Linc Ltd: Writing the future of Bharat

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.
• 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:

• The Linc brand experienced a decline in sales for some legacy products in Q1 due to price increases.

• While some products absorbed the price increase and are growing, others are yet to recover.

• The company aims to limit the decline in legacy products and hopes for improved performance in the future.

• Margin Breakdown:

  • Highest margin: Pentonic (company-manufactured brand)
  • Second highest margin: Uni-Ball and legacy products
  • Third highest margin: Deli brand (imported finished products)

• 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.

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