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Company Background

Linc Pen & Plastics Limited (Linc), promoted by Mr. Deepak Jalan, Managing Director, in 1994, is India’s leading manufacturer, marketer and exporter of complete range of writing instruments, having presence in over 50 countries. Its state-of-the-art integrated manufacturing facilities are located at Falta SEZ and Sirakole in West Bengal and Umbergaon in Gujarat.

Mitsubishi Pencil Company, Japan, a global writing instruments giant, whose popular products like Uni-ball are being exclusively marketed in India by Linc for over a couple of decades, has a 13.45% stake in Linc’s equity capital. With an aim to further strengthen its product portfolio and leverage its distribution network, in 2018, Linc entered into a marketing tie-up with the Chinese stationery giant, Deli to market its products in India.

Investment Rationale

Sequential improvement in performance with better off take

* During Q4FY21, Linc’s net sales witnessed a decline of ~6.4% y-o-y to ~Rs 937.7 mn. Exports remained muted and declined by ~38.7% y-o-y to ~Rs 123.6 mn on the back of weak global sentiments and continued trade disruptions. Also, demand from Myanmar, one of its key markets, continued to remain subdued with the ongoing political disruptions in the country. Domestic sales however grew by ~1.8% y-o-y to ~Rs 814.1 mn on the back of increase in off take driven by wider distribution reach. For FY21, topline de-grew by ~35.3% y-o-y to ~Rs 2.6 bn. Sustained closure of educational institutions and commercial offices still operating with lower workforce impacted the overall performance of the Company.

* However, sequentially the Company witnessed an improvement of ~32.2% in top line driven by Company’s focus to strengthen their distribution reach that helped them seed their brands with new retailers. The Company widened its product basket into non-stationery products.

* The Company sustained its focus across its brand portfolio - Linc, Uni-ball, Pentonic and Deli. Since April 2020, Linc has embarked on a rejig of its distribution model by undertaking remote engagement and non-facial contact, which is a potential game changer - helping it grow its network and making it more efficient, thereby, improving market share, revenue and profitability which is likely to start reaping benefits from FY22E. Linc widened its retail network by ~13,000 in Q4FY21 with the total retail reach of ~1,48,000 as on March 2021. The Company aims to expand its presence to half a million outlets over next three years. This will deepen Linc’s presence into Tier-II+ markets and amongst non-conventional retailers. The management believes that with change in their business model by shifting towards a distribution driven Company, they will lay a foundation of a reinvented Linc.

* The Company witnessed a gradual recovery with sales improving each successive month. From 27% y-o-y levels in Q1FY21, sales improved to ~74% y-o-y levels in Q3FY21 and ~94% of the pre-COVID levels in Q4FY21. However, the improvement has currently been impeded with Covid-19 second wave induced lockdown in many states. Visibility of educational institutions opening up remains bleak in the near term, despite the increase in India’s vaccination pace. Thus, in light of tough business climate we expect the topline to remain flattish in FY22E and bounce back to FY20 levels by FY23E buoyed by a rise in economic activity and gradual resumption in educational institutions. However, our estimates are contingent upon future uncertainties of COVID-19 disruptions, which might impact our forecasts.

EBITDA margins to remain subdued in FY22E

* During the quarter, EBITDA margins declined by 328 bps y-o-y to ~7.0% due to increase in raw material (RM) costs driven by the surge in crude oil prices. RM costs as a percentage of sales increased by 684 bps y-o-y to ~67.7%. On the other hand, employee cost reduced by 89 bps y-o-y to ~9.1% while other expenses as a percentage of sales decreased by 268 bps y-o-y to ~16.2% on the back of controlled and selective advertisement expenses.

* For FY21, EBITDA margin deteriorated by 567 bps to ~4% on account of lower off take and increase in input cost. Going forward, we expect margins to remain subdued in FY22E, stabilizing at ~9.5% in FY23E with a) increase in volume on the back of increase in distribution footprints, b) continued cost control initiatives and c) improvement in average realization driven by rise in proportion of value added products, priced at Rs 10 and above.

* The Company witnessed a profit of just ~Rs.0.4 mn at PAT level for the year vis-a-vis ~Rs 192.5 mn last year on account of lower operating margin. Interest cost, however, declined by ~49.8% y-o-y to ~Rs 27.4 mn during the year as the Company repaid its entire long term borrowings. For Q4FY21, Linc reported PAT of ~Rs 62.0 mn as against ~Rs 49.8 mn in Q4FY20 driven by increase in other income and savings in interest obligation.

* The Company is undertaking effective inventory management efforts in order to reduce its working capital requirement. Also, to conserve cash, Linc continues to keep on hold all major capex in anticipation of normalization in trade conditions.

Pentonic’ breaking the barrier

* During Q1FY19, the Company launched an innovative; new generation product i.e. ‘Pentonic’ which has been the highest contributor in terms of value and margins, enhancing Linc’s overall proportion of revenues (general trade – domestic) derived from value added products priced at Rs 10 and above from 40% in the FY19 to 50% in FY20 with an aim to increase the share to 75%. Going forward, Linc intends to add an array of new pens under the Pentonic umbrella.

Valuation

* Linc has consistently witnessed improving financial performance and strong brand equity. The recent blip is led by Covid-19 related demand destruction. The Company’s earnings are expected to witness a rebound by FY23E. We have valued the stock at 18x FY23E earnings of Rs 12.5/share and recommend a ‘Accumulate’ on the stock with a target price of Rs 225/share (upside of ~14%).

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