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Plant visit takeaways

We recently visited DOMS’ manufacturing facility located in Umbergaon, Gujarat. The 13 manufacturing facilities in Umbergaon span across c.37 acres of land and is one of the largest stationery manufacturing facilities in India. On the business front, the company reiterated its focus on continued innovations (Powering growth through innovation) and the importance of making product the winner. The management is comfortable with 16-17% operating margins, and growth driven by customer satisfaction remains the top priority. The company would be content with topline growth ‘higher-than-industry’, as per the promoter Mr. Santosh Rasiklal Raveshia. The promoter hinted that the company may explore other avenues in future (indicative from entry into toys & bags segment), but would be confined to the ‘Kids’ category. Given the superior growth trajectory & healthy return ratios, we expect the stock to trade at a premium multiple. We remain optimistic on the company’s ability to gain market share by focusing on innovations and leveraging end-to-end manufacturing capabilities. Any sharp correction should be used as an opportunity to add.

* Enhancing manufacturing capabilities..: The Umbergaon facility spans across 37 acres, making it one of India’s largest stationery manufacturing facilities. The facility is equipped with modern production processes. The company is backward integrated with operations such as procurement of raw materials, moulding, assembling, and integration of subassemblies into finished products – being done at the Umbergaon manufacturing facilities. This has enabled it to gain competitive advantage by improving productivity and reducing costs. The company is expanding capacity – a) 1L sq ft added in Q3FY24 and another 1L sq ft to be operational soon, b) Pencil manufacturing expansion underway, expected to commence production by 4QFY25, c) regular upgradation at existing facilities leading to improved capacities, and d) acquisition of c.44 acres of land adjacent to the existing Umbergaon facilities – the 6L sq ft area in Phase 1 (out of total 18L sq ft) will be dedicated to pens, highlighters and mechanical pencils. The first building should be operational in 12-15 months’ time and would be dedicated to manufacturing pens.

* … along with sharp focus on innovation will allow better market servicing, drive growth and sustain profitability: The managmeent re-iterated its focus on innovation-led growth and will continue to grow faster than industry. Further, with new capacities getting added and supply constraints getting eased, DOMS will be able expand distribution (currently reaches c.125-130k outlets vs universe of c.300k). While input costs have been benign to stable which led to strong EBITDA margins (c.19% in 2HFY24), on conservative basis management expects margins to be in the range of 16-17%. Innovation remains the DNA of the company. The company has a 50-member team involved in designing and R&D. The team focusses on developing products, keeping in mind latest trends and profitability (all products have margins in the range of mid to high teens). A combination of strong innovation and enhanced manufacturing capabilities will enable DOMS to gain shelf space among retailers, add newer touch points and drive overall growth.

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