Linc Pen & Plastics - Soft crude prices to boost profitability - Angel Broking

Linc Pen & Plastics Ltd (LPPL) is one of India's leading writing instrument brands. The company is headquartered in Kolkata and its products are available across India as well as in 50 countries across the globe.

Lower raw material price and product mix change to expand margins: Going forward, we believe that the company would be able to increase its margins owing to easing raw material prices including that of high density polyethylene, polyethylene, nylon etc. which are linked to crude prices. Also, the company is now targeting higher margin segments like >Rs. 10 pens which command higher margins compared to
Continuous debt repayment & improving return ratios: The company is continuously generating better cash flows, which has resulted in debt reduction and improvement in ROE. The company has been consistently repaying debt over the past four years, resulting in debt having come down from ~Rs. 43cr in FY2012 to Rs. 18cr in FY2015. Going forward, we believe the company will continue repaying debt with strong cash flows, which in turn will lead to reduction in interest cost. The interest cost has reduced from ~Rs. 3.8cr in FY2012 to ~Rs. 1.5cr in FY2015. A lower interest expense in turn will lead to higher profitability for the company. Further the company's ROE has improved from 3.6% in FY2012 to 16.2% in FY2015.

Increased focus on western & southern regions coupled with recovery in export business to accelerate top-line growth: We expect LPPL to report a healthy recovery and post a top-line CAGR of ~8% over FY2015-17E, on the back of various triggers. These include (a) the company's increased focus on southern and western regions (which contributed by less than 25% to the total revenue in FY2015) should contribute additionally to the overall top-line, (b) the company has a market share of 10% with a strong brand recall. Further, the company is spending significant amount on ad spend to boost sales growth, (c) an expected recovery in exports. The geographies where the company exported were affected due to political turmoil/socioeconomic crises in FY2015; the crisis has now been resolved (d) the company's strong distribution network coupled with continuous new product launches, should aid the top-line.

Outlook and Valuation: Going ahead, we expect LPPL to report a top-line CAGR of ~8% over FY2015-17E to ~Rs. 371cr owing to strong domestic as well as export sales. On the bottom-line front, we expect the company to report ~17% CAGR over FY2015-17E. This would be on account of expansion in operating margin on the back of lower material prices and higher exports, which is a high margin business. Further, the company has reduced its debt significantly, which will lead to cost saving for the company. At the current market price, LPPL trades at a P/E of 11.6x its FY2017E EPS. We initiate coverage on the stock with a Buy recommendation and target price of Rs. 185 (14x FY2017E EPS), indicating an upside of ~21% from the current levels

Shares of LINC PEN & PLASTICS LTD.-$ was last trading in BSE at Rs.153.8 as compared to the previous close of Rs. 158. The total number of shares traded during the day was 10273 in over 215 trades.

The stock hit an intraday high of Rs. 167.1 and intraday low of 148.2. The net turnover during the day was Rs. 1585107.

Source : Equity Bulls

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