Pick of the Week:
Linc Pen and Plastics Ltd
BSE Code: 531241
CMP: Rs.66.85
Book Value: Rs.32.58
EPS: Rs.6.06
P/E: 11.02
Industry P/E: 32.32
Dividend Yield: 2.69%
Market Cap: Rs.85.41 Cr
Introduction: Linc Pen & Plastics Ltd was incorporated in 1994 by Mr. S M Jalan and listed on the stock exchanges (BSE and CSE) in 1995. The Company is a leading manufacturer, marketer and exporter of writing instruments and stationery products. It is one of the largest manufacturers of ballpoint and gel pens, refills, pencils and stationery accessories in India. At present it sells more than 1.5 million pens a day. Its product portfolio comprises over 50 products. It provides mass pens, premium pens, pencils, erasers and allied stationery products.
Its manufacturing units are certified for ISO 9001:2008. It also market products manufactured by Mitsubishi Pencil Co. Ltd, Japan (‘Uniball’ brand). It market products manufactured by C. Joseph Lamy GmbH, Germany (‘Lamy’ brand). It is headquartered in Kolkata, West Bengal. The company has five offices across India, catering to dispersed national needs. Its products enjoy a presence in more than 30 countries. Its manufacturing units are located in Falta SEZ and Serakole in West Bengal. The company’s operations are supported by a strong network of around 49 exclusive channel partners, 2,591 distributors and 194 sales representatives. Its products are also available across 12 direct retail fronts (‘Office Linc’ and ‘Just Linc’ stores). The bulk of its revenues come from Pen (75%) refill (11-12%) sections. In 2003 Linc entered the global market through private label supplies to Wal-Mart, the retail giant of USA. Linc introduced a gel pen – ‘Ocean gel’ at Rs.5, a first of its kind in India.
Shareholding Pattern: The promoters hold 69.14% of the shares of the company while the general public holds 30.86% of the shares of the company. The corporate bodies hold 12.13% of the shares of the company.
Financials: For FY11, the company came out with good set of numbers: the total income of the company for FY11 came out to be Rs.225.65 Cr as against Rs.192.38 Cr in the same period previous year. The net profit of the company came out to be Rs.8.39 Cr as against Rs.5.04 Cr in the same period previous year. This is on an expanded equity of Rs.12.79 Cr. The EPS of the company for FY10 came out to be Rs.6.57 as against Rs.6.30 in the same period previous year. Moreover, both the net and operating profit margins increased during this period comparing on Q-o-Q basis.
For Q3FY11, the total income of the company came out to be Rs.67.48 Cr as against Rs.56.06 Cr in the same period previous year. The net profit of the company for Q3FY11 came out to be Rs.1.82 Cr as against Rs.2.49 Cr in the same period previous year. The net profit got affected due to higher price of raw materials.
Industry Overview: The global writing instrument market is estimated at US$12.3 billion. The Indian writing instrument industry is estimated at Rs.24 billion (organized presence Rs.19 billion). Since the industry is price-sensitive, brand recall is critical. The Indian stationery market is expected to grow 10% annually till 2012. With the Indian government laying an emphasis on education, more schools are being built, which will drive the offtake for stationery products. India is also emerging as an outsourcing hub of multinational companies, resulting in an attractive growth in stationery offtake.
The low-priced pen segment (Rs.2 to 5) accounts for a large proportion which is marked by the absence of brands; where consumer loyalties shift in response to marginal price shifts. The premium/super premium writing instruments extend beyond functional utility, serving as style statements. The Indian writing instrument industry is competitive with low entry barriers and a large presence of unorganized players beyond tax and other statutory obligations. The share of the organized sector is increasing owing to stronger innovation, better style, enhanced quality, brand association, pride of use, better packaging and wide distribution. Foreign brands dominate the premium segment (above Rs.50 each). The small-scale industry (SSI) reservation, restricting high capital investment in the writing instruments industry, was removed in 2007-08, making it possible for organized players to enhance capacity and investments.
The industry structure is characterized by the following:
(i) Fragmented, marked by several small local and regional brands
(ii) Industry growth of 5-10% between FY2006-08; 10% growth in 2009-10
(iii) Growing production automation in line with the international industry
(iv) China enjoys a market share of 10% of the US$12.3 billion global writing instrument industry; India’s share is inching upwards following improving product quality
(v) Most Indian players enjoy alliances with global players for marketing their value-added products in India
(vi) Strong competition among brands like Reynolds, Cello, Linc, Montex, Today’s, Lexi, Rotomac, Flair, Stic and small scale players
(vii) Growing incidence of endorsements by celebrities like Sachin Tendular (Reynolds), Shahrukh Khan (Linc), Mahendra Singh Dhoni (Cello) and Yuvraj Singh (Classmate)
(viii) Entry of large multinational companies into India with stakes in Indian companies (French multinational BIC apparently acquired a 40% stake in Cello, valuing the Indian company at around Rs.2000 Cr, significantly higher than the prevailing industry market capitalization)
(ix) Marketing of mass products and high value pens through distributors who cater to the requirement of outlets; Companies like Linc Pen also have direct retail outlets (Office Linc Stores) that market its own products.
(x) Marketing of premium products through multi-brand high-end lifestyle outlets and exclusive shops; these outlets stock watches and accessories with a separate corner for premium brands. Occasionally, these products are supplied directly by manufacturers to the outlets.
(xi) Relative insulation from economic cyclicality and environmental
Triggers:
- In FY10, the Interest cost was down by 40.6% at Rs.1.70 Cr from Rs.2.86 Cr in 2008-09. The Interest / Turnover was 0.8% and Interest Cover was 9.6 in 2009- 10, which were 1.5% and 4.5 respectively in 2008-09. The Company retained its PI rating as regards to Rs.100 Million Commercial Paper Programme of the Company--this rating indicates that the degree of safety with regard to timely payment of interest and principal on the instrument is very strong.
- Linc is on aggressive advertising of its product which is going to deliver good result in the near future, though a short term impact on profitability is seen. Company is rolling out outlets for office stationery under the brand name Justlinc and Officelinc. These retail outlets are based on idea of providing all stationery items under one roof. It has already set up few stores in Kolkata and has started a nationwide rollout.
- The company applied for the registration of its brand in over 30 countries; the company is marketing its products in over 20 countries. The company grew its exports from Rs.39.43 Cr in 2008-09 to Rs.52.18 Cr in 2009-10. The company increased export proportion from 21% of revenues in 2008-09 to 23.5% in 2009-10. The company was also able to penetrate the markets in the Middle East, Africa and Southeast Asia. The Company continued to supply products to demanding international buyers like Sanford, Wal-Mart, TESCO and Poundland, among others.
- In the recent budget there are talks of increasing the allocation for the education sector. Any upward thrust of the government on education sector in the recent budget announcement this week, will benefit the company in getting good orders. Moreover, with the start of new academic sessions of schools and colleges there is already an increased demand of the company’s products.
- In the past, the company had generally focused on exporting under private label brands, relieving it of the pressure to find markets. In 2009-10, 66.8% of its exports were made in its own brand name. In the past, it had focused on capturing a larger share of the mass market marked by low realizations. In 2009-10, the company introduced value-added products and raised the proportion of value-added products (in excess of Rs.10 per writing instrument) from 13% of revenues in 2008-09 to 19% in 2009-10.
- In FY10, the company took four broad initiatives. The company understood that re-branding starts when consumers associated a product with a bigger idea. In view of this the company associated with an icon like Shahrukh Khan for a broad organizational and product sheen that would translate into a higher visibility. The company invested up to 4.4% of its net sales in promotional and visibility exercises, which covered the Shahrukh Khan endorsement and the tie-ups with Kolkata Knight Riders and Rajasthan Royals. The result was that its products began to rise above the clutter of a competitive marketplace. The company also recognized that no brand association can be effective without a change in the product mix. In view of this, the company introduced five major products during the last financial year. The launch of these products did two things for it: they excited the trade, strengthening its reputation as a company that provides retailers a wider product range to market—moreover, it also resulted in additional sales.
- The company has chalked out the following strategies to accelerate growth in 2010-11: (i) widen its international presence further, (ii) increase the volume of its product lines to drive revenue growth, (iii) increase the production of value-added products to strengthen margins, (iv) increase production capacity, (v) invest in promotional activities to enhance brand exposure, (iv) deliver better designs and innovative packaging.
- Linc aims to increase its market share by about 2% in 2010-11, of an estimated industry size of around Rs.24 billion (Rs.19 billion for the organized sector). The company believes that this is achievable, owing to changing lifestyle and consumption patterns on the one hand and increasing literacy on the other. There is a fundamental basis for this optimism: the pen cost, as a proportion of the wallet, is lower today than ever before. Consequently, the company sees the prospects of sustained growth leading to a Rs.5-billion turnover and a five million production mark by 2012-13, with a higher proportion of value-added products.
- Linc enjoys marketing alliances with leading international brands like Uniball (Mitsubishi Pencil Co Ltd, Japan) and Lamy (C. Joseph Lamy GmbH, Germany) for value added products. Linc is among the top three brands in the writing instrument industry in India with a 11-12% market share. In eastern India and UP, Linc’s market share is estimated to be over of 25%.
- Even though OEM supply is declining, Linc’s products were outsourced by global retail giants like
- Walmart, Tesco, Sanford, W. H. Smith and Poundland for their private labels. Linc addresses mass (below Rs.20) and class (above Rs.20) preferences across writing instruments and other related stationery products. There is a strong correlation between the growth in literacy and a growth in the size of India’s writing instrument industry. Hence with the increase in literacy percentage of population, there would be greater sell of company’s products. India’s per capita increased from Rs.40,141 in 2008-09 to Rs.44,345 in 2009-10, creating a basis for enhanced literacy and widening the market for writing instruments.
- Literacy in the 15-19 age groups is expected to increase to 85% by the end of 2011, taking the number of literates in this age group to 103.4 million. According to a 'Status of Adult Literacy in India' study brought out by the National Literacy Mission, literacy rate in the age group of 15 and above, is slated to increase from 61% in 2001 to 67.8% by 2011. The total number of literates in the country is projected to climb from 405.5 million in 2001 to 573.2 million in 2011, an increase of 168 million. Thanks to the Government's programmes for the education sector, including the Sarva Siksha Abhiyan, overall literacy increased 4.5% during the seven years from 1998-99 to 2005-06. "At this rate, about 40 million adult illiterates are estimated to become literate through adult literacy programmes during 2001-11. With this, the literacy rate for age group 15 and above will be around 73% by 2011," the study states. The Eleventh Five Year Plan (2007-12) allocated unprecedented funds for education, outlining the greatest expansion in apex higher education institutions in decades. The Right to Education Bill, which makes primary education a fundamental right, was approved by a parliamentary panel. The new scheme would thus benefit an additional 25 million children, taking the total coverage to about 140 million children. Secondary education also received a major boost for 2008-09, as the sector received an all-time high allocation of Rs.4, 554 Cr. All these are positive for the growth of the company and its products.
Chart Check and Conclusion: From the charts it has been found that the stock has made a rock solid bottom above Rs.64, which is near the 52-week low price of Rs.60.60. The MACD, RSI and Stochastics are more or less in buy mode. The scrip should be accumulated over one year period for a target of Rs.85-90. In these volatile markets it is better to have these kinds of scrips which gives slow but steady returns. However, there is good thrust in the education sector, the stock could shoot upto Rs.85-86, where profit book should be done for the short term.
Disclaimer: Though due care has been taken while preparing this report but no responsibility will be assumed by the author for the consequences what so ever, resulting out of acting on these recommendations or after reading the report.
The calls made herein are for informational purposes and are not recommendations to any person to buy or sell any securities. The information is derived from sources that are deemed to be reliable but its accuracy and completeness are not guaranteed. The author does not accept any liability for the use of this column for buying and selling of securities. Readers of this column who buy or sell securities based on the information in this column are solely responsible for their actions. The author, his acquaintances, his company or his family members may or may not have positions in the Scrips mentioned in this column. Investors should take their own decisions while buying and selling the shares/securities.
Note: This stock was recommended to the Paid Groups on 27th February, 2011. Hence the chartical patterns were based on last week's parameters.