Colorful future

Kokuyo Camlin (formerly Camlin), owner of the well-known Camel and Camlin brands, is one of India's leading stationery companies with a wide product range and strong pan-India distribution network. Established in 1931 by D. P. Dandekar with a single product (ink powder), today it is a company manufacturing over 2000 products, including variants. Its wide distribution reach and quality products have made it household name in school and education stationery products. Camlin’s products have been used for generations and enjoy strong brand loyalty. It is a market leader in art materials product segment like crayons, sketch pens, water colors, oil pastels etc. besides school education products such as pencils, gel pens, erasers, sharpeners, maths sets/compass boxes and notebooks among others. It is also present in the office stationary segment (stamp pads, ink etc but primarily markers) as well as fine art and hobby products segment (glass colors, fabric colors etc). The company was the first to launch the Hobby Range of colors in India, and introduced color categories such as fine art colors, hobby colors and fashion colors. It has 4 manufacturing units, 3 in Maharashtra (Tarapur, Taloja & Vasai) and 1 in Jammu where the goods produced enjoy excise exemption leading to competitive pricing and higher profitability.

The company has ventured into pre-school business from the year 2009 and has commenced 3 pre-schools till date in and around Mumbai. The schools, branded as Alpha Kids, have received good response, in terms of number of enrolments. How they scale up this business remains to be seen.

Last year around this time of the year, Camlin promoters, the Dandekar family, sold a major part of their stake (20.3% out of the total 38%) crore to Kokuyo S & T Co Ltd., a leading company in Japan with over 100 years of experience in stationery and furniture products, design and construction of office and store interiors, mail order business, lifestyle retail and distribution having an annual turnover US$ 3.2 Billion. This was followed by an open offer to the other minority shareholders @110/share. Post the stake buy, the foreign promoter Kokuyo holds nearly 51% in the company and the erstwhile promoters the Dandekar family holds nearly 13%. So the promoter holding in the company is a robust 64% which gives a great comfort as an investor.

However, as in any business catering to a wide market, there are challenges. The company operates in an extremely competitive environment, wherein the size of the unorganized market is supposed to be about 40%-45%. The company faces tough competition from both the organized and the unorganized segments of the industry. The company’s business is also cyclical to a certain extent with Q1 (when the schools and colleges open) being the strongest and Q4 (when they close) being the weakest. However, as the company gets into the expansion mode with the financial and technology backing of its Japanese parent, it is poised to exploit several new opportunities and create & maintain its competitive edge in many of the new as well as existing products. Kokuyo may introduce own products such as Campus notebooks (where it is a strong player in Japan), Airofit scissors, Dotliner adhesive dispensers and its furniture line, as these will either be new products or brand diversifications. There are many high-growth areas such as schoolbags and notebooks where Camlin is not present and Kokuyo’s know-how is expected to help. At $2.2 billion or roughly Rs 10,000 crore, the Indian stationery market is big.  That the company has its task cut out is clear. The space has evolved over the last few years with the entry of new players like writing majors Cello, Reynolds, Linc and Luxor at one end and ITC with its Classmate brand of notebooks and allied products at the other. International brands, like Faber Castle and 3M, are also consolidating their presence here. Acquisitions of domestic companies by global brands are also on a rise: Societe BIC of France had acquired 40 per cent stake in Cello in 2009, the same year when Japan's Mitsubishi formed a joint venture with Linc Pens, and recently bought a stake in it. So it may not be a cakewalk for Camlin, its strong brand equity notwithstanding.

Rising disposable income, growth of the private sector and increasing government spending on primary education would increase the consumption of quality stationery products. The education and literacy drive of Government of India is creating the platform for growth in the stationery business. The biggest boost in the education sector has been the historic "Right of Children to Free and Compulsory Education Act, 2009". Camlin is all set to align its resources to gain advantage of various government initiatives on education such as 'Sarva Shiksha Abhiyaan'.

Camlin @38 is available right now at 33% (nearly 1/3^rd) of what the foreign promoter actually offered for the company. What the promoter bid for 54% odd levels of the total market-cap right now is available for 30%. M-cap/sales for the company is at a paltry 0.6x while most FMCG companies command it in excess of 2x+. So there is some catching up to do yet. Some time back, PE fund New Vernon is said to have picked up a small stake through open market deals. So here is a company with a strong Japanese promoter who brings in vast technological expertise to the table, and is looking to integrate its operational strength with the company's strength, where the balance-sheet clean up is already done. Things can only look up from here though short term challenges due to the deteriorating economic conditions remain. This provides an opportunity to accumulate the stock at attractive levels and wait for a turnaround.

Japanese firms appear to have finally learned their lessons in the Indian consumer market. After Sony and Panasonic were laid low by the Korean onslaught of LG and Samsung, they have quietly regrouped themselves and are now giving the Koreans a run. Similar is the case with Ranbaxy. A few years back, Dai Ichi Sankyo paid what then was thought to be an astronomical sum for buying out Singh brothers’ stake. However, they believed in the company’s core strength and did not mind the expensive buy. All was not rosy along the way, though. There were many regulatory issues faced by the company with the US drug authorities which affected them significantly resulting in the share price crashing from 600 levels to around 200. In the last year or so, it has slowly clawed back to around 500. A similar thing could happen with Camlin. It is in fact at the same level it was before the stake sale happened. From here on, an investor who has got patience and has a longer timeframe has hardly anything to lose because the insider himself is paying a very high premium valuation because they know what they will do with the company in the longer timeframe.