low teens and he looked around at the people he admired and he said, “I want to be admired, so why don’t I behave like them?” And he found out that there was nothing impossible about behaving like them. Similarly he did the same thing on the reverse side in terms of getting rid of those qualities. I would suggest is that if you write those qualities down and think about them a while and make them habitual, you will be the one you want to buy 10% of when you are all through. And the beauty of it is that you already own 100% of yourself and you are stuck with it. So you might as well be that person, that somebody else.”

    1. Prashanth, that’s a valid point. The results don’t change, however, when we look at the data from April 2011 onwards as well. See:

      I am making a general point here. How is the market pricing good corporate governance? In my view, good corporate governance is getting to become so scarce, that when companies having Hawkins-type DNA are found, the market really doesn’t care much about the near-term mediocre or even poor performance. Any drop in the stock price creates new demand for shares because of the scarcity value. Investors have got so badly burnt by RCOMS, GMRs and Unitechs of India that when they find companies having DNAs similar of that of Hawkins, they don’t care.

      This scarcity value, may or may not last. I hope it doesn’t because if it doesn’t that would mean that there are many more companies that have excellent corporate governance than just a handful.

      None of the above detracts from the importance of a great business. An excellent Hawkins-type DNA in cotton yarn manufacturer isn’t going to do much for equity owners in the long run. But when you get a solid moat + the Hawkins DNA, and if this combination is scarce, you get to see scarcity value in the stock market…

      1. hi Sanjay sir,
        ur reply tells a lot indirectly and many different forum members know what it means 🙂


  3. Buffett says it time and again that there are 3 requirements of success – 1. intelligence, 2. energy and 3. integrity. Unitech just had #2 pre-2008. Hawkins, the link suggests, had all three, and especially #3. Maybe (or certainly) that’s what mattered here. Regards.

    1. Well in a sense the market is saying that ill-gotten wealth should get a very low multiplier and honestly-earned money gets a higher multiplier. So, the PE multiple is not just about earnings growth, but also about the a durability of long-term earnings growth. And if earnings growth (with the help of political clout, financial shenanigans, gambling activities etc) are non sustainable, then those earnings will get a poor discounting from the market. At least that’s what the market seems to be saying right now. Maybe in the next bull run, new robber barrons will arrive, new source of funds will also arrive and that market won’t give a damn about corporate governance standards either. But for now, its giving a very large premium to high standards of corporate governance (at least in those companies that are visibly ethical).

  4. There is a definite co-relation. Hawkins talks about wishful optimism, whereas Unitech about blind optimism. Sanjay Chandra mentions that “we are chasing growth”, but he probably forgot that first he needs to build a platform. If the platform is correct, growth will come which Hawkins has clearly demonstrated over the years. It is like investing where the key thing is to focus on the process of investment decision making and not the outcome. If the process is reasonable correct, outcome will eventually follow.

    Hawkins speech is humble to which anyone could instantly connect to. He doesn’t talk of big, smart and stylish things but the basic principles which even followed on a personal capacity could lead to better life. I believe, if the shareholders are clearly made aware of the boundaries within which the management will operate; it will eventually show in the market quotations.

    Warm Regards,
    Manav Choksi

  5. Couldn’t spot a co-relation. A 1400% gain is just about the symmetrical opposite of a 93% decline though, which is how the two companies have seen their stock price change in the above charts since 2007. Similarly, the two companies’ managements also seem to be symmetrical opposites of each other on the important counts of ‘skills (operating as well as capital allocation) and ethical conduct’.

  6. I think only Part of the reason of the stock movement is explained by the links.
    Ofcourse, Management quality & intergity matters for a long term investor..

    But business fundamentals matter more than that, Sir.
    Hawkins- Asset light, high roce, good dividend, good brand, Moat.
    Unitech- A poor business with high debt.

    Also, FMCG is into bull run right now, Real estate into Bears. What say, Sir?

  7. Those who purchased Hawkins worth Rs.1Lakhs in 2008 can now buy “Hyundai Elandra”

    Those who purchased Unitech worth Rs.1Lakhs in 2008(at the same time) can now buy average Atlas bicycle


  8. In 2007 the same column would have called Unitech as visionary and Hawkins as a dud 😉 …nevertheless always be wary of businesses and promoters who promise to deploy substantial incremental capital at superior RoE/ROCEs…epecially the debt laden ones….

  9. Yes, there is a co-relation, of ‘-1’.

    1). While, Hawkins was and remained “stay-close-to-the-knitting kind of company” and tried becoming better as that, Unitech moved out of it and did something they were never cut out for – Telecom.

    2).Hawkins stuck to its philosophy of “Be Prudent”, Unitech did the exact opposite.

    3). Hawkins said “All our people are instructed time and again that the results have to be achieved and the means have to be right. It is not a question of doing one or the other – we have to do both”, Unitech, again the exact opposite…forget the means, focus only on the End!

  10. Sir,

    What we could see that from the period 2007 till date, The returns on NSE and BSE are almost 0%, but returns on Hawkins is 1300 % and Unitech is -92%.

    But in the given period 2007 – 2012, the bull run had reached a peak and also a big low as suggested from Index (For various macro reasons)

    Both stock had a remarkable past and promising future at that point of time. Hawkins was a conservative company who would keep tabs on contingent liabilities also.

    Whereas Unitech is a leveraged company betting on higher returns in bull run. but things did not go well and it ran in to a debt trap.

    Sir, Are you suggesting a portfolio of Aggressive and Defensive Stocks, wherein each will performs in different times i.e Unitech would have performed if the bull run would have continued and Hawkins would performs in case of bear Run as people will run for defensive stocks.

    But if I have a portfolio, The Returns would have been almost 650 % on portfolio excluding cost of funds.

    Expecting you critical comments


  11. Masterji, your answer is in your question – you are making things up. There is NO real correlation between the two. It is human nature to try and correlate even unrelated things just because they may appear to correlate. You know you have asked us a question and most of us instead of actually finding out if there a relationship have focused on creative ways of coming up with an answer. There are people who will try and provide an explanation to everything. This is one such case.

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