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LTL growth below est., capacity addition & recovery in core will be key

DOMS 4QFY25 earnings print was largely inline on topline and operating profitability. On the revenue front, the construct was not on expected lines - organic (core stationery business) growth was c.14% (weaker than our est. of 17%) and incremental growth was led by higher sales from recently acquired Uniclan business. Within core business, revenue decline was seen in Scholastic Stationery & Art Material (together accounted for c.49% of sales) - a function capacity constraint, higher rebates/discounts which impacted net realisation and also higher growth in Kits & Combos. On full year basis, these 3 segments together grew c.8% with balanced mix of volume & pricing. Uniclan reported strong sales, similar to Q3 benefiting from additions in capacity & channel partners. Operating performance was inline - our est. indicate base business margin stable at c.18.3% and Uniclan margins at c.8%. Management on conservative basis is looking at consol. sales growth of 18-20% (core growth lower vs. earlier expectations as new capacities will likely come on stream in FY27E), EBITDA margin of c.16.5-17.5% & PAT margin of 10% (Uniclan acquisition led amortisation impact of c. INR 45mn/year) for FY26E. Factoring the same, we have cut earnings by 9-10%. We like DOMS’ execution so far as well as its strategy of increasing TAM and extending to additional categories (like toys, bags, baby care etc.). However, with valuations at 57x FY27E headroom for error is limited. To that extent, scale up in capacities & core business will be key monitorable. We roll forward to June 27E EPS & retain Buy with revised TP of INR 2,845.

* Organic sales growth at 14% was below expectation & lower vs. historical trends: Consol. revenue grew by 26% yoy to INR 5.1bn (inline) – LTL sales (in core stationery business) growth was 14.1% yoy as strong growth in Paper Stationery (+51.2%), Kits & Combos (+38%) & Office Supplies (double yoy) due to capacity additions was offset by weakness in Scholastic Stationery and Scholastic Art Material which saw decline in sales. Mgmt. attributed the weakness in latter two to capacity constraints, higher rebates/discounts and increased preference for Kits & combos. Recently acquired Uniclan Healthcare business reported strong performance with sales of INR 481mn (vs. est. of INR 350mn) led by capacity additions and increased penetration due to addition of new channel partners. Exports grew c.19% yoy (after witnessing a decline in the previous three quarters) during the quarter, albeit on a soft base.

* Delivery on operating profitability largely inline with expectations: Consol. gross profit grew 25.8% to INR 2.2bn with stable margin performance of 43.9% (better than our estimate of 43.5%). This was partially offset by elevated staff costs (+29.1% yoy) and other overheads (+37.8% yoy) resulting into EBITDA growth of 16.2% to INR 883mn. EBITDA margin contracted 146bps yoy to 17.3% (largely inline). YoY compression in EBITDA margins is due to consolidation of Uniclan business which has lower EBITDA margins. Reported PAT grew 7.2% to INR 484m, 6.3% below our estimate due to higher depreciation (+44% yoy, includes impact of additional amortisation due to Uniclan consolidation) and lower other income (utilisation of funds partly towards capex).

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