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Resilient performance in challenging environment

DOMS Q2FY25 performance was tad better than our forecasts both on revenue and profitability. Ex-Uniclan sales, LTL revenue growth was c.16% yoy which is moderation from c.19-20% yoy sales growth seen in past quarters. However, it is still a resilient performance, especially in a challenging environment and likely to be ahead of peers. Input costs remained benign which along with better product mix resulted in healthy operating performance. We like DOMS’ strategy of increasing TAM and extending to additional categories (like toys, bags, baby care, children apparels, cosmetic pencils, sports gear, etc.) which are associated with growing years of kids and young adults is clear, as also evidenced by the recent acquisitions (Uniclan, Skiddo, Clapjoy). The recent acquisitions are not expensive, however, headroom for error is limited given the expensive valuations; hence, inorganic growth strategy, scale up in the new categories (Bags/Babycare) and sustaining growth in core business will be key monitorables in our view. We raise our FY25-27E by 3-4%, incorporating Uniclan acquisition & roll forward to Mar’27. Maintain BUY with revised TP of INR 3,000.

* LTL sales growth of c.16% yoy, resilient in challenging demand scenario:

Consol sales grew by 19.7% yoy to INR 4.6bn, while growth in EBITDA and PAT was higher at 31.7% and 42.5% to INR 859mn and INR 513mn respectively. Revenue growth was c.2% better than our expectations led by domestic sales (aided by kits/combos, office supplies, scholastic stationary) and consolidation of Uniclan acquisition (sales of c.INR 137 mn in the quarter). Ex of Uniclan, LTL sales growth for the quarter was c.16% yoy. While gross margins were ahead of our forecasts, benefit was partially offset by higher overhead costs resulting in c.2% beat on EBITDA.

* Domestic sales up 26% yoy while exports performance remains muted:

Domestic business grew by c.26% yoy while exports declined (c.-7% yoy) during the quarter, impacted by weak demand in international markets on the back of geopolitical tensions. On segmental basis, growth was led by Pens, Adhesives, and Kits & Combination packs. Scholastic stationary grew by 11% while Art material growth was flat on yoy basis. Paper stationary grew by 6% yoy while strong growth was seen in Kits & Combos (+20%) and Office supplies (+90%). On the distribution front, DOMS has expanded its retail touchpoints by 10,000 outlets to 1,35,000 outlets in the quarter.

* Delivery on operating profitability remains strong:

Gross margins improved 231bps yoy and 31bps qoq to 43.4% - a function of benign raw material environment and better sourcing (benefit of scale efficiencies). Staff costs grew 15.5% yoy, largely in line with our estimates. However, other expenses grew by 32.7% yoy at a faster pace vs revenue growth of 19.7%. Flowthrough of gross margin benefit was partially offset by sharp increase in other overheads during the quarter. Resultant EBITDA grew by 31.7% yoy to INR 859mn with a margin expansion of c.171bps yoy to 18.8% (inline with our estimate). Higher other income resulted in PAT growth of 42.5% yoy to INR 513 mn, 3% above our estimate.

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