The Rs 1,200-crore DOMS Industries initial public offering (IPO) opened for subscription on December 13. The stationery and art products maker will be the first company to make a mandatory debut on the stock exchanges in the T+3 timeline.
The price band of the IPO, which closes on December 15, has been set at Rs 750-790 per share. The Gujarat-based company plans to raise Rs 1,200 crore through a public issue. The offer consists of a fresh issue of 44.3 lakh shares worth Rs 350 crore and an offer for sale of 1.07 crore shares worth Rs 850 crore by promoters FILA – Fabbrica Italiana Lapised Affini SpA, Sanjay Mansukhlal Rajani and Ketan Mansukhlal Rajan.
While most analysts rate the offering a Subscribe, the sudden surge in net profit and surprising improvement in margins and return ratios have caught everyone's attention.
Let's delve deeper into the key aspects of the business model, financials and factors that influence the company's performance.
Also read: DOMS Industries IPO: Will this stationery supplier make a name for itself on the stock exchanges?
The business
DOMS Industries designs, develops, produces and distributes a wide range of stationery and art products primarily under the flagship brand “DOMS” in over 45 countries. With a market share of 12 percent, it is the second largest player in India's branded stationery and arts market, just behind ITC, which has a market share of 20 percent. The company's core products such as “pencils” and “mathematics instrument boxes” dominate the market with 29 and 30 percent market share, respectively.
The Company offers consumers products that it divides into seven categories: school stationery, school art supplies, paper stationery, kits and combinations, office supplies, hobby and craft products, and art products.
The company has manufacturing facilities in Umbergaon, Gujarat and Bari Brahma, Jammu and Kashmir. In Umbergaon, DOMS operates 13 manufacturing facilities spread over an area of approximately 34 hectares and is one of the largest stationery manufacturing facilities in India. The company recently acquired 44 hectares of land adjacent to its existing facility in Umbergaon.
Financial performance
Net profit attributable to the parent company increased 567 percent year-on-year to Rs 95.8 crore for the year ended March 2023 and operating revenue increased 77.3 percent year-on-year to Rs 1,212 crore for the same period during the six months till September FY24 It posted a net profit of Rs 70.63 crore on a revenue of Rs 761.8 crore.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose 168 per cent to Rs 186.7 crore in FY23. The EBITDA margin improved from 10.4 percent in FY22 to 15.4 percent in FY23. The PAT margin increased to 7.9 percent from 2.1 percent in the same period.
Return ratios
At 46x, DOMS Industries' price-to-earnings (P/E) ratio is cheaper than that of Kokuyo Camlin (64.14x), but much higher than that of Linc (28.15x), Navneet Education (15.86x), and Flair Writing Industries (35.76x). . The return on equity (RoE) rose impressively from 6.86 percent in FY22 to 33.54 percent in FY2023. The return on capital employed (RoCE) rose from 10.04 percent in the same period to 33.31 percent.
Also read: DOMS Industries IPO: Should you subscribe to Rs 1,200 crore issue?
Reason for the high growth in fiscal year 23
“The high growth in FY23 was due to two factors. Firstly, FY21 and FY22 were affected by COVID-19 as educational institutions were almost closed. In FY23, we saw the impact of normalization, there was also the impact of a lot of pent-up demand, which enabled us to achieve such a high percentage of growth,” Rahul Shah, CFO, DOMS Industries, told Moneycontrol.
A similar trend was also observed in the peer group. Flair Industries' PAT margin improved from 0.33 per cent in FY21 to 12.53 per cent in FY23 and RoCE increased from 0.14 per cent to 31.24 per cent. Likewise, Linc's margin increased from 0.02 percent to 7.68 percent and RoCE rose from -1.55 percent to 29.12 percent over the same period.
DOMS reported a net loss of 6 billion in FY21 from March 22, 2020 to May 3, 2020 to comply with quarantine measures.
While the nationwide lockdown lasted until May 31, 2020, educational institutions such as schools and colleges remained closed for a long time. Multiple lockdowns and prolonged closure of schools, offices and other facilities impacted the entire industry, resulting in lower sales, revenue and expansion plans, as well as disruptions in the distribution network.
DOMS dependency on FILA
As a project sponsor, FILA dominates DOMS' business operations, research and development capabilities and, in particular, export sales. The FILA Group accounted for 61.58 percent of total export sales in FY23. Although high, it has come down from 69.19 percent in FY21.
“The share of total export sales in the FILA Group’s total sales is 16 percent. So, if an adverse situation arises, the company may not face much impact on its business and apart from that, the company continues to maintain close ties with FILA, which will give it access to export opportunities,” said Narendra Solanki, Head of Basic Research – Investment Services , Anand Rathi stocks and stock brokers.
Also read: Doms Industries IPO: 10 things you should know before subscribing to Rs 1,200 crore issue
The future of the pencil
DOMS generated a significant portion of sales from wooden pencils, contributing 31.66 percent of total gross product sales in FY23. A decline in pencil sales hurts the overall business and therefore poses a potential risk. However, Prashanth Tapse, Research Analyst and Senior VP Research at Mehta Equities, believes that the wooden pencil market is recession-proof and will continue to grow by 8 in the next five years despite digitalization will grow by up to 12 percent.
“Pencils have a wide range of uses like writing, drawing, sketching, painting etc. Healthy growth would continue in this segment as pencil marks are erasable unlike pens, sketch pens and markers which are non-erasable, which works as Trigger for good long-term growth,” said Tapse.
But then nothing can be taken for granted. Even the power of the pencil, so to speak. The current market trend moving from the traditional way of classroom learning to the new age of “online learning” will obviously affect the sales of pencils. If the trend continues to rise, the company could see a decline in sales across all product categories, especially school supplies. But it doesn't seem like a big risk yet.
“Although pencils as a product may look old in a digitalized world, their use among a rapidly growing target group (children) is increasing. “It is difficult to assume that schools and offices without pencil, pen or paper are unlikely to be introduced soon in the next decade,” Tapse said.
Also read: Doms Industries IPO: Investors buy shares worth Rs 538 Cr through anchor book, issue begins on December 13
Analyst call
Several brokers, including Choice, Anand Rathi, Mehta Equities, KR Choksey and StoxBox, have assigned a subscribe rating to the issue.
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