IPO: DOMS Industries

DOMS Industries, a leading stationery manufacturer, is coming up with its IPO (initial public offering) on December 13, 2023. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROCE are about 14 and 15 per cent, respectively. Also, it generated positive free cash flows in two of the last three financial years.
  
• Growth: Its revenue and net profit grew at an annual growth rate of 23 and 42 per cent, respectively, over the last three years. Moreover, its EBIT and PAT margins have zoomed in the past two financial years.
  
• Valuation: The stock is valued at a P/E and a P/B of 50.0 and 6.2 times, respectively, compared to its peers' median and average of 30.5 and 4.7 times, respectively.
  
• Overview: Higher government spending on education and literacy will drive growth. However, the high competitive intensity and dependency on FILA remain a threat.

About the company

Incorporated in 2006, DOMS Industries is a leading stationery and art product manufacturer in India. It has an extensive product portfolio, with over 3,800 distinguishable products. Its core products comprise pencils and mathematical instrument boxes.

Strengths of DOM

• It is the market leader in the Indian stationery and art material industry, with a market share of 12 per cent as of FY23; it has a market share of 29 per cent in pencils and 30 per cent in mathematical instrument boxes.
  
• Extensive product portfolio. It offered over 3,800 distinguishable products as of September 30, 2023.
  
• Its strategic partnership with FILA, a leading global stationery manufacturer, provides it access to international markets and positions the company to capitalise on emerging global trends.

Weaknesses of DOM

• Revenue concentration. Wooden pencils, one of its core products, accounted for about 32, 34 and 37 per cent of revenue in FY23, FY22 and FY21, respectively. Any headwinds in this segment, in the form of higher competition or lower demand, will have a significant impact.
  
• Dependence on FILA. It is reliant on FILA for business operations and R&D capabilities. Hence, any deterioration in its relationship with the international brand will impact its financial performance.

IPO questions

Company and business

• Are DOMS Industries earnings before tax more than Rs 50 crore in the last 12 months?
  Yes, the company's earnings before tax was Rs 139 crore as of March 31, 2023.
• Will DOMS Industries be able to scale up its business?
  Yes, government initiatives in the education sector, urbanisation, and the rising literacy rate of India will drive growth.
• Does DOMS Industries have recognizable brands with client stickiness?
  Yes, it is a recognisable brand with a wide range of product offerings.
• Does the company have a credible moat?
  No, it faces significant competition from its peers and does not have a competitive advantage over them.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Promoter's stake will be around 75 per cent post IPO.
• Do the top three managers have more than 15 years of combined leadership at DOMS Industries?
  Yes, the top three managers have over 15 years of leadership experience at DOMS.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes, we have no information to suggest otherwise. However, the company has been fighting an infringement case of certain designs against Kokuyo Camlin .
• Is the company's accounting policy stable?
  Yes, there is no information to suggest otherwise.
• Is DOMS Industries free of promoter pledging of its shares?
  Yes, promoters have not pledged any shares.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. Its ROE and ROCE stood at 19 and 18 per cent, respectively, as of September 30, 2023. However, its three-year average ROE and ROCE are 13.5 and 14.6 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes, it reported positive operating cash flows in the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes, as of September 2023, its net debt-to-equity ratio was 0.3.
• Is DOMS Industries free from reliance on huge working capital for day-to-day affairs?
  No, it plans to use a portion of the fresh issue for working capital requirements.
• Can the company run its business without relying on external funding in the next three years?
  Yes, it will use 80 per cent of the proceeds to set up a new manufacturing facility. Also, its healthy cash flows should be enough to fund further expansion activities.
• Is DOMS Industries free from meaningful contingent liabilities?
  Yes. Its contingent liabilities as a percentage of equity was 0.6 per cent as of September 2023.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No, the stock offers a 3.0 per cent operating earnings yield on its enterprise value based on its 12-month earnings as of March 2023.
• Is the stock's price-to-earnings less than its peers' median level?
  No, it is valued at a price-to-earnings ratio of 50 times compared to peers' median level of 30.5 times (as of September 2023).
• Is the stock's price-to-book value less than its peers' average level?
  No, it is valued at a price-to-book ratio of 6.2 times compared to peers' average level of 4.7 times (as of September 2023).

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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