The stationery market in India, despite wide-scale digitisation initiative and increased adoption of electronic devices still continues to maintain its prominent position. Notebook continues to be the second largest category growing at 6.4%. While fountain pen and Ball pen has low growth, gel pen are growing at 6%. The other segment for school children i.e., Crayons and Geometry Box had growth of 5% and 6% respectively.

In the recent past, the Government has been payingincreasing emphasis on the education sector with significant investments.Further, the favourable demographic composition augurs well for India with 70% of the country’s populationbeing below 35 years of age.

Company Overview

Kokuyo Camlin Limited (the Company) is one of leading and most trusted stationery brand in India. The Company started operations in 1930s and has an unmatched legacy with the brand name synonymous with quality products for schools, offices and niche art markets. CAMEL and CAMLIN are the flagship and the most recognised brands of theCompany.In2011,KokuyoS&TCo.Ltd. (nowKokuyo Co. Ltd., a leading Japanese stationery manufacturer, acquired a majority stake in the erstwhile Camlin Ltd. enabling the Company to enhance its presence in the Indian market with increased product portfolio. The strong R&D capabilities of Kokuyowas also able to provide Camlin the opportunity to improve its product quality and develop innovative and aesthetically pleasing products for the Indian market.

The company’s products are broadly classified into three business segments:

1. School and Education products
2. Fine Art and Hobby Materials
3. Office Stationery products

Kokuyo Camlin currently has market leadership in many categories like Crayons, Water Colours, Mechanical Pencils, Geometry box, Markers etc., with the help of increased marketing and distribution efforts. (Kokuyo Camlin advertising efforts on both TV and social media has won awards like Abby, DMA and CEF). The company is now strengthening its portfolio in the categories of pens & notebooks.

The Company has a pan-India network of 1,500+ dealers/distributors ensuring supply of the Company’s products to over 300,000 retailers in the remotest corner of the country.

Analysis of AnnualReports

• The company had one of its best results FY10, with a sales growth of 17% and PAT Growth of a whopping 97%.
  • The ROCE grew from 16% in FY09 to 21% in FY10.
  • The boost to the education sector Right of Children to Free and CompulsoryEducation Act, 2009 which came into force on April 1,2010 gave an extremely positive outlook to the company.
  • However, it has been unable to sustain such growth since then.
• In FY11, the sales grew a mediocre 8.14%, whereas profit actually fell by 28.7%.
  • The reason for this fall was an increase in overheads, raw material costs (due to inflation) and interest on borrowings.
• In FY12, the sales again grew by a mediocre 7.16%, but the Profit actually plunged 84.4%.
  • The management said this was caused by increase in some operating expenses, including sales and marketing expenses and manpower costs.
• In FY12 and FY13, the operating cash flow was also negative.
• In FY14, the Company raised 103.24 Lacs by way of rights issue with an object to set up a new fully integrated manufacturing plant situated at Patalganga.
• The construction of this plant was started in May of 2015, and was expected to become operational in Q2 of FY15.
• However, due to delays the actual announced date of commercial production of Patalganga Plant was 28th April, 2017.
• The company has made no significant promises apart from the fact that the Patalganga plant will help to improve production efficiency and also reduce factory and other overheads. All these measures are aimed at putting the Company back on the course of profitability and growth.

Analysis of Financial Statements

• The company has promoter shareholding of 74.99%, out of which 73.74% belongs to Kokuyo Company Ltd.
• The company has had mediocre sales growth of about 8% from FY13 to FY18, the NP has grown at a CAGR of 26% from FY15 to FY18, in both FY13 and FY14, the company had a net loss.
• The company’s explanation for low NP in recent years is due to the utilization of funds for the Patalganga Project.
• The company’s Cash from Operating Activities has generally remained above the Net Profit:                                            (₹ in Crore)

	FY17	FY16	FY15	FY14	FY13
NP	₹0.96	₹5.26	₹4.93	₹(7.78)	₹(15.06)
CFO	₹8.91	₹12.36	₹8.38	₹7.83	₹(3.79)

• The company does not have much debt as of now, and their debt to equity ratio over the past 6 years has remained at around 0.08.
• The company paid 6.56 crore in FY17 to its management and directors, which is almost 7 times the net profit.
  • However, the company hadfiled an application with the central govt. for approval of revised Managerial Remuneration effective from 1^st February 2016. The approval was received on 12^thSeptember 2016.
• The Closing Inventory and Trade Receivableshave grown by 11% and 12% respectively, which is higher than the sales growth of 8% over the past 6 years.
• The company has had the following related party transactions in which its KMP hold positions of interest.
  • Services Received: 14.9 crore.
    • From Dandekar Inks & Adhesives Ltd. ,Nilmac Packaging Industries Ltd. and Excella Pencils.
  • Reimbursement of expenses: 1.7 crore
    • From Excella Pencils, Triveni Pencils Ltd. and Nilmac Packaging Industries Ltd.

Opportunities

1. Most of the company’s future opportunities arise from the Patalganga plant, and the increase in net profit from 0.96 crore in FY17 to 9.81 crore seems to prove that the strategy may be working, however the proof has yet to be convincing.
2. The company has focused a lot on digital marketing with the Kokuyo Camlin Facebook page having over 6.5 lakh fans and the Kokuyo India page having over 50,000 fans, this can pay off in the future, as the new generation are not affected by traditional forms of marketing.
3. The company has undertaken a drive for digitization of Human Resource processes, which in the future will help them save on manpower costs.

Threats

1. Contingent liabilities (claims against the company and bank guarantees) amounting to 13.2 crore.
2. The company also has 10.11 crore worth of contracts remaining to be executed on capital account which have not been provided for.
3. The company’s primary business segment, the school product segment which accounts for approximately 2/3 of the company’s revenue, is highly seasonal with demands peaking during the beginning of new sessions and remaining flat the rest of the year. So any adverse event happening in the peak season can cause a major setback to the business.
4. The company faces major competition from the unorganized sector, as well as cheaper imports from China, Taiwan and Korea.
5. The company has invested highly in the new plant, however due to this being primarily a mass market business denoted by high volumes and low margins, if the company is not able to manufacture enough volume, the profitability may actually plunge.

Conclusion

The company has seen mediocre growth over the past 6 years, and has been unable to emulate the high returns that it had achieved in 2009-10, however if they are able to achieve the volumes required to make the new plant efficient, the company may just have a chance.

CA.BinoyJ.Kattadiyil