DOMS: Pioneer In Stationery and Art Market
We are initiating coverage on DOMS Industries Ltd. with a BUY recommendation and a price target of Rs 2,670/share, representing an upside of 22% from the CMP. Our confidence in DOMS’ promising future is grounded in the company’s robust and consistent performance over the past several quarters. This trend is expected to persist in the coming years, supported by factors such as a) Continued distribution expansion in under-penetrated small towns & east/south markets and b) Sustained focus on NPD, capacity expansion, and entry into the larger pens category, thus broadening its product portfolio beyond the small pencil segment. Additionally, entering the fast-growing bags and toys segments will further boost growth.
DOMS is expected to achieve healthy Revenue/EBITDA/PAT growth of 25%/26%/28% CAGR, respectively, over FY24-27E. This growth trajectory is anticipated to elevate the company’s ROCE from 22% in FY24 to 25% in FY27.
Investment Thesis
Structural Growth Trend in the Stationery and Art Materials The Indian stationery and art material market has been experiencing continued growth over the years and is expected to grow at a 13% CAGR over FY23-28, reaching a market value of Rs 71,600 Cr by FY28 from Rs 38,500 Cr in FY23. DOMS Industries has emerged as a leading player in the Indian stationery and art products market, holding a 12% market share in FY23. This growth can be attributed to a) In-house manufacturing, b) Product differentiation by identifying market gaps; c) Strategic partnerships with FILA, thus providing DOMS access to global products and expanded reach; and d) Continued focus on expanding distribution reach.
Embracing The Transformation for The Next Leg of Growth
The company has been implementing strategic initiatives over the last couple of years and they are expected to bear fruits in the coming year. A few notable initiatives are – 1) Managing entire end-to-end operations, driving operating efficiency while maintaining high-quality standards. The new 44-acre greenfield facility will further boost growth, 2) The company’s continued focus on launching new products and expanding into the larger pens category, as opposed to its earlier presence in the small pencil segment, which will broaden its product portfolio. Additionally, entering the fast-growing bags and toys segments will further boost growth, 3) There is significant potential for distribution expansion, with DOMS currently reaching 122,500 outlets. The company has the potential to expand its reach to ~300,000-350,000 outlets, as there is still untapped potential in the east and south markets as well as smaller towns in India, and 4) The strategic partnership with FILA, which enables DOMS to expand its global reach while leveraging FILA’s R&D capabilities, providing a long-term advantage.
Room for Margin Expansion
We expect the company’s EBITDA margin to be in the range of 17-18% for FY25-27 and it will be driven by 1) Operating leverage through increasing capacity utilization, 2) Improving product mix – scaling up fast-growing pens, and bags category, 3) stable raw material prices, and 4) Improving on-ground execution by selling a larger number of products and SKUs per outlet, increasing efficiency and throughput across outlets. Similarly, its ROCE is likely to improve from 22% in FY24 to 25% in FY27.
Valuation & Recommendation
Given the investment thesis outlined above, we expect the company to report robust Revenue/EBITDA/PAT growth of 25%/26%/28% CAGR over FY24-27E. This positive trajectory is expected to enhance the overall return profile of the company, translating into ROCE growth from 22% in FY24 to 25% in FY27. Currently, at the CMP, the company is trading at 53x/41x its FY26/27E EPS. With improved visibility in earnings growth and a stronger return profile, the stock appears attractive within the midcap space. Hence, we initiate coverage on DOMS Industries with a BUY rating and value the company at 60x June-26 EPS to arrive at a TP of Rs 2,670/Share, implying an upside of 22% from the CMP.
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