Initiating this thread on Linc Ltd. Putting in my notes for Q1FY24 concall. I believe that this is a good place to start researching a company. Looking forward to all of y’all inputs.
Pentonic Sales
- Pentonic sales continue to grow, reaching over 36% market share.
- Export revenue contributes over 16% to the company’s top line.
Revenue Growth
- Operating revenue for Q1FY24 grew by 14.2% to INR 111.88 crores, compared to INR 97.94 crores in Q1FY23.
- Pentonic’s contribution and stationary portfolio growth drive stronger top-line performance.
Writing Instrument Dominance
- Linc maintains a strong presence in the writing instrument segment with a market share of approximately 7%.
- Pentonic emerges as a leading brand in India’s affordable writing instrument industry, reaching INR 150 crores since its FY2019 launch.
Gross Profit Margin Expansion
- Gross profit margin expands to 32.3% in Q1FY24, marking a 693 basis points increase from Q1FY23.
- Gross profit grows by 45%, outpacing the 36.3% growth in overhead costs, demonstrating robust operating leverage.
Strong EBITDA Growth
- Operating EBITDA increases by 65%, with the operating EBITDA margin expanding from 8.2% (Q1FY23) to 11.8% (Q1FY24).
- Profit after tax rises to INR 7.39 crores compared to INR 4.38 crores in Q1FY23.
Formation of Morris Linc Private Limited
- The company establishes a subsidiary, Morris Linc Private Limited, to initiate a joint venture with Morris, a global writing instrument and stationery player based in South Korea.
- Linc will be the majority shareholder, with further details forthcoming in subsequent quarters.
- Morris Linc products will be priced in the range of Rs. 30 to Rs. 50.
- They will offer advanced features in the writing instrument segment.
- The new products will not compete with existing ones in the portfolio.
- The Morris product line includes markers, a category that Linc Limited is currently working on. Since Linc has minimal or no presence in this category, there is no expected cannibalization.
Expanding Market Reach
- The company extends its presence in non-stationary outlets, including kiranas, medical stores, and Pan plus, reaching 1.44 lakh such outlets directly.
- Total touchpoints surpass 2.45 lakh outlets, with a focus on further expansion.
Geographical Revenue Diversification
- Revenue share from south and west zones increases from 27% (FY19) and 36% (FY23) to 43% in Q1FY24.
- The company aims to expand its reach to more than 5 lakh touchpoints by FY25.
Focus on High-Value Products
- Emphasis on high-value, high-margin products, with Pentatonic volume growing over 34% YoY.
- Introduction of Pentonic G - RT, priced at Rs. 40, and development of three more Pentonic products within the financial year.
Deli Brand Success
- Deli, the stationary brand, achieves a turnover of INR 6.4 crores in Q1FY24, up from INR 4.98 crores in Q1FY23.
- Revenue share of Deli increases from 4.7% (Q4FY23) to 5.8% (Q1FY24), targeting a top line of at least INR 75 crores by FY25.
Expansion Plans
- Plans to increase manufacturing capacity in Gujarat by establishing an additional facility adjacent to the existing factory.
- Infrastructure creation for doubling production capacity to 20 lakh pens per day.
- Total project cost expected to be approximately INR 50 crores. Initial infrastructure work costing INR 17 crores to be finished by FY24.
Debt Reduction and Cash Flow
- The company effectively reduced its net debt over the past five years, becoming debt-free.
- Free cash flow increased to INR 15.6 crores as of June 30, 2023.
Capacity Increase
- First phase of equipment expansion to 50 lakhs pens per day expected in FY25, at a cost of INR 18 crores.
- Second phase planned subsequently at an estimated cost of INR 15 crores.
- Anticipated meeting FY25 demand through existing capacity and increased outsourcing agreements.
Revenue Growth Targets
- Aims to achieve a top-line revenue of INR 750 crores by FY25, with a CAGR of around 25%.
- Aims to achieve a top-line revenue of INR 600-625 crores by FY24
- Expects Pentonic’s share of revenue to reach 40%, with an additional contribution from ally products.
- To achieve a 25% growth target in the next three quarters after a 14% growth in Q1, Linc Limited is focusing on growing the Pentonic portfolio, which showed over 30% growth in Q1.
EBITDA Margin and ROI
- Targets an annual operating EBITDA margin of about 15% by FY25.
- Expects a return on investment (ROI) above 21%
Pentonic G - RT
- Priced at 40 Rs
- Recently tested in Bombay, Pune, Chennai, and Kerala.
- Received excellent customer response during the test phase.
- Linc Limited is ready to launch the gel pen nationwide.
- Anticipated to be accessible throughout India in the next two to three months.
Exploring Export Market Opportunities:
- Linc Limited prefers to promote its own brand in international markets.
- White labeling is generally avoided due to potential margin challenges.
- Open to white label opportunities if they offer long-term partnerships and substantial benefits.
Export Gross Margins:
- Export gross margins are generally slightly better than domestic margins.
- For instance, if domestic margins are around 40%, export margins could be approximately 44%-45%.
Major Export Markets:
- Linc Limited exports to approximately 40 countries.
- Prominent markets include Southeast Asia, neighboring countries, Africa, Middle East, Brazil, Russia, and North America.
Seasonality in Business:
- Q1 is a lower quarter due to seasonal factors.
- Summer vacations during Q1 result in reduced consumption, especially among primary consumers, school and college students.
Outsourcing vs. In-house Production:
- Linc Limited is considering outsourcing as it aligns with industry trends where FMCG companies often maintain a 50:50 ratio of in-house and outsourced production.
- Outsourcing provides flexibility and reduces asset commitment. It is recommended by investors and considered a balanced approach.
- The current ratio of outsourcing to in-house production stands at 50:50.
Marketing:
- Budget constraints limit extensive 360-degree marketing.
- Current approach includes careful selection of print media.
- Campaign running in Times Of India (all editions).
- Additional strategies: outdoor advertising in select cities, digital and social media.
- Future plans may involve a TV campaign, likely in the next year when more budget is available.
Online Availability of Product Range:
- E-commerce Potential: Online sales offer significant potential, especially with the Deli brand, known for a wide range of stationery.
- Chinese Partner: Linc Limited’s Chinese principal company derives 50% of its sales from e-commerce, indicating substantial opportunities.
- Current Share: Presently, e-commerce contributes only 3% to the company’s revenues.
- Future Growth: Linc Limited sees substantial potential for growth in the e-commerce segment and is actively exploring opportunities to increase its share in India.
Positioning at Micro Retail Outlets:
- Challenges: Positioning at micro retail outlets where consumers seek pens irrespective of the brand is challenging in India’s unstructured market.
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Strategies:
- Relationship Building: Sales teams work on building good relationships with retailers.
- Visibility: Maintaining brand visibility through various media channels.
- Point of Sale Displays: Providing retailers with attractive displays for product placement.
- Consumer Demand: Popular brands like Pentonic are top-of-mind for consumers, and retailers prefer stocking such demanded brands.
Impact of Pentonic on Linc Brand Sales:
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The Linc brand experienced a decline in sales for some legacy products in Q1 due to price increases.
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While some products absorbed the price increase and are growing, others are yet to recover.
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The company aims to limit the decline in legacy products and hopes for improved performance in the future.
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Margin Breakdown:
- Highest margin: Pentonic (company-manufactured brand)
- Second highest margin: Uni-Ball and legacy products
- Third highest margin: Deli brand (imported finished products)
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Price Adjustment for Raw Material Costs:
- In the Rs.10 pen range, there is limited room to increase prices when polymer prices rise.
- Typically, there’s room for a 6%-7% price increase to the trade, but end-user prices remain relatively stable.
- This strategy is employed to mitigate the impact of rising polymer prices.
Gelx India-Kenya Acquisition:
- Market Expansion: The acquisition in Kenya serves the purpose of expanding Linc Limited’s market presence in East Africa, particularly in countries with tariff barriers that restrict imports from India.
- Export Advantage: With a local unit in East Africa, Linc Limited gains the ability to export its products to neighboring markets without incurring duty costs.
- Revenue Expectation: The company anticipates achieving a topline of approximately $2 million (around Rs. 15 crores) by FY25 through this expansion.
Disc: No position. Only studying.
