DOMS Industries to see normalise revenue growth at 20% in FY24

Rahul Shah: To give you a broad idea, DOMS has over the last few years been in a continuous capex cycle. In the last three years itself, we've already invested close to about Rs 175-odd crore on capital expenditure. As we speak, there are additional facilities coming up in our existing manufacturing infrastructure, plus wherever possible we are upgrading our moulds, our machineries, as well as doing de-bottlenecking. This will basically take care of the immediate growth. In terms of capital expenditure, we are doing this fresh issue for a project we are going to launch that will entail Rs 450 crore of total investment. We've acquired the land.

Another Rs 380 crore still needs to be invested, out of which Rs 280 crore will come from the fresh issue and the rest Rs 100 crore would be from the internal accruals. Historically, whenever we've made an investment, we've tried to achieve a gross fixed asset turnover of 3x, which is something which we'll like to continue with. Construction for the new project will start from January 2024, and in the next 12-odd months, we'll have the first building up and running, and eventually the entire project will get over by March 2026. But we'll have commissioning part by part where we plan to have four manufacturing buildings in this project.

A 100,000 sq ft plant for writing instruments has already started, in the first half of FY20. Just to guide you about the numbers, in the first half which we closed, our revenue was about Rs 760 crore. So there is growth coming in.

Plus, there are a lot of manufacturing infrastructure additions that are happening in terms of new machines, new mould in the existing infrastructure. What we are talking about the capex plan from the IPO is for a completely different, new project, a greenfield investment. Capacity enhancement will come from the existing plant as well.

Your revenue has almost doubled from Rs 600 crore in FY22 to Rs 1,200 crore in FY23. In the first six months, the number that you highlighted was roughly in the range of Rs 760 crore. If you were to annualise, Rs 1,500 crores is doable by FY24…

Shah: The high growth you see in FY23 was the result of two factors. One was that the base year was impacted because of COVID. FY21, FY22 were two years that were impacted because of COVID. Educational institutions were almost shut. Things then normalised. In FY23 we saw that normalisation impact, plus there was the impact of a lot of pent-up demand, because of which we were able to achieve such a large percentage in terms of growth. But like we said, FY23 is like a normalised year. We believe this trajectory will continue.

Having said that, the second half of the financial year will be more or less similar. There is no seasonality that we see in our business. Capacity addition is something which drives revenue growth for us, rather than any seasonality, I could say.

But do you think the pencil industry is on the decline, owing to the shift towards digital learning?

Santosh Rasiklal Raveshia: Basically, what we've experienced across these years, if you talk about 10 years, there was consumption of slate and pencils, chalk pencils. Now the entire shift has been to the normal wooden pencils. So basically, what we have been experiencing is that because of basic education becoming very important for our country as well, I think the pencil as a tool is becoming very important. And we've been demonstrating this through our numbers as well. Pencils as a category looks very interesting, still very much preferred by kids and also officegoers for their usage.

What are your inorganic growth plans as it forms a key part of your strategy? Have you identified some projects, some companies where you could build on to the scale?

Raveshia: If you understand the DNA of DOMS, it has grown more through partnerships. Whether it is a partnership between the Raveshia and Rajani families (the promoters), further followed with the FILA family (the Italian corporate promoter), so when we wanted to enter a category like paper stationery, we were able to enter with the support of the Pioneer Stationery acquisition where we today have 51 percent in that particular company. When we entered this company in 2015, it was a Rs 4-crore revenue company. In 2023, we've done around Rs 138 crore from that particular business, in just seven years.

We had a very small participation of around 30 percent equity in a toy company, ClapJoy Innovation. This is again within our consumer spectrum, and we feel that anything that is interesting within the kids’ segment and within our target consumer, we would love to explore.

What made you invest in a toy company? What's the growth outlook there? More businesses that you think you can diversify into?

Raveshia: As I said, we have a distribution channel of around 100-plus super-stockists today, around 4,000-plus distributors, and 120,000 retail touchpoints. And we felt that toys are something very close to what we are doing. We have certain products like hobby and craft (material), and we feel that toys again complement a lot of our business, because it's more to the kid's growing pattern. This is the reason we entered toys. For now, it's more from understanding the business, how much it can complement our network and to our business strategies as well. I am not ready to say much on what will be happening on toys. But yes, it's an interesting category.

Revenue from the toys business is minuscule. I can say it's not even gaugeable. This company used to sell its toys mainly on e-com platforms. With our distribution channel, we've just started helping them to reach out to the general trade of India.

What we've always aspired to is we should focus on having better market share. Similarly, for toys, we aspire to look at gradually bringing ourselves on that particular shelf of market share. As of now, we are just beginners.

It's more of a startup.

We've invested around Rs 1.5 crore in this business. You can imagine the size and scale of this business right now. But yes, I would like to say that it's an interesting business. We would love to scale this business going forward, and make sure that we try to be a remarkable player in this particular field.

Next is what?

Raveshia: Anything that resonates with our TG (target group), which is kids, we'd love to explore. We're just looking out for certain opportunities that will come in future.

The entire team is on board with this particular project. Once we are online and inline with this particular project of writing instruments, we'll have other streams always in the pipeline. And we'll for sure come back to you on what we are thinking about the other lines.

It is very important to retain the philosophy of our founders, my father, the late Rasikbhai Raveshia, and my uncle, the late Manubhai Rajani. They had a very clear philosophy about the company, that we should always focus on our niche group which is kids. Anything relevant to kids and young adults, we would be there. We would not follow any unusual product lines that we are not good at. We understand child psychology to the fullest and we'd love to cater this particular TG well.

Talk about your geographical mix. A little over 20 percent comes from exports and 78 percent or 79 percent comes from the domestic market. Do you see that mix changing anytime soon? And if so, what are the growth levers?

Raveshia: Today around 70-plus percent of our revenue comes from general trade. I would like to say here that this particular general trade has been built up through the years with a lot of hard work, a lot of passion and a lot of personalisation. Our first priority would always be general trade and domestic requirements. Of course, export is always very interesting to explore and we are there. But for us, the immediate priority is to cater to the ever-growing demand in our domestic trade.

We are balanced. We are more focused on operating margins. And we make sure that our operating margins across categories and across channels are similar. Also, I would like to highlight one very important thing here. DOMS is probably one of the finest regional balanced players across the set. If you look at DOMS' presence in the north, our revenue contribution is about 32 percent, because it has a larger population base. The west is at 30 percent, followed by the south at 19-20 percent and the east with the same ratio.

Do you expect the margins to normalise now at 15 percent? Or do you think there is a scope for further growth? And if yes, what are the levers?

Raveshia: We have always believed that we follow a very sustainable margin policy. Of course, we never shy from margins. Our 2023 EBITDA (earnings before interest, taxes, depreciation and amortisation) margin was around 15.4 percent, in H1, it rose to 16.7 percent. We are on our way to improve margins little by little. But we always say that nothing at the cost of market and nothing at the cost of margins. We are right now focusing more on market share. For us, every year is very important to achieve more market share. We believe 15-17 percent is something that we would want to focus on.

Do you see an opportunity to increase exports to FILA group companies under China plus one strategy? Do you see any tailwinds coming from that?

Raveshia: I would like to share here that we together, FILA and us, have been working on this China plus one strategy since we have partnered. And we have made sure that we have been taking fullest advantage of that until now. Of course, our domestic priorities are always been taken on as a first layer, but our presence across international geographies is also not ignorable. FILA contributes around 11 percent of our export numbers and DOMS, through its direct channels, contributes to around 8 percent. With FILA, we are present across their different geographies and with DOMS we are present across the Middle East, Southeast Asia and also neighboring countries.

An area of concern is high dependence on FILA. The concentration has come down from 69 percent to 61 percent in FY23. Is more diversification in offing?

Raveshia: As I said, FILA is our strategic partner and also corporate promoter. The relationship between us has been very symbiotic. Right now, both the families are only focused and concentrated on how we can maybe take advantage of the strengths DOMS has in terms of R&D, in terms of manufacturing. This is the only point of view both families have today.

Let’s talk about your business moat, unique business proposition? And also, what explains your lower margins compared to other peers like Linc, Flair Writing? They command margins of 35-40 percent.

Raveshia: I will take your last question first. Basically, when it's about margins, we are operating in seven-plus categories today. And for us, it's very important to focus more on achieving market share. Each and every category has its own opportunities. For us, when we take the decision of what margins we are going to make, it's very important for us also to balance it with what market share we are going to take ahead. As we discussed, we've grown from 8 percent of market share to 12 percent.

And we would love to continue doing this for our brand. Of course, as a unique proposition, I can say we are a company with the fullest production participation in place. All the products that come from DOMS have been produced at DOMS. This is what DOMS’ strength is about. Also, this production happens with a lot of backward integration, also with the highest level of R&D, where we have around 50-plus R&D teams having their pipeline of products to launch. We strongly believe that we are not a catalogue company, we are a very serious player. And we'll continue being very serious going ahead.