IPO Size: Rs. 1,200 cr 

• Fresh Issue Rs. 350 cr for greenfield capex of Rs. 280 cr, to be completed by March 2026
• Offer for sale (OFS) Rs. 850 cr – Rs. 800 cr by foreign promoter Fabbrica Italiana Lapised Affini (FILA, Italy – not the sports brand) whose 51% holding will drop to 31% post IPO, and Rs. 50 cr by domestic promoters (49% to shrink to 44%)

Price band: Rs. 750-790 per share

• 75% reserved for institutions, as company reported loss in FY21 due to covid

M cap: Rs. 4,794 cr, implying 25% dilution

IPO Date: Wed 13^th Dec to Fri 15^th Dec 2023, Listing Wed 20^th Dec 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

India's 2^nd Largest Branded Pencil and Stationery Maker

Doms Industries enjoys 12% market share in the Rs. 13,860 cr branded domestic stationery and art materials market and 29% market share in Rs. 1,650 cr domestic pencil market. Of Rs. 1,212 cr topline of FY23, pencils accounted for 32%, art material 24% and paper stationery 10%. Company sweats its network of 4,000+ pan-India distributors well, as topline is similar to recently-listed pen-maker Flair, with the latter clocking lower topline on 7,700 distributors in India. Doms working capital management, vital for any distribution business, is also better than peers, with outstanding inventory and debtors, put together, under 3 months of sales, as against 5 months for Flair and 3.5 months for Kokuyo Camlin.

Capex supports High-Growth Visibility

Pencil capacity utilization was 97% in FY23. To capture market opportunity (branded stationery market expected to growth at 17% over the next 5 years), company is increasing capacity in existing products and expanding to new segments like pen. It is undertaking Rs. 450 cr capex for a greenfield plant, for which Rs. 73 cr has already been spent on land acquisition, and Rs. 280 cr IPO proceeds and internal accruals will fund the balance expansion.

Company’s net fixed assets have already doubled in the past 18 months to Rs. 347 cr (as of 30.9.23), from Rs. 180 cr (as of 31.3.22). Excluding Rs. 73 cr for land acquisition, balance Rs. 95 cr has been spent on brownfield capex, highlighting the investment made for growth.  

Both brownfield and greenfield capex is sizeable, and given an asset turnover ratio of 3x, Doms has potential to more than double revenue by FY27E.

Industry-Leading Growth

Post-covid, Doms has posted the fastest growth in the Indian stationery market, with revenue surging 23% CAGR, from Rs. 654 cr in FY20 to Rs. 1,212 cr in FY23, significantly higher than peers - Linc (7%), Kokuyo Camlin (7%), Flair (9%) and Navneet (4%). On 37% gross margin, Doms reported 16% EBITDA margin for FY23 and 8.5% net margin.

H1FY24 revenue grew to Rs. 762 cr, with 17% EBITDA and 9.7% net margin, as PAT surged to Rs. 74 cr in the first half, from Rs. 103 cr in FY23. Thus, EPS stood at Rs. 13 and Rs. 18 for H1FY24 and FY23 respectively. Given high volume growth visibility, current margins can be maintained going forward.

Likely Growth justifies Pricing

Based on FY24E EPS of Rs. 25, shares are being offered on a current year PE multiple of 31.5x, which is seen attractive for 34% RoE and high-double digit growth visibility due to massive capex underway.

While Doms’ IPO pricing is partly influenced by secondary markets touching life high this week, it is still attractive, as peers are ruling at both lower and higher multiples:

• Kokuyo Camlin has similar gross margin of 37% as Doms, but lower net margin of just 6% and only 9% RoE on Rs. 820 cr topline, yet its FY24E PE is 42x.
• Doms net margin is 100-150 bps higher than Linc, which has a smaller topline of Rs. 500 cr topline and lower RoE of 23% RoE. But Linc is trading at PE of 28x.
• Flair Writing, which got listed on 1^st Dec, has Rs. 942 cr topline, 12% net margin, 31% RoE, is trading at a PE multiple of 28x.

The IPO is being undertaken primarily to facilitate a part-exit for Italian promoter. Post listing, 31% foreign parentage of total 75% promoter holding will give the stock an MNC touch and hence enjoy some premium in valuation multiples.