LINC LTD Stock Research Report by HDFC Securities
Sector: Printing & Stationery
CMP Rs. 595, Target Rs. 715 (20% upside potential)
Target Period: 12 Months
Linc Ltd. (Linc) is a prominent writing instrument player domestically with a good brand recall and is a trusted name in the market place. Over the years, Linc has introduced many revolutionary products right from being the first Indian company to introduce a ball pen in 1980s at Rs. 2, it launched gel pen “Hi School” for Rs. 10/unit (prevailing price for gel pens was Rs. 15- 20/unit). In 2002, Linc launched Smart, an oil based gel pen for Rs 5. Linc Ocean Gel pen launched in 2003 is the highest selling gel pen. Other key launches include Linc Signetta and Link Twinn. However, it’s most important launch so far is the Pentonic which was introduced in FY19. Its success in FY23 has taken the industry by surprise and reshaped the company’s growth trajectory.
The company is also the sole distributor of Uni-Ball brand of pens by Mitsubishi Pencil Company (Japan), which also holds ~13.5% stake in Linc. Further, in 2018, Linc entered into partnership with Deli (Asia’s largest stationery manufacturer) for exclusive distribution of its products in India which has enabled it to diversify beyond writing instruments.
Linc is graduating from writing instruments to stationery products – a single-point solution. With increasing thrust on augmenting literacy levels domestically, the demand for education products is expected to remain good. Linc with its increasing ‘Reach’ and ‘Range’ coupled with improved brand salience is well poised to grow.
LINC LTD Stock Research Report: Valuation & Recommendation:
Linc’s revenue over FY13-19 grew at mere 3.7% CAGR due to higher competitive intensity, discontinuation of less profitable products, unfavourable macroeconomic factors (demonetisation, rollout of GST), etc. In FY19, it launched a path breaking product, Pentonic which was a runaway success. Given that schools were shut for the longest period of time due to pandemic, the recovery was delayed. However, the company has recorded a strong performance over past two quarters and we expect the momentum to continue.
In past couple of years, Linc has decisively undergone a paradigm shift in its business model. The company has unleashed Linc 2.0: a five- pronged strategy to drive next leg of growth. The fundamental goal is to expand the “Range” and widen the “Reach” of its products. As a part of its renewed strategy, the company is looking to 1) increase touch points, 2) emphasis on highermargin products, 3) widening the stationery portfolio, 4) enhancing existing capacity, and 5) improve on ESG aspect.
On the back of its renewed commitment to growth, we expect the company to report Revenue and PAT growth of ~24% and 90% (partly due to low base) over FY22-25E. Lower working capital requirements and improving profitability has improved company’s cash generation while also bolstering its return profile. Linc aims to maintain a healthy, deleveraged balance sheet in the future by financing its operations largely through cash accruals.
The management of the company has envisioned to transform Linc into a FMCG company by increasing its reach, enhancing its brand visibility and embarking on innovations to de-commoditize its business. Consistency in performance would make Linc a strong candidate for re-rating, in our view. We think the base case fair value of the stock is Rs 661 (17.5x FY25E EPS) and the bull case fair value is Rs 715 (19x FY25E EPS). Investors can buy the in stock Rs 591-601 band (16x FY25E EPS) and add more on dips in Rs 525-533 band (14x FY25E EPS).
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