DOMS Industries IPO: A deep dive into its business, risk factors and whether you should invest

DOMS Industries will be the first company to mandatorily debut on the bourses in the T+3 timeline

DOMS Industries’ Rs 1,200 crore initial public offering (IPO) opened for subscription on December 13. The stationery and art product manufacturer will be the first company to mandatorily debut on the bourses in the T+3 timeline.

The price band of the IPO, which will close on December 15, has been fixed at Rs 750-790 per share. The Gujarat-based company plans to raise Rs 1,200 crore via public issue. The offer consists of a fresh issue of 44.3 lakh shares worth Rs 350 crore and an offer for sale of 1.07 crore shares worth Rs 850 crore by promoters FILA- Fabbrica Italiana Lapised Affini SpA, Sanjay Mansukhlal Rajani and Ketan Mansukhlal Rajan.

While most analysts have assigned a "subscribe" rating to the offer, the sudden surge in net profit and surprising improvement in margins and return ratios has captured everyone’s attention.

Let’s delve into the key aspects of the company’s business model, financials, and the factors influencing performance.

Also Read: DOMS Industries IPO: Will this stationery player make a mark at the bourses?

The business

DOMS Industries design, develop, manufacture and sell a wide range of stationery and art products, primarily under the flagship brand ‘DOMS’ in over 45 countries. It is the second largest player in India’s branded ‘stationery and art’ products market, with a market share of 12 percent, just behind ITC, which has a 20 percent market share. The company’s core products such as ‘pencils’ and ‘mathematical instrument boxes’ dominate the market with 29 percent and 30 percent market share, respectively.

The company offers products to consumers, which it classifies across seven categories: scholastic stationery, scholastic art material, paper stationery, kits and combos, office supplies, hobby and craft and fine art products.

The company has manufacturing facilities in Umbergaon, Gujarat and Bari Brahma, Jammu & Kashmir. In Umbergaon, DOMS operates 13 manufacturing units spread over approximately 34 acres of land and is one of India's largest stationery manufacturing facilities. The company recently acquired 44 acres of land adjacent to its existing Umbergaon facility.

Also Read: DOMS Industries IPO: GMP jumps 63% today; issue booked over 5 times on Day 1

Financial performance

The net profit attributable to the parent, increased by 567 percent on-year to Rs 95.8 crore for the year ended March 2023 and revenue from operations jumped 77.3 percent YoY to Rs 1,212 crore during the same period, while in six months ended September FY24, it recorded a net profit of Rs 70.63 crore on revenue of Rs 761.8 crore.

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation) jumped 168 percent to Rs 186.7 crore in FY23. EBITDA margin improved to 15.4 percent in FY23 from 10.4 percent in FY22. PAT margin rose to 7.9 percent from 2.1 percent in the same period.

Return ratios 

DOMS Industries’ price-to-earnings (P/E) ratio at 46x is cheaper than Kokuyo Camlin's (64.14x) but is much more than Linc (28.15x), Navneet Education (15.86x) and Flair Writing Industries (35.76x). The return on equity (RoE) impressively surged to 33.54 percent in FY23 from 6.86 percent in FY22. Return on capital employed (RoCE) jumped to 33.31 percent from 10.04 percent in the same period.

Also Read: DOMS Industries IPO: Should you subscribe to Rs 1,200 crore issue?

Reason behind high growth in FY23

“The high growth in FY23 was due to two factors. One was, FY21 and FY22 were impacted because of COVID-19 as educational institutions were almost shut. In FY23 we saw the normalisation impact, plus there was an impact of a lot of pent-up demand because of which we were able to achieve such a large percentage in terms of growth,” Rahul Shah, CFO, DOMS Industries told Moneycontrol.

A similar trend was seen in the peer group as well. Flair Industries PAT margin improved from 0.33 percent in FY21 to 12.53 percent in FY23 and RoCE rose from 0.14 percent to 31.24 percent. Similarly, Linc’s margin grew from 0.02 percent to 7.68 percent and RoCE surged from -1.55 percent to 29.12 percent in the same period.

DOMS reported a net loss of Rs 6 crore in FY21 as the company had to cease production activities by shutting down Umbergaon manufacturing facilities for a period of 51 days from March 22, 2020, to May 11, 2020, and Jammu manufacturing facility for 43 days from March 22, 2020, to May 3, 2020, to comply with quarantine measures.

While the nationwide lockdown lasted until May 31, 2020, educational institutions such as schools and colleges continued to remain shut for a long time. Multiple lockdowns along with the extended closure of schools, offices and other institutions had affected the whole industry in terms of reduced sales, revenue and expansion plans and disruption of the distribution network.

DOMS dependence on FILA

FILA, being the promoter, dominates DOMS’ business operations, R&D capabilities and particularly export sales. FILA group accounted for 61.58 percent of the total export sales in FY23. Though it’s a big figure, it has come down from 69.19 percent in FY21.

“Since the total export sales as a percentage of total revenue from the FILA group account for 16 percent. So if any adverse situation arrives then the company might not have a major impact on its business, and apart from that company continues to have strong relations with FILA going forward which will provide them access to export opportunities,” said Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers.

Also Read: Doms Industries IPO: 10 things to know before subscribing to Rs 1,200 crore issue

The future of pencil  

DOMS generated a significant portion of sales from wooden pencils contributing 31.66 percent to total gross product sales in FY23. A decline in the sales of pencils will hurt the overall business and thus is a potential risk. However, Prashanth Tapse, Research Analyst, Senior VP Research at Mehta Equities, believes that the wooden pencil market is recession-proof and will continue to grow in the range of 8-12 percent in the next 5 years despite digitalisation.

“Pencils have a wide range of applications, such as writing, drawing, sketching, colouring, etc. Healthy growth would continue in this segment as pencil markings are erasable, unlike pens, sketch pens, and markers that are not erasable, which is acting as a trigger for long-term decent growth,” said Tapse.

But then, nothing can be taken for granted. Even the power of the pencil, so to speak. The current market trend of shifting away from the conventional mode of classroom learning to the new-age ‘online learning’ will obviously chip away at pencil sales. If the trend continues to rise then the company may experience a decline in sales across the product categories primarily in the scholastic stationery. But it does not appear to be a big risk yet.

“Even though pencils as a product may look old in a digitalised world their use of the same is growing with a fast-growing target audience (children). It is difficult to assume pencilless, penless or paperless schools and offices are not likely to happen anytime in the next decade soon,” said Tapse.

Also Read: Doms Industries IPO: Investors buy Rs 538 cr worth of shares via anchor book, issue opens on December 13

Analysts' call

Several brokerages, including Choice, Anand Rathi, Mehta Equities, KR Choksey and StoxBox have assigned a ‘subscribe’ rating to the issue.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.