Stock Pick From The Writing Products Sector

Sometimes, it makes sense to focus on scrips that are ignored by investors despite them having good potential. Linc Pen & Plastics (Linc) is one such counter, which has witnessed investor apathy in the past. However, we feel that with a strong brand name and distribution network it may see some growth.

Linc has been spending a good chunk of money on branding for the past three years, and we feel that the results will be seen in the coming years. The growing export market is an added advantage. Also, the recent preferential placement to Mitsubishi Pencil Company (MPC) values Linc at much higher levels, making it a good buy at the current levels. None of its shares are pledged. On the valuations front, the CMP of Rs 50 discounts its trailing four-quarter earnings by 17x.

Linc is one of the leading manufacturers of writing products in India. The writing products’ market in India is majorly dominated by unorganised players. The organised market is worth around Rs 2000 crore, of which Linc enjoys a market share of around 10 per cent. With a presence in 30 countries, around 25 per cent of the company’s revenue comes from exports, while the remaining 75 per cent comes from the domestic market. While the company also markets high-end products, 80 per cent of its revenues come from the products priced under Rs 15.

On the growth front, we feel that the rising student population on account of rising literacy rates and higher government spending on educational initiatives are expected to be major growth drivers for the company. Further, Linc has a strong brand. For the past three years, it has roped in popular star Shahrukh Khan to endorse its brand, which has added further strength. It has spent around Rs 22 crore on the branding exercise. We feel that the large scale branding exercise undertaken by the company will help it grow on the topline front. It is also focussing on exports by targeting lucrative markets like Africa and the Middle East. The management expects a higher contribution from the export markets going forward, which provide better realisations than the domestic market.

Linc has recently entered into a business and capital alliance with MPC by making a preferential allotment of 20 lakh shares at Rs 100 per share (Rs 20 crore). This is almost double the CMP of Rs 50. As per the deal, MPC will hold a 13.50 per cent stake in the company post issue. Linc already has a distribution agreement with MPC to distribute its Uni and Uni-Ball brands. The recent deal will serve to open new avenues of commercial growth for both entities. The deal values Linc at Rs 148 crore, which is around twice the company’s current market capitalisation. Although the deal appears to be costly, it is actually not. In fact, it is at 13.2x of its trailing four-quarter EBITDA. This is in line with the Kokuyo Camlin Deal, which was struck at 14x. Further, it is lower than 16x, at which the BIC Group bought a 40 per cent stake in Cello three years ago. Thus, the deal itself signifies the growth potential of the company.

On the financial front, Linc’s performance has been good, with a consistent topline and EBITDA growth. For 9MFY12 though, despite a topline growth of five per cent, the bottomline remained stagnant on account of higher employee and advertising costs. However, with an increased focus on the export markets and expected better growth in the domestic market, we recommend that investors should buy the scrip at the current levels.