Weekender APRIL 10, Outlook This Week:

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1 Index Closing Chg Chg % Sensex % Nifty % Auto % Bankex % Cap Goods % Cons Durables % FMCG % Healthcare % IT % Metal % Oil & Gas % PSU % TOP GAINERS Closing Chg Chg % RIL % PNB % COAL INDIA % SESA STERLITE % M&M % TOP LOSERS Closing Chg Chg % LUPIN % HDFC % HERO MOTOCORP % WIPRO % ICICI BANK % Currency Rates Expiry Closing USDINR 28/04/ GBPINR 28/04/ EURINR JPYINR 28/04/ /04/ Weekender Outlook This Week: APRIL 10, 2015 The government sold 5% of REC for about Rs 1,650 crore on Wednesday through an offer for sale on the stock exchanges, which will be followed by another transaction sale of a 5% stake in PFC next week that would fetch Rs 1,900 crore. In a boost to Coal India Ltd, the government has increased the quantity of coal that the state-owned miner can sell through e-auction from 7% to 10%. US crude stocks surged by nearly 11 million barrels last week, the biggest gain in 14 years, as imports jumped, while oil stocks unexpectedly increased and distillate inventories dipped. REC share sale over subscribed 5 times, govt to get Rs 1,550 cr. On strong institutional and retail demand, bids were received for over crore shares as against 4.93 crore shares on offer, resulting in over-subscription of 5.11 times. At the floor price of Rs 315 apiece, the government would raise over Rs 1,550 crore from the Offer For Sale (OFS). The Telecom Regulator Authority of India (TRAI) reduced the ceiling tariff for national roaming service with effect from May 1. The regulator has cut ceiling tariff on outgoing local voice call on roaming to Rs 0.80 per minute and the ceiling tariff on incoming local call charges on roaming has been cut Rs 0.45 per minute. So the national voice tariffs have come down by about percent. Credit rating agency Moody's revised upwards the outlook to positive, from stable, for 12 state-owned banks and financial institutions including SBI, PNB, Canara Bank, REC and PFC. Moody's also revised to positive the outlook on the long- term ratings of private sector lenders, ICICI Bank, HDFC Bank and Axis Bank. World stocks marched higher on Thursday, lifted by Greece's confirming it will pay a 450 million-euro loan tranche to the International Monetary Fund and growing expectations the US will not raise interest rates until the latter part of the year. Date Nifty Sensex 6-Apr Apr Apr Apr Apr

2 Commodity Spot Prices Research Desk Closing Castor seed /100kg Chana /100kg 3725 Coriander /100kg Jeera /30kg Mustardseed /100kg Soy bean /100kg 3460 Economic Data Date Event Forecast Previous 14th April Tue 15th April Wed 17th April Fri 17th April Fri 17th April Fri India WPI Inflation YoY MAR -0.37% -2.06% EUR European Central Bank Rate 0.05% 0.05% Decision (APR 15) India Bank Loan Growth 9.50% 4/APR USD Consumer Price Index (YoY) (MAR) 0.10% 0.00% USD U. of Michigan Confidence (APR P) Stock Specific news: Dena Bank plans lower price to sell around Rs 500 cr NPAs. Dena Bank, which did not receive good response for its non-performing assets (NPA) sale last fiscal, is now planning to auction again but at a lower price. Central Bank of India has topped the list of public sector banks with maximum bad loan including restructured assets as a percentage of total advances. Central Bank of India's 21.5 per cent assets are either bad or have been restructured to save them turning nonperforming assets (NPAs). GMR Infrastructure will acquire shares from investors in its subsidiary GMR Airports as the company looks to consolidate its holdings. GMR is a diversified group with presence in airports, power and other sectors. AAP government has strictly directed Reliance Infra -backed BSES power distribution companies to immediately clear dues of nearly Rs 6,000 crore to Delhi Transco Ltd and two state-run power generation companies. M&M has stopped selling pick-up trucks and sports utility vehicles in Brazil, seven years after it entered the market, due to factors including changes in local regulations. TVS group, the $5billion diversified industrial conglomerate consisting of India's third largest two-wheeler maker TVS Motors, is in talks with the Andhra Pradesh government to set up one of its largest forging units close to Krishnapatnam port on the state's southern coast. Troubled shipbuilder ABG Shipyard is looking for a white knight and it's now pinning hopes on India's richest man MD of Sun Pharma Dlilip Shanghvi for a bailout. Bharat Heavy Electricals (BHEL) disappointed street with its provisional numbers for the financial year BHEL net profit fell 62 percent to Rs 1,314 crore during the year compared to Rs 3,461 crore in previous year. Direct to Home services provider Videocon D2H has withdrawn its Rs 700- crore initial public offer proposal amid reports that it plans to start a fresh process to hit the capital markets DLF will reduce its net debt to about Rs 17,500 crore by March 2016, from Rs 20,300 crore at the end of 2014, as company plans to raise funds through various routes to cut borrowings, rating agency Crisil has said. Zuari Group will launch an open offer for MCFL (Mangalore chemicals and Fertilizers) on April 20 to acquire additional percent stake in the company, for which it is competing with rival Deepak Fertilisers. BSE said it will drop ING Vysya Bank from BSE 200 and BSE 500 indices from April 16. SBI said it has voluntarily delisted its equity shares from the now nonfunctional Madras Stock Exchange (MSEL). Shares of Inox Wind saw huge buying demand on listing, rising more than 31 percent intraday on Thursday. The stock touched an intraday high of Rs against issue price of Rs 325 after opening at Rs 400 on NSE. Outlook Next week: The broader market seems to be range bound as the RBI maintained its status quo stance. Damage was done recently to Rabi crops which has impacted the farm sector may further induce RBI not to cut rates in the forth coming policy date. Expect volatility in market during the coming week or market may remain in sidelines. 2

3 Linc Pen and Plastics Current Price 159 Target Price Upside 35.22% Duration months STOCK DATA BSE Code NSE Code INE802B01019 Market Cap (Crores) Face value week H/L 53 / Industry Overview The Rs crore Indian writing instruments industry has a large unorganised sector estimated at around 20-25%. The market for writing instruments below Rs 15 a unit grew at 7-8%, whereas the demand for pens above Rs 15 grew 8-10% annually. Linc possessed an all-india market share of 10%, retaining its position among the top three Indian players and accounting for the largest share in Eastern India. The bulk of off take in the Indian stationery market is moving from the unbranded to the branded, catalysed by frequent (students and office workforce) and occasional users (housewives and literate manual workers). The domestic pens market can be divided into ball point pens and gel pens. Ball point pens account for a 72% share of the market while gel pens constitute the rest. Interestingly however, gel pens are becoming increasing popular among students while the use of marker pens are growing fast following increased use in the corporate sector. Close to 8% of the revenues of the countrys pens industry is derived from products priced below Rs.15 per unit; a small revenue percentage is derived from pens priced between Rs.100 and 300. Finance Minister proposed to set aside Rs.69, crore for education in , as against Rs.70,505 crore in the revised estimate in Of the total outlay for , Rs.42,219.5 crore was pegged for the schools sector and Rs.26, crore for higher education. In comparison, higher education has been given a plan allocation ofrs.15, crore in , as against Rs.13,000 crore pegged in the revised budget for In other words, the higher education sector saw an increase of nearly 22%. Company Overview Incorporated in 1994 by Mr. S. M. Jalan, Linc Pen & Plastics Limited is Indias leading manufacturer, marketer and exporter of writing instruments and stationery products. Linc Pen & Plastics offers complete range of writing instruments through its two manufacturing facilities located at the Falta SEZ and Serakole, West Bengal. Its manufacturing facilities are accredited with the ISO-9001:2008 certification, ensuring superior product quality. Linc evolved its singular focus to widening its international presence in its own brand name. Linc widened its global footprint by eight countries in , taking the total to over 45. It is also a supplier to global retail giants like Walmart, ASDA and Tesco for their private labels. 3

4 Segments Segment wise revenue Pens 73% Refills 10% Pencils 5% Others 12% Total 100% Shareholding Pattern (31/12/2014) Category % of equity Promoters 60.43% Public 39.57% Total 100% *None of the Promoter shares are pledged Mistubishsi holds % in linc Pen and Plastics. In FY12, MPCL made a strategic investment to the tune of Rs. 20 crores in Linc Pen and Plastics by subscribing to its 20 lakh equity shares at Rs.100 each, representing.5 % of the companys capital. The amount received is utilized in reducing borrowings, thereby strengthening balance sheet and saving interest cost. Opportunities Linc Pen which has strong brand is among the top players in the organized domestic writing instrument markers with 10% market share in India and is poised to increase its market share in the future. Major players are Cello, Linc, Today and Reynolds. Opened Linc stores to cater to consumers directly and is planning to open more stores in the future. The company is opening chain of stores which sell pens and stationery products - under the brands Just Linc and Office Linc. Just Linc stores focus more on pens and Office Linc stores sell all office stationery besides pens.. `Office Linc' claims to offers its customers a range of office stationery products- from pins to laptops. ` `Office Linc' stores. The company has ambitious plans for roll out of Office Linc stores on a nationwide basis. 4

5 Also has wide distribution network approximate 2800 distributors across india and mainly caters to tier 2 and tier 3 cities where demand is huge because the low-end market accounts for 90 percent. Company has tapped its footprints in exports in over 50 countries and also registered its brand. In its latest annual report company said that they expect the exports to grow at a CAGR of 19.5% over FY14-FY16E to INR 130 crores despite the ongoing geo-political unrest in Middle East. Increase in exports will be a positive for the company as price realization is better in abroad markets leading to higher margins as compared to selling products domestically. % of Market Revenues Domestic 80% Exports 20% Company also stated that going forward EBIDTA margin would increase from current 7.03% to 8.45% from FY 2015 and 2016 Company is presently into mass segment, but now its focusing more on semi premium and premium segments by introducing innovative products and also entering new geographies. The Company introduced a new product (Twinn) a first of its kind with a pen on one side and a pencil on the other in Government has also made education a key thrust area in the recent budget. So with rise in number of students, stationary companies will see more consumers for its products. Company is looking to tap at least 5 more countries next year and widen the customer base in the international markets Company has in-house assembling facility, ensuring superior quality control, quick delivery and a reduction in labour costs. Linc reduced lead time due to a shift from outsourcing to inhouse product development. Exports lead time of was brought down by about 20 days in Company is growing at CAGR of 9% from last 5 years,, more than industry average of 6-8%, along with its OP and NP, both growing at same rate of 8%. Table CAGR Sales % Operating Profit % Net profit % Increasing awareness about its brand by advertisement campaign with the the central theme of Koi bhi pen nahin, Linc pen. Linc pen lo, kismat badlo(dont choose any pen, ask for a Linc pen. Buy Linc and change your destiny). Pens are a low consumer involvement category. People who go to buy a pen, dont generally ask for a brand, so to discouraging the sale of unorganized brands in India, Linc pen is planning to address the campaign which will not only boost its image but will also engrave its brand in 10 to 16 years old child who are the major users. 5

6 The company has reduced the debt in last 5 years with D/E of 0.55 in 2010 to 0.44 in The company has got negligible long-term debt. They do have debt in terms of working capital. But if you talk of long-term debt, it is just about Rs 1.98 crore. (see Table 1.2) Table Total Debt Total Equity D/E Company has consistently rewarding its shareholders with dividends, doling out very large dividends each year from its profits. This shows that company rewards its shareholders handsomely. Company is constantly paying dividends from last 15 years (see Table 1.3) Table Dividend Net Profit Dividend Payout ratio 26.96% 27.32% 73.14% 40.00% 25.34% Companys advertisement expenses as % of sales have significantly come down from 4.37% in 2010 to 1% in Company is poised to reap rewards in future for the advertisement expenses it done in last few years, as its brand image is engrossed in the minds of consumer. This will enhance profitability of the company as company no longer has to incur expenses in future as it did in past. (see Table 1.4) Table Revenue Advertising expense Adv. Exp as % of Sales 4.37% 5.39% 5.62% 1.58% 1.00% There are only 2 companies listed in stationery segment which has only Pen as a major segment. Next to its listed peer is Todays writing which fundamentals are no way at par with Linc. It is currently trading at P/E of approx 15 and has ROCE at approx 15% (see Table 1.5) Table 1.5 Linc Pen Today's writing Price Operating profit % 7.02% 5.60% Net profit % 3.66% % Debt Equity D/E ROCE 15.36% 0.00% Market Cap Face value P/E

7 Company is strengthening its core operations to avoid delay and give better operational efficiency by implementing ERP. The ERP being implemented by Price Waterhouse Coopers would connect all its branch offices and plants with the central server in Kolkata Company started bundling its products in order to take on cut throat competition. i.e. on Rs. 5 per pen, Linc earned not more than a rupees profit. But, after the bundling, earnings per pen are Rs per pen (or a 33 per cent increase). The bundling offer saw Linc not just increase prices, on the one hand, but club pens in packs of three. A direct doubling of price would be steep and Linc would have lost its market share to its competitors. So, this strategy Linc pens worked out which will not only improve its market share along with the margins. Products under Rs. 5 have been discontinued and focus is on promoting the pack of three from Rs.. In the past the company endorsed Shahrukh Khan as brand ambassador for Linc and also Katrina Kaif to promote Uniball products in India. It has also inked sponsorship deals with IPL teams to enhance its visibility. Thus this positioning had made Linc one of the most preferred brands both domestically and internationally. Linc added three new products to its portfolio in , comprising Zapp, Polco and Twinn, targeting the mass segment. The Company strategically phased unprofitable products out to concentrate on fast-moving products Cello had sales of approx 450 crores in 2008 and is growing at average of 10% CAGR then sales in 2014 comes out to be approx 700 crores Linc had sales of approx 175 crores in 2008 and is 314 crores in 2014, which gives 9% CAGR If we compare Linc with Cello, we can see that Linc is slowly taking over market share of Cello (see Table 1.6) Table Linc Revenue Cello Revenue Linc revenue as ratio of Cello revenue Company has ventured into the wooden pencil, geometry box and related stationery products. Company is also entering into the paper business, particularly the Note-Book Industry which is a huge market by itself. Pen industry is not Cyclical but recession proof, as we can see from the economic crisis in Instead they are in demand throughout the year and demand mostly increases during exam period of students and also during festive seasons like Diwali when they are used for Corporate gifting. 7

8 Concerns and Risks Plastic granules which is the key raw material for Linc Pen is dependent on crude prices. Now the crude prices seems to have stabilized, once the crude prices starts rising, it will severely impact the companys margins. Foreign currency fluctuations may impact the companys sales as any appreciation in the Indian currency will impact export sales of the company Low entry barriers exists as it is not a capital intensive industry Cannibalization of existing sales can happen with new products launches Stiff competition exists in the pen industry. Major Competitor is Celio, an unlisted entity which as 37% market share as compared to Linc which has 10% market share. Diversifying into unrelated business like in film production in 2011, the film did not do well, so the management accepted their mistake and now focusing on core business Companys inability to introduce innovative products may lead to stagnation in sales Distribution remains the challenge as this industry in India has a fragmented retail structure, with most customer spend going to very small, independent shops and kiranas Major issue Company faces is the Retailer power to influence customer choice which is extremely high in some areas where purchase involvement is low. Latest Quarter Results Snapshot During the quarter ended 31 dec 2014, Revenue registered approx 3.30% decrease and stood at a record Rs crores from Rs crores over the corresponding quarter last year. During the quarter ended 31 dec 2014, PAT registered approx 24.11% increase and stood at a record Rs 3.14 crores from Rs crores over the corresponding quarter last year. 9 months Results Snapshot During 9 months ended 31 dec 2014, Revenue registered approx 1.74% increase and stood at a record Rs crores from Rs crores over the corresponding quarter last year. During 9 months ended 31 dec 2014, PAT registered approx 35.66% increase and stood at a record Rs crores from Rs crores over the corresponding quarter last year. 12 months Results Snapshot During 12 months ended March 2014, Revenue registered approx 2.90% increase and stood at a record Rs crores from Rs crores over the corresponding quarter last year. During 12 months ended March 2014, PAT registered approx % increase and stood at a record Rs crores from Rs crores over the corresponding quarter last year VALUATION For FY 2015, we expect the company to register Net sales and PAT of Rs crores and Rs crore. This gives an EPS of Rs approximately. Current market price of Rs 159 discounts FY 2015 projected earnings by times. Buy at CMP of 159 with target price of Rs 215 approximate 35.22% increase in next months 8

9 BALANCE SHEET (Crores) SOURCES OF FUNDS : Share Capital Reserves Total Equity Share Warrants Equity Application Money Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Other Liabilities Total Liabilities APPLICATION OF FUNDS : Gross Block Less : Accumulated Depreciation Less:Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Producing Properties Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Other Assets Total Assets Contingent Liabilities

10 PROFIT & LOSS (Crores) (12) (12) (12) (12) (12) INCOME : Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income EXPENDITURE : Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses Less: Pre-operative Expenses Capitalised Total Expenditure Operating Profit Interest Gross Profit Depreciation Profit Before Tax Tax Fringe Benefit tax Deferred Tax Reported Net Profit Extraordinary Items Adjusted Net Profit Dividend Earnings Per Share(Adj)-Unit Curr Book Value(Adj)-Unit Curr

11 CASH FLOW (Crores) Cash Flow Summary Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year

12 CHART:- Terms used : FCF : Free cash flow TTM : Trailing twelve months RONW : Return on net worth ROE : Return on Equity ROCE : Return on Capital Employed EV/EBIDTA = Enterprise value / Earnings before interest, depreciation, tax and amortization P/E = Price to earnings ratio EPS = Earnings per share BV = Book value PBT = Profit before tax PAT = Profit after tax OPM = Operating profit margin 12

13 Disclosures: (a) The research analyst or research entity or his/their associates or his/their relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company or any financial interest in the subject company (b) The research analyst or research entity or his/their associates or his/their relatives do not have any other material conflict of interest at the time of publication of the research report or at the time of public appearance (c) The research analyst or research entity or its associates have not received any compensation for investment banking or merchant banking or brokerage services nor received any compensation for products or services from the subject company in the past twelve months (d) The research analyst or research entity or its associates have not received any other benefits from the subject company or third party in connection with the research report (e) The subject company is not or was not a client during twelve months preceding the date of distribution of the research report and the types of services provided by the research analyst or research entity or his/their associates or his/their relatives (f) The research analyst has not served as an officer, director or employee of the subject company (g) The research analyst or research entity has not been engaged in market making activity for the subject company 13

14 THANK YOU Disclaimer:- This report has been prepared by. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only.. may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments.., its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Neither Latin manharlal Securities Pvt Ltd. nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai Tel. (022) , Fax (022) LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh). 14