Detailed rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of DOMS Industries Ltd (DOMS; part of the DOMS group) to ‘CRISIL A+/Positive’ from 'CRISIL A/Stable'.

 

The rating upgrade and revision in outlook reflects healthy and sustained improvement in the group’s credit risk profile, driven by improved business and financial risk profiles along with the expectation of CRISIL Ratings that the credit risk profile will continue to improve over the medium term. 

 

The improvement in the business risk profile is driven by the group’s continued strong market position in the stationery and art material segment, strong acceptance of the products in the market, strong brand recall, well-diversified product mix and established dealer-distributor network. The group achieved revenue of Rs 1,133 crore during the nine months ended December 31, 2023 (against Rs 875 crore during the nine months ended December 31, 2022) and is expected to achieve revenue of more than Rs 1,500 crore during fiscal 2024. Operating revenue improved 77% to Rs 1,212 crore in fiscal 2023 from Rs 684 crore in fiscal 2022. Growth in fiscal 2023 is supported by increase in realisation due to increase in average selling prices and volume growth post lifting of covid regulations. A diversified product base and new product innovations, along with strong acceptance of the products in the market, will drive sales growth over the medium term. The group is also planning to rollout new products pan India like ball point pen, scholastic adhesives which will result in higher market size over the medium term. The group has recently acquired a 51% stake in the Punjab based bag manufacturing company, that shall allow the company to enter the back to school segment

 

The operating margin increased by over 300 basis points to 17.4% in the first nine months of fiscal 2024 as compared to the corresponding period of the previous fiscal, aided by better absorption of fixed costs and stabilisation of key raw material prices. In case of any increase in key raw material prices, the DOMS group may revise its prices to safeguard its operating margin, on account of its strong market position in the domestic market. Operating margin is expected to remain range-bound at 16-17 % over the medium term.

 

The improved business risk profile has also resulted in improvement in the group’s financial risk profile. The group reported continuous growth in its revenue amid higher capital expenditure (capex), debt levels are similar, indicating improving sales efficiency and lower leverage. Furthermore, the total debt was Rs 49 crore as on December 31, 2023, which primarily comprises short-term debt (working capital borrowings) required for procurement of raw material and day-to-day business activities. The group has also raised funds through initial public offering (IPO) of Rs 350 crore. The group’s networth is expected to be over Rs 800 crore as on March 31, 2024, against Rs 353 crore as on March 31, 2023. CRISIL Ratings believes that the financial risk profile of the group will continue to improve, supported by healthy accretion to reserves and lower dependency on external debt. Gearing and total outside liabilities to tangible networth (TOLTNW) ratio are expected to be 0.10 time and 0.30 time, respectively, over the medium term. Though the group is planning capex over the medium term, it is expected to be completed without external debt and any increase in debt levels or larger-than-expected acquisition or investments over the medium term, which will remain monitorable.

 

The rating continues to reflect the DOMS group's established market position in the Indian stationery industry, its healthy financial risk profile and efficient working capital management. These rating strengths are partially offset by the susceptibility of operating margin to fluctuations in raw material prices and exposure to intense competition.

Analytical approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of DOMS with its subsidiaries, Pioneer Stationery Pvt Ltd (PSPL) and Micro Wood Pvt Ltd (MWPL). This is because these entities, collectively referred to as the DOMS group, are managed by the same promoters and have operational and financial linkages.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key rating drivers and detailed description

Strengths:

• Established market position and track record in the writing instruments industry: The group has established market position and strong presence in the domestic market, backed by its pan India presence with over 100 plus super stockist, 4,000 plus dealers/distributors and over 1,22,500 wholesalers/retailers. The group has two popular brands, DOMS and C3 which target the premium and economy segments, respectively. Fabbrica Italiana Lapis Ed Affini (FILA) which is one of the leading Italian multinational suppliers of art materials and related products is having stake of 30.58% Presence of FILA along with five-decade experience of the promoters in the stationery and art material segment and established market position of the group as one of the top players has supported revenue growth. Revenue growth is also supported by an increase in average selling prices (realisation), better product mix which led to higher acceptance of products among end users and higher offtake from enhanced capacities.

 

The group has made steady investments in the latest technology, invested in capacity improvement, and launched new category of products including art, modelling material and pens. It also undertook backward integration. This has resulted in better utilisation of capacities and economies of scale. The group is focusing on high pull demand stock keeping units (SKUs) which will increase the shelf space, help move inventory and provide price leadership in the market. The group is setting up one of Asia Pacific region’s largest single-location manufacturing facility in the stationery industry. The group is expected to incur capex of Rs 454 crore in a phased manner during fiscals 2023 to 2027 mainly to increase existing capacities, set up a plant for new products as well as refurbishment of some old machinery. The entire capex is expected to be funded through IPO and internal accrual.

 

• Strong financial risk profile: The capital structure is likely to remain supported by continuous reduction in debt and the absence of large, debt-funded capex. The DOMS group was able to grow the business from fiscals 2017 to 2023 with lower proportion of total debt, indicating improving sales efficiency and lower leverage. The group’s dependence on debt has reduced substantially year-on-year. Total debt has reduced to Rs 50 crore as on December 31, 2023, from Rs 100 crore as on March 31, 2023. It has only Rs 14 crore of long-term debt outstanding as of December 31, 2023. Debt to EBITDA ratio has been continuously improving; the ratio improved to 0.65 time as on March 31, 2023, from 1.18 times as on March 31, 2022 and is expected to remain range-bound at 0.5-0.3 time as on March 31, 2024. The group’s networth is expected to be over Rs 820 crore as on March 31, 2024, against Rs 353 crore as on March 31, 2023. CRISIL Ratings believes that the networth will continue to increase at a robust rate due to healthy accretion to reserves over the medium term. The debt protection metrics are strong, as reflected in interest coverage and net cash accrual to adjusted debt (NCAAD) ratios that are estimated to improve further in fiscal 2024.

 

• Efficient working capital management: Gross current assets (GCAs) have been comfortable at 80-120 days for the three fiscals through March 2023, driven by quick realisation of receivables (15-30 days). Inventory (60-90 days) has also been prudently managed. The GCAs are expected to be in a similar range over the medium term.

 

Weaknesses:

• Susceptibility of operating margin to fluctuations in raw material prices: Raw material prices account for a major portion of overall production cost in the stationery industry, resulting in susceptibility of operating profit margin to fluctuations in raw material prices. The group is susceptible to fluctuations in prices of key raw materials, such as polymer and graphite. However, on account of prudent management, operational efficiencies and ability to partly pass on the prices to customers, the group’s operating margin had remained steady at 12-15% over the five fiscals through 2023. While operating margin moderated in fiscal 2021 on account of the pandemic to 6.7%, it has improved to above 15% due to the company’s ability to increase the prices of finished goods and improve operational efficiencies during fiscal 2023.

 

• Exposure to intense competition: The group faces intense competition due to the highly fragmented Indian stationery industry with many unorganised players in the lower end of the product segment, such as pens, pencils and adhesives. The group also has to compete with other established brands. Competition is much more intense in the pens segment where the DOMS group has limited exposure. Continued diversification of the product profile will enable the company to increase its turnover as well as presence in the stationery segment. Furthermore, any slowdown in demand can impact the operating performance of the group.

Liquidity: Strong

Liquidity should remain supported by the ample cushion available in net cash accrual and bank lines. Net cash accrual is expected to be Rs 180-230 crore in fiscals 2024 and 2025, which will be more than adequate to meet the yearly debt obligation of Rs 4-5 crore per year over the medium term. Bank limit utilisation was low at 31% on average for the 12 months through December 2023. The current ratio was healthy at 1.22 times as on March 31, 2023, and is expected to be better than the previous year over the medium term. The group accumulates cash and maintains it as fixed deposits with banks. CRISIL Ratings believes the group has sufficient accrual and cash and cash equivalent to meet the term debt repayment, partly finance its capex and incremental working capital needs over the next one year.

Outlook: Positive

CRISIL Ratings believes the group’s operating performance will continue to benefit from the established brand and comfortable financial risk profile.

Rating sensitivity factors

Upward factors

• Significant and sustained growth in revenue with continued product diversification while maintaining operating profitability above 17% leading to higher-than-expected net cash accrual
• Efficient working capital management and sustenance of the capital structure and debt protection metrics
• Timely completion of planned capex without any significant cost overrun

 

Downward factors

• Decline in revenue or lower operating margin below 14% leading to lower-than-expected accrual
• Higher-than-expected debt-funded capex or stretch in the working capital cycle weakening the financial risk profile, particularly liquidity

About the group

DOMS Industries Limited (‘DOMS’), is one of India’s leading stationery and art products company.  The Company designs, develops, manufactures and sells a wide range of well-designed, quality stationery and art products, categorised into seven categories that include, scholastic stationery, scholastic art material, paper stationery, kits and combos, office supplies, hobby and craft and fine art products. The Company’s products are primarily sold under the flagship brand ‘DOMS’, as well as through other brands/ sub-brands, like C3, Amariz and FixyFix. The Company’s multi-channel distribution network is spread domestically across 28 states and UTs of India as well as in 45 countries globally covering the US, Africa, Asia Pacific, Europe and Middle East. The Company’s shareholders include the Raveshia-Rajani family that collectively owns 44.47% and FILA  - Fabbrica Italiana Lapis Ed Afini SpA, Italy has 30.58% shareholding as on March 2024. DOMS is listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Any other information: Not applicable