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Penning the growth story ahead

Cello World Ltd (CELLO) has achieved significant success within the writing instrument segment (accounted for ~17% of its consolidated revenue in FY24) following its re-entry into the space in CY19. Currently, Unomax (CELLO’s brand) is one of the leading brands in the industry, posting revenue of ~INR3.3b in FY24 (~44% revenue CAGR over FY21-24) along with industry best margin profile. The domestic business accounted for ~60% of segmental revenues in FY24, with exports accounting for the rest.

* The domestic business is expected to sustain strong growth momentum as the company has adopted a multi-pronged strategy wherein it will focus on enhancing the distribution network (with the goal to reach over 0.2m outlets by FY26 vs ~0.12m as of FY24), increasing market penetration (~60-65% as of FY24) and expand its product portfolio (in the process of adding more products within the segment).

* The exports business was adversely impacted by logistic-related challenges in 1HFY25 (revenue declined on a YoY basis). Although challenges in key markets such as Russia persist, the company anticipates a much stronger 2H, led by the improving situation and a seasonally strong 4Q.

* In the medium to long run, the company will focus on diversifying its reach by entering into newer countries (will also reduce the concentration risk) and strengthening its market share within existing geographies, ensuring its return to a strong growth trajectory.

* CELLO’s writing instrument segment commands the highest margins among peers (EBIT of ~25.8% in FY24 vs 18.1%/9.6% for Flair/Linc), and we expect this to continue on account of its focus on premiumization, differentiated market positioning, and superior cost management. We expect the writing instrument segment to clock ~20% revenue CAGR over FY24-27, with EBIT margins to sustain at ~25%.

Adopting a multi-pronged strategy to ride the growing market

* CELLO forayed into the writing instrument business under the brand ‘Cello’ in CY95 and has since achieved remarkable success, becoming a household brand over the years. It sold the brand to a French company ‘Bic Clichy’ in CY15.

* However, considering the huge potential within the writing instrument industry (Domestic TAM of ~INR134b as of FY23; expected to clock ~16% CAGR over FY23-27E), CELLO decided to re-enter the market under the brand ‘Unomax’ following the expiration of the non-compete clause in CY19.

* Post its re-entry, the company rapidly scaled its writing instrument division, re-establishing itself among the top brands in the segment. It recorded sales of ~INR3.3b in FY24, reflecting an impressive ~44% revenue CAGR over FY21-24 (accounting for ~17% of CELLO’s consolidated revenue in FY24).

* Although the company witnessed headwinds in 1HFY25 as a result of declining exports, it is confident of a much better 2H and expects to maintain strong growth momentum in the medium to long run

* CELLO is pursuing a multi-pronged strategy centered on expanding its distribution network (~0.2m outlets by FY26 vs ~0.12m in FY24), diversifying its product portfolio, and entering untapped international markets.

* The company is in the process of adding more products within the writing instrument segment (recently launched highlighter pens). It continues to leverage its collaborations/partnerships with the likes of Disney/Marvel for more visibility.

* In line with its focus on premiumization, the company has launched multiple higher price point products, such as metal and executive pens, colored pens, and cartridge fountain pens. Currently, Unomax is present in all price points from INR10 onwards and does not expect to enter the segment below this price point.

* Accordingly, factoring in CELLO’s strategic roadmap to sustain the strong growth momentum, we expect its writing instrument segment to clock ~20% revenue CAGR over FY24-27.

Navigating near-term export challenges; poised to grow in the longer run

* CELLO re-entered the writing instrument segment with solely export sales in the initial year and expanded into domestic markets later on. As of FY24, export sales still account for ~40% of the segmental revenue.

* Globally, the writing instrument market was valued at ~USD17.7b (~INR1.5t) as of CY23 and is expected to clock ~4.4% CAGR over CY24-30. CELLO’s ~40% export revenue share is the highest among peers (Flair/Linc have export shares of ~19%/20%), reflecting its strong global reach.

* However, the volatile geo-political situation led to headwinds within the export segment, leading to a decline in segmental revenue over 1HFY25.

* CELLO witnessed container-related issues (delay of ~2-3 months) while shipping to key export markets of Russia and US. The increased sanctions have complicated trade with Russia, while disruptions in the Red Sea have adversely impacted logistics to the US.

* The situation is gradually improving but will continue to remain challenging, especially in Russia, due to ongoing internal issues. Nonetheless, the company expects 2H to be much stronger than 1H, led by a seasonally strong 4Q.

* Domestic demand for the writing instrument segment continues to remain strong. Accordingly, we expect the segment to post ~10% revenue growth for FY25, despite the drag in 1H.

* Within the medium to longer run, CELLO plans to target new geographies to ramp up the segment (this will also help reduce concentration risks). It also plans to strengthen its share within existing geographies by improving its presence and distribution network.

* Factoring in the huge addressable market, growing global opportunity and strategic roadmap of CELLO to further tap into global markets, we expect exports to maintain material contribution within the writing instrument segment.

Standing out among peers

* Within its listed peers in the writing instrument segment, Linc and Flair are the largest competitors for the company, while DOMS has recently entered the space.

* While Flair is the largest player in the market with revenue of ~INR9.2b in FY24 (highest growth rate at ~47% CAGR over FY21-24), its margin profile is still relatively weaker compared to CELLO.

* Despite being a relatively new player, CELLO is leading in terms of margins, driven by its strong experience (developed CELLO as a household writing instrument brand over CY1995-2015), differentiated market positioning (presence across all price segments), and a focus on premiumization (diverse range of premium products includes metal pens, executive pens, cartridge fountain pens, etc.). CELLO’s superior EBIT margins (~25.8% in FY24 vs ~18.1%/9.6% for Flair/Linc) also indicate its superior cost management over peers.

* CELLO’s distribution reach is still way below its competition, with 1,522 distributors as of FY24 vs 8,080/2,871 for Flair/Linc. (though it has been present in the market for only half a decade, while its peers have an experience of over 2-3 decades). However, this indicates a greater potential for CELLO to tap into the untapped market and capture further market share within the industry.

* Overall, we believe that Unomax is positioned very well in a growing market and is expected to grow at a much higher rate than the industry going forward.

Valuation and view

* Operating in diverse industries, CELLO benefits from an expanding TAM across markets. Within the writing instrument segment (TAM of ~INR134b as of FY23; expected to clock ~16% CAGR over FY23-27E), the company will benefit from industry tailwinds such as favorable demographics, increased discretionary spending, growing literacy rates, rising skill enhancement courses, etc. We estimate CELLO’s writing instrument segment to grow faster than the industry.

* Overall, the company is expected to post a robust CAGR of 19%/22%/22% in revenue/EBITDA/adj. PAT over FY24-27, led by healthy growth across segments on account of the expansion of SKUs as well as distribution reach, coupled with strong growth in the glassware segment after the ramp-up of the new plant in Rajasthan.

* We reiterate our BUY rating on CELLO with a TP of INR1,000 (premised on 40x Sep’26E EPS).

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