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In an evolution zone

We initiate coverage on DOMS with a BUY rating and TP of Rs3,349. In an industry dominated by unorganized players, competitive edge of DOMS stems from 1) superior brand recall 2) ability to offer innovative products (eraseners, two-dooz sharpeners & grove pencils) 3) cost competitiveness arising from backward integration 4) strong distribution reach with 125,000+ retail touch points and 5) superior R&D capabilities & technical know-how given the collaboration with FILA. DOMS has a diversified stationary & arts material portfolio and has outlined a capex plan of Rs4,535mn spread over 2 years to expand capacity in writing instruments, water color pens and markers & highlighters at Umbergaon. Given the expansion plans, we expect revenue/PAT CAGR of 26%/28% over FY24-FY27E. Recent entry into diapers market with plans to enter into ancillary categories like footwear, apparels, confectionaries, and sports gears & accessories widens the addressable target market for DOMS providing growth optionality. We value the stock at 60x FY27E EPS with a TP of Rs3,349. Initiate with a BUY.

Strong brand re-call with product innovation capabilities: A&P spends averaging at ~ 0.5% over last 5 years and adoption of cash & carry model in general trade (GT) is an indication of superior brand strength. In addition, DOMS has launched quite a few innovative products like eraseners (combination of sharpener & eraser), grove pencils (provide strong grip) and Two-Dooz sharpeners (can be effectively used by both left & right-handed individuals) that act as a key attraction for children resulting in higher re-call value. Ability to innovate & garner mind share in low ticket SKUs has been a key factor in developing customer loyalty.

Strong distribution network with a pan-India presence: DOMS has established a strong domestic distribution network comprising of 125+ super-stockists and 4,750+ distributors across 29 states and UTs along with a dedicated sales team of 675+ personnel covering more than 125,000 retail touch points. Given stationary & art material products are low-ticket SKUs and buying decisions are impromptu, distribution strength is all the more critical for growth and DOMS has made reasonable progress here since last 3 quarters.

Backward integration provides competitive advantage: DOMS has attained a strong leadership position in core product categories such as pencils and mathematical instrument boxes via full backward integration. Apart from having the ability to manufacture ferrule (metal strip that binds eraser & pencil), DOMS has capabilities to manufacture all key components of mathematical instruments in-house including the tin-box. Full backward integration provides cost competitiveness and a huge competitive advantage over peers.

Outlook & valuation: DOMS has outlined a capex plan of Rs4,535mn to expand capacity in writing instruments, water color pens and markers & highlighters at Umbergaon. Construction has already begun on the land measuring ~44 acres and production is expected to commence from 3QFY26E. Given the expansion plans, we expect revenue/PAT CAGR of 26%/28% over FY24-FY27E. We value DOMS at 60x FY27E EPS with a TP of Rs3,349. Initiate with a BUY.

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