Linc Pen & Plastics Nano Nivesh Recommendation By ICICI-Direct

• Prominent player, innovation – key driver: Linc is a leading writing instrument player in India with domestic sales accounting for 74% of its gross sales in FY16. It is among the top five brands (Cello, Reynolds, Luxor, Linc, Flair) with a market share of ~10% of the organised segment (total industry ~Rs. 3300 crore, organised segment ~Rs. 2500 crore). It is particularly strong in East, North East & Northern India. Glycer (MRP: Rs. 7/unit) is the largest selling brand of Linc with new product innovation being Linc Twin (MRP: Rs. 10/unit) & Linc Touch (MRP: Rs. 20/unit). It has been continuously innovating across the years with five to six new product launches due in CY17E, thereby ensuring continuity in operations & climbing up the premiumisation ladder, going forward

• Impressive expansion on track; commissioning in Q1FY18: Linc currently has a capacity to manufacture 76 crore pens annually and is operating at 90%+ capacity utilisations levels. Sensing the same, it is setting up a greenfield project in Gujarat to cater to its export markets. The said plant will have a capacity of 15 crore pens annually and is intended to clock ~12% EBITDA margins. The peak turnover from the facility will be ~Rs. 60 crore with intended RoCE of ~20% on a total capex spend of ~Rs. 26 crore. The execution is on track with commissioning expected in Q1FY18. This will ensure volume led growth, with sales volume CAGR of 7.1% to 88 crore pens in FY19E (72 crore pens in FY16)

• Branded play, quality of earnings to improve: On the back of volume led growth and premiumisation of its product profile, profitability is on an uptrend at Linc. We expect EBITDA to grow at a CAGR of 16.5% in FY16-19E to Rs. 50 crore in FY19E (Rs. 31 crore in FY16). Corresponding improvement in EBITDA margins is expected at 190 bps. Consequent PAT growth is expected at 13.5% in FY16-19E. We have valued Linc at Rs. 300-315, i.e. 1.0x MCap/sales on FY18E-19E sales of Rs. 430-452 crore, respectively.