September 20, 2011

Linc Pen & Plastics Ltd

Inking success CMP: Rs. 61.65 Target: Rs. 81 Initiating Coverage: Buy

Key Share Data

Face Value (Rs.) Equity Capital (Rs. Crs) Market. Capitalization (Rs. Crs) 52-wk High / Low (Rs.) Average Daily Volume (1 year) BSE code NSE code Reuters code Bloomberg code

10 12.79 78.85 94.90/57.00 8579 531241 LINC.BO LPP IN

COMPANY PROFILE
Incorporated in 1994 by Mr. S. M. Jalan, Linc Pen & Plastics Limited (LPPL) is Indias leading manufacturer, marketer and exporter of writing instruments and stationery products. The company is headquartered in Kolkata with manufacturing facilities in Falta SEZ and Serakole (West Bengal). INVESTMENT RATIONALE Strong brand image LPPL has successfully leveraged its strong brand image to reach to a wide consumer base in India. The company has invested Rs 22.70 crores in branding and advertising in the last three years. The wide scale branding exercise undertaken by the company will further enhance the topline of the company going forward. Catering to all sections of the society As pricing plays a very important part in Indias writing instruments industry, LPPL has products that cater to all sections of the society. The company is focusing on premium and allied products. This is positive for LPPL as competition in this segment is relatively lower as compared to the mass segment. LPPL is expected to launch 7 new products by Q2FY12 of which 4 will be in Rs. 10 and above segment. This will further augment the margins of the company going forward. Wide distribution network and increasing presence in India LPPL provides its products directly to consumers through its 11 direct outlets. It has a vibrant all-India distribution network of 48 exclusive channel partners, 3050 distributors and 213 sales representatives. LPPL is looking to increase its presence in Western and Southern India where its market share is currently low. Strong footprint in export market LPPL has presence in over 30 countries and has registered its brand in 46 countries. The company has emerged as the largest selling brand in Myanmar, Yemen, Bangladesh and Sri Lanka. The companys exports has grown 6.36% from Rs 52.18 crores in 2009-10 to Rs 55.50 crore in 2010-11 despite concerns. With Middle East problems subsiding, LPPLs exports are expected to increase. This will improve the margins of the company going forward.

Shareholding Pattern (as on 30th June, 2011)

Public & Others 18.34% Foreign 0.59% Non Promoter Corporate Holding 11.71%

Promoters 69.35%

Source: Capitaline

Financials (Rs. Cr.)

Particulars

FY10 222.06 18.38% 16.32 8.40 67.00% 6.57

FY11 248.45 11.88% 16.37 8.40 0.00% 6.57

FY12E 284.82 14.64% 20.85 11.15 32.69% 8.71

FY13E 328.97 15.50% 26.15 14.81 32.85% 11.58

Net Sales Sales Gr EBIDTA PAT PAT Gr EPS (Rs.)

Key Ratios
Particulars

Source: Capitaline, SKP Research

FY10 18 9.39 0.36 20.35% 21.65% 7.35% 3.78% 0.55 FY11 18 9.39 0.32 16.41% 18.87% 6.59% 3.38% 0.92 FY12E 18 7.07 0.28 17.69% 21.96% 7.32% 3.91% 0.86 FY13E 18 5.33 0.24 20.39% 24.94% 7.95% 4.50% 0.79

Dividend(%) P/E MCap/Sales ROCE RONW EBITDM(%) NPM (%) Debt-Equity

Source: Capitaline, SKP Research 1 year Price performance LPPL v/s BSE Midcap

0.5 0 -0.5

VALUATION
LPPL BSEMIDCAP

LPPL is currently trading at a PE of 7.07x FY12E and 5.33x FY13E EPS. We recommend BUY rating on the stock with a 15 months target Prajwal Kanoi price of Rs 81, at 7x FY13E earnings, implying an upside of 31% from Tel No.: +91 33 4007 7416 Mob: +91 9836907373 the current levels. prajwal.kanoi@skpmoneywise.com
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Linc Pen & Plastics Ltd

Industry Overview
The global writing instruments market is estimated to be around USD 38 bn of which pens account for a major portion of USD 30 bn. The annual global pen demand is estimated at 1,600 - 2,400 mn units. Though the writing instruments market in India is comparatively small, the country ranks among the top in terms of quality. The Indian market comprises around 15 large, 100 mid-scale and 900 small-scale manufacturing units, which have a combined daily production capacity of over 10 mn pieces. Indias writing instruments industry is largely unorganized with small regional players. The organized industry is estimated at over Rs 2,000 crore. In India, there are about 50 brands in the organized and unorganized industry. Many premium international brands have entered India either independently or in collaboration with Indian manufacturers and distributors. These include Reynolds, Parker, Cross, Mont Blanc, Cartier, Pierre Cardin, Episode, Frazer and Haws, Christian Dior and Waterman. Over the years, industry has seen a shift of consumer focus from unbranded to the branded sector. The market in India can be segmented on the basis of target audience - students, frequent users (in offices across commercial and public establishments) and occasional users (housewives and literate manual workers). Among the consumers, pen demand among the employed is relatively stagnant while demand from students is experiencing a healthy growth as this segment is more brand-conscious.

Exhibit: Consumer market in India Category User Share Students Commercial Multi-level
Source: Company

55-60% 20-25% 15-20%

Pricing plays a very important part in the Indian writing instruments market. About 80% of the Indias pen industry revenue comes from pens with price range of up to Rs 15 followed by pens in the range of Rs 100-300. The super premium segment where prices extend beyond Rs 100,000 contributes only a small portion. While the market for lower price pens (up to Rs 15) is growing at 7-8% annually, the market for mid-range pens is growing faster at 8-10%.

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Linc Pen & Plastics Ltd

Exhibit: Indian Stationery Market
Market Players: Parker , Mont Blanc, Cross, Lamy, Sheaffer, among others

Premium (Above Rs 400)

High Value (Rs 20-400)

Market Players: Uni-ball, Pilot and Parker, among others

Mass Market (Below Rs 20)

Source: Company

Market Players: Cello, Linc and Reynold, among others

Growing literacy in India According to the provisional data of 2011 census, Indias effective literacy rate recorded a rise from 64.83% in 2001 to 74.04% in 2011. Growth in literacy is a key enabler for growth of writing instruments and stationery market.

Exhibit: Literacy growth in India Census Year Population (%) 1951 1961 1971 1981 1991 2001 2011
Source: Census 2011 review

Male (%) 27.16 40.40 45.96 56.38 64.13 75.26 82.14

Female (%) 8.86 15.35 21.97 29.76 39.29 53.67 65.46

18.33 28.30 34.45 43.57 52.21 64.83 74.04

Per capita income in India has grown by 17.9% to Rs 54,835 in 2010-11 from Rs 46,492 in 2009-10. Rise in per capita income furthers literacy thereby generating demand for writing instruments.
Exhibit: Per capita income growth in India Year Per capita income (Rs) 2006-07 29,382 2007-08 2008-09 2009-10 2010-11
Source: Company

35,430 40,605 46,492 54,835

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Linc Pen & Plastics Ltd

Demographics in India favourable to the industry According to the 2011 census, Indias population has risen to 1.21 bn over the past decade. Indias population today comprises 17.5% of the worlds total population. India has one of the worlds youngest population and it is expected that the working population of India will increase 20% by 2020 leading to higher per capita income catalyzing demand for writing instruments. Government initiatives Sarva Shiksha Abhiyan (SSA) is a comprehensive plan to provide free education to children between the 6-14 age group. It was launched in 2001 with an initial outlay of Rs 7,000 crores. Rashtra Madhyamik Shiksha Abhiyan (RMSA) is an initiative to achieve the universalisation of secondary education (USE) and was implemented during the Eleventh Plan with an initial outlay of Rs 20,120 crore. Government initiatives to increase literacy in India augurs well as this increases the consumer market of the writing instruments industry. Budget 2011-12 Budget 2011-12 allocated over Rs 520 crore for education, an increase of 24% over Budget 2010-11. The allocation for school education was increased to Rs 389.57 bn in 2011-12 from Rs 310.36 bn on 2010-11. Increased SSA allocation from Rs 150 bn to Rs 210 bn. It also allocated Rs 52.54 bn for University Grants Commission, Rs 56.60 bn for technical education and Rs 9.43 bn for National Mission in Education. Introduced scholarships for underprivileged students belonging to scheduled castes and tribes, studying in standard IX and X. The increased focus on the education sector is favourable for the industry as it increases the demand for writing instruments and stationery products. Outlook The global stationery product market is expected to touch USD 155.4 bn by 2015 aided by technological advancement, increasing literacy rates and rising population. The Indian stationery market is expected to grow at a CAGR of 20% over the next three years. Moreover, the thrust on education by the Government will further accelerate the demand for writing instruments.

Company Profile
Incorporated in 1994 by Mr. S. M. Jalan, Linc Pen & Plastics Limited (LPPL) is Indias leading manufacturer, marketer and exporter of writing instruments and stationery products. The company is headquartered in Kolkata with manufacturing facilities in Falta SEZ and Serakole (West Bengal).

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Linc Pen & Plastics Ltd Business Overview

Raw Materials LPPL is a quality driven manufacturer and uses plastic granules, ball and gel pen tips, ink, springs and stamping foil as raw material. The company imports quality ink and tips and is focused on quality packaging material.

Exhibit: Raw Materials Raw Materials

Plastic Granules
Polypropylene (PP) High density polyethylene (HDPE)

Tips
Brass tips Brass nickel plated Nickel silver Stainless steel tips

Ink
High viscosity ink Liquid ink Oil-based ink Gel ink

Polystrene (PS) Gel tips Styrene acrylonitrile copolymer (SAN) Acrylonitrile butadiene styrene (ABS)

Source: Company, SKP Research

Operations LPPL has invested extensively in equipment, processes and practices with state-of-art manufacturing units achieving high operational efficiency and timely delivery through the following initiatives: Ensured scheduled plant maintenance to minimize unexpected equipment breakdown Replacement of old equipment with latest technology Introduced auto assembly, injection moulding, refill-making and pad printing machines Automated processes through hydraulic and PLC-based machines, leading to productivity enhancement and lower energy costs Initiated the critical path method to estimate completion time for each activity for onward scheduling Alliances LPPL enjoys an exclusive marketing tie-up with Mitsubishi Pencil Company Ltd, Japan for Uni-ball brand priced between Rs 30-225. The company is also associated with C. Joseph Lamy, Germany for marketing its premium Lamy brand in India with prices starting from Rs 550.

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Linc Pen & Plastics Ltd Investment Rationale

Strong brand image LPPL has successfully leveraged its strong brand image to reach to a wide consumer base in India. The company has invested Rs 22.70 crores in branding and advertising in the last three years. The wide scale branding exercise undertaken by the company will further enhance the topline of the company going forward. The company has earmarked Rs 10 crore as advertisement budget with endorsers such as Shah Rukh Khan for Linc and Katrina Kaif for Uniball. This will further augment LPPLs brand image and increase its mass appeal. LPPL had inked sponsorship deals with three teams for Indian Premier League (IPL) 2011 Kolkata Knight Riders, Deccan Chargers and Kings XI Punjab and was the Associate Sponsorer of Rajasthan Royals. The association with IPL has enhanced the brand image of LPPL through prominent visibility of the companys logo in the electronic and print media for over a month. Catering to all sections of the society As pricing plays a very important part in Indias writing instruments industry, LPPL has products that cater to all sections of the society. The company is focusing on premium and allied products (pens priced above Rs 10). This is positive for LPPL as competition in this segment is relatively lower as compared to the mass segment. LPPL is expected to launch 7 new products by Q2FY12 of which 4 will be in Rs. 10 and above segment. This will further augment the margins of the company going forward.
Exhibit: Catering to all segment with increased focus on premium segment

Premium and Semi-Premium Segment Price: Rs 10 & Above Revenue Contribution: 12%

Premium and Semi-Premium Segment Price: Rs 10 & Above Revenue Contribution: 27%

Mass Segment Price: Below Rs 10 Revenue Contribution: 88%

Mass Segment Price: Below Rs 10 Revenue Contribution: 73%

2007-08
Source: Company, SKP Research

2010-11

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Linc Pen & Plastics Ltd

Wide distribution network and increasing presence in India LPPL provides its products directly to consumers through its 11 direct outlets. It has a vibrant all-India distribution network of 48 exclusive channel partners, 3050 distributors and 213 sales representatives.
Exhibit: Domestic supply chain
Channel Partners (super stockists)

LINC

Wholesalers/ Retailers

Distributors

Source: Company, SKP Research

LPPL is looking to increase its presence in Western and Southern India where its market share is currently low. The company is looking to expand in states like Rajasthan, Madhya Pradesh, Maharasthra and Tamil Nadu. Strong footprint in export market LPPL has presence in over 30 countries and has registered its brand in 46 countries. The company has emerged as the largest selling brand in Myanmar, Yemen, Bangladesh and Sri Lanka. The companys exports has grown 6.36% from Rs 52.18 crores in 2009-10 to Rs 55.50 crore in 2010-11 despite concerns like geo-political unrest in Middle East and sudden imposition of excise duties on writing instruments in March 2011 (owing to time consuming documentation). With Middle East problems subsiding, LPPLs exports are expected to increase. Increase in exports will be a positive development for LPPL as price realization is better in certain markets abroad leading to higher margins in export sales as compared to domestic sales.

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Linc Pen & Plastics Ltd Financial Performance

Exhibit: Net Sales
328.97

LPPLs sales has grown 11.88% in FY11 over FY10. Net sales is expected to grow at a CAGR of 15.07% in FY11-13 period on the back of strong brand image, growth in exports sales and expansion in domestic markets where its market share is currently low.

222.06

248.45

284.82

FY10

FY11

FY12E

FY13E

Source: Company; SKP Research

Exhibit: EBITDA
26.15 20.85 16.32 16.37

LPPLs EBITDA has remained more or less constant in FY11 over FY10. EBITDA is expected to grow at a CAGR of 26.39% in the FY11-13 period. The rising cost of raw material and imposition of excise duty are likely to put some pressure on EBITDA margins going forward.

FY10

FY11

FY12E

FY13E

Source: Company; SKP Research

Exhibit: PAT

LPPLs profitability remained at the same levels in FY11 as compared to FY10.

14.81 11.15 8.4 8.4

PAT is expected to grow at a CAGR of 32.77% in FY11-13 period.

FY10

FY11

FY12E

FY13E

Source: Company; SKP Research

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Linc Pen & Plastics Ltd Concerns

Rise in raw material prices Price of plastic granules (which forms the main raw material) is dependent on crude prices. This poses a threat to the companys EBITDA margins going forward. LPPLs raw material cost reduced by 18.63% in FY11 over FY10 due to increase in manufacturing job work. However, it is expected to rise at a CAGR of 13.59% in FY11-13 period.
Exhibit: Raw Materials
87.73 71.39 92.11

79.75

FY10

FY11

FY12E

FY13E

Source: Company; SKP Research

Forex fluctuations With its export sales expected to rise and given the uncertainty in USD-INR exchange rate going forward, LPPL is susceptible to foreign exchange fluctuations. An appreciation of Indian Rupee versus the US Dollar will have a negative impact on the topline of the company. Import of raw materials acts as a natural hedge against foreign exchange risk faced by LPPL on export of final products. Moreover, LPPL has taken loans in foreign currency which further hedges the risk posed by foreign exchange fluctuation.

Outlook & Recommendation

LPPL is well poised to grow with improvement in literacy rates in India and pro-education policies of the Government. The strong brand image of the company, increasing exports and rising presence in the domestic market will further improve the topline of the company going forward. LPPL is currently trading at a PE of 7.07x FY12E and 5.33x FY13E EPS. We recommend BUY rating on the stock with a 15 months target price of Rs 81, at 7x FY13E earnings, implying an upside of 31% from the current levels.

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Linc Pen & Plastics Ltd

Income Statement Particulars
Net sales

FY10
222.06 18.38% 16.32 7.35% 27.60% 3.07 1.70 7.79 11.55 3.15 8.40 3.78% 67.00% 1.28 6.57 9.39

FY11
248.45 11.88% 16.37 6.59% 0.31% 3.62 1.93 6.61 10.82 2.42 8.40 3.38% 0.00% 1.28 6.57 9.39

FY12E
284.82 14.64% 20.85 7.32% 27.34% 3.89 2.10 8.09 14.86 3.72 11.15 3.91% 32.69% 1.28 8.71 7.07

FY13E
328.97 15.50% 26.15 7.95% 25.44% 4.12 2.29 9.64 19.74 4.94 14.81 4.50% 32.85% 1.28 11.58 5.33

Balance Sheet Particulars

Equity Capital Reserves Net worth Secured Loan Unsecured Loan Deferred Tax Liab. Total Liabilities Net Fixed Assets Capital WIP Investments Inventories Accounts receivable Cash & Bank Loan & Advances Current Assets Current Liab. Provisions Total Curr. liab. & prov. Net Current Assets Total Assets

FY10
12.79 28.87 41.65 20.65 2.19 1.65 66.14 17.55 2.01 0.00 47.54 19.92 0.43 6.56 74.45 23.41 4.46 27.87 46.58 66.14

FY11
12.79 34.58 47.37 41.35 2.20 1.85 92.77 26.06 2.16 0.00 66.68 21.96 0.33 6.41 95.38 27.54 3.29 30.83 64.55 92.77

FY12E
12.79 41.37 54.16 44.27 2.33 1.85 102.60 24.61 2.59 0.00 76.90 25.63 1.37 7.41 111.31 30.93 4.98 35.91 75.40 102.60

FY13E
12.79 51.77 64.56 48.25 2.54 1.85 117.20 23.60 2.75 0.00 88.82 29.61 5.15 8.72 132.30 35.70 5.73 41.44 90.86 117.20

Growth (%)
EBIDTA

EBIDTA Margin (%) Growth (%)

Depreciation Interest

Interest Coverage (x)

EBT Tax PAT

PAT Margin (%) Growth (%)

O/S Shares (Crs) EPS (Rs.)

PER (x)

Cash Flow Statement Particulars

Profit before Tax Add: Depreciation, Int. & Other Expenses Net changes in WC, tax interest Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Net Inc./Dec. in Cash & Cash Equivalents Opening Cash Balance Closing Cash Balance

FY10
11.55 5.25 -1.18 15.62 -4.81 -10.88 -0.07 0.28 0.21

FY11
10.82 5.55 -20.32 -3.95 -12.13 16.09 0.02 0.21 0.22

FY12E
14.86 5.98 -15.22 5.63 -2.75 -1.73 1.15 0.22 1.37

FY13E
19.74 6.41 -18.45 7.69 -3.14 -0.77 3.78 1.37 5.15

Key Ratios Particulars

Valuation Ratios P/E P/BV EV/EBIDTA EV/Sales Earnings Ratios OPM NPM ROCE RONW Balance Sheet Ratios Current Ratio Debt/Equity Debtor days Inventory Days FA Turnover

FY10
9.39 1.89 6.23 0.46 7.35% 3.78% 20.35% 21.65% 2.67 0.55 32 92 6.20

FY11
9.39 1.66 7.48 0.49 6.59% 3.38% 16.41% 18.87% 3.09 0.92 30 88 5.71

FY12E
7.07 1.46 6.02 0.44 7.32% 3.91% 17.69% 21.96% 3.10 0.86 30 97 5.63

FY13E
5.33 1.22 4.96 0.39 7.95% 4.50% 20.39% 24.94% 3.19 0.79 30 98 6.16

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Linc Pen & Plastics Ltd

The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol, Ticker plant and ISI Securities . DISCLAIMER: This document has been issued by SKP Securities Ltd (SKP), a stock broker registered with and regulated by Securities & Exchange Board of India, for the information of its clients/potential clients and business associates/affiliates only and is for private circulation only, disseminated and available electronically and in printed form. Additional information on recommended securities may be made available on request. This document is supplied to you solely for your information and no matter contained herein may be reproduced, reprinted, sold, copied in whole or in part, redistributed or passed on, directly or indirectly, to any other person for any purpose, in India or into any other country without prior written consent of SKP. 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