CMP - Rs1,855 l TP - Rs1,965 l HOLD l Upside 6%
We had released an initiating coverage report (link) in Dec'23 with TP of Rs1,500 implying ~90% upside from IPO price. Since then, stock price has moved up significantly, thereby achieving our subsequent TP of Rs1,825. DOMS reported mixed 4QFY24 results which missed our revenue estimates but beats the margins driven lower RM cost, operating leverage & backward integration. Management continues to remain confident in achieving revenue growth of 22-25% for FY25E along with increase in market share. We expect earnings to grow at 31% CAGR over FY24-26E on back of capacity additions and operating leverage. We continue to value DOMS at 43x FY26E EPS, arriving at TP of Rs1,965 (up from previous TP of Rs1,825) but reduce our rating to HOLD after the strong run-up in stock.
Strong FY24 results: FY24 revenue grew by 27% yoy to Rs15.4bn backed by increase in capacities across it's core products, ASP increase and new product launches. Gross margins improved 491bps yoy to 41.9% driven by lower RM price, better procurement, consolidation of Microwood and change in product mix. EBITDA margins increased 234bps yoy to 17.7% supported by higher gross margin partially offset by higher employee & other expenses.
Capacity expansion to drive growth: DOMS continues to focus on expanding its manufacturing capabilities and has spent ~Rs1.5bn for FY24 and expected to further invest ~Rs2.1-2.25bn in FY25. It added 0.1mn sq. ft. of manufacturing floor space during 3QFY24 with another 0.1mn sq. ft. under construction for pencil manufacturing which is expected to be operational by 4QFY25. This coupled with its already proposed 44 acres expansion (in 3phases till FY27), with focus on writing instruments, adhesives, pencils, markers, etc will provide it required resources to continue its growth momentum and enhance its market share.
Capitalising inorganic opportunities: DOMS entered into the back-to school category by acquiring 51% in SKIDO, a school bag manufacturing company, complementing its existing portfolio and distribution network. These kind of strategic investments and acquisitions (Microwood, Clapjoy) helps DOMS in increasing market share, deepening presence in categories and improving profitability.
Focused marketing initiatives: with focus on strengthening it's connect with consumers and building brand recall company has come up with initiative like 'DOMS Art League' and 'DOMS Painting Studio'. It plans to further strengthen its marketing through more such collaborations.
Future Outlook: a) Company has revised upward its lower end of FY25 guidance and expects revenue growth of 22-25% with EBITDA margin of 16-17% vs prev. guidance of rev growth of 20-25% with EBITDA margins of 15-17%. b) Company will continue to focus on domestic market with addition of new SKUs in scholastic, adhesive and fine arts range.
Valuation: With upcoming capacity expansions, product innovation & penetration into new geographies will continue to drive growth in the medium term. Focus on high margin products like fine arts and increasing the depth and width of existing products will support margin expansion. We now expect the company to grow its earnings CAGR at 31% for FY24-26E. We continue to value DOMS at 43x FY26E EPS, arriving at TP of Rs1,965 (from previous TP of Rs1,825) but reduce our rating to HOLD.
Shares of DOMS Industries Limited was last trading in BSE at Rs. 1847.55 as compared to the previous close of Rs. 1802.95. The total number of shares traded during the day was 23210 in over 4373 trades.
The stock hit an intraday high of Rs. 1966.00 and intraday low of 1823.05. The net turnover during the day was Rs. 44005477.00. |
