The initial public offering (IPO) of Flair Writing Instruments is open till November 24. The company manufactures pens and writing instruments and is the amongst the leading players in its segment. Given strong distribution reach, better financials, and reasonable valuation of the public issue at 27 times FY23 EPS, investors can subscribe to the issue. The company’s growth will be aided by capital investments and expansion into steel bottles business in the next two years.  

Flair’s major business is its writing instruments segment (88 per cent of FY23 revenues) which includes ball pens, fountain pens, gel pens, roller pens and metal pens, available across price points ranging from mass market to premium. The company started a ‘creative division’ in FY21 and the segment contributed 12 per cent or ₹115 crore to revenue in FY23.

Firm domestic presence

The company has a manufacturing capacity of 200 crore pens per year and has the leading distribution reach of 3.15 lakh retailers/wholesalers. This network reaches 2,400 towns in India and enjoys 9 per cent share in the country’s pen market. According to RHP, the scale of reach is ahead of its peers DOMS, Kokuyo Camlin, Linc or other leading pen manufacturers. The company has a long-established OEM business as well (20 per cent of FY23 revenues) where it is contracted to supply pens to foreign companies.

The scale of operations from exports and domestic business and reach of distribution is well reflected in company financials with leading profitability and return metrics compared to peers (see table). Apart from economies of scale aiding margins, Flair’s automated manufacturing and ability to internally source 70 per cent of its pen tips (which are 15 per cent of cost) adds to margins, according to the company. Its products cover mass market (₹5 to ₹15) as well as premium range which extends up to ₹3,000 with Pierre Cardin, Hauser (both of which were acquired) and Flair’s brands, improving its product mix and thus, adding to its margin potential.

Expansion and steel bottles

Flair has started a division to manufacture steel bottles. The division shares the similar end market of schools and office use. But the commonality in distribution and manufacturing is limited. The company got into the business with one OEM customer. According to the company’s management, this OEM customer will pick up 65 per cent of output in FY24 and the company will build the market in the next one year for the remaining portion. With clear visibility on order book and marketing experience in the end market, this segment can add 6-7 per cent to revenues by FY24.

With the fresh issue proceeds of ₹292 crore (total issue size of ₹593 crore), Flair will setup a greenfield facility at Valsad in Gujarat (₹56 crores) and also invest ₹87 crore to debottleneck and expand its tip manufacturing facility. This should improve margins and add to capacities in next two years. The company has a high asset turnover of 3.5 times and the fresh investment will add significant revenue capacity in next two years. The remaining fresh issue proceeds will be utilised for working capital deployment (₹77 crore) and repayment of loans (₹43 crore).

Financials and valuation

The company reported revenues of ₹943 crore in FY23 which is a 63 per cent YoY growth and an EBITDA margin of 20.4 per cent. The rebound is on account of operations normalising post-Covid. The company has a net-debt to EBITDA of 0.6 times as on June 2023 and will improve further with debt repayment from fresh issue.

On a post issue basis, Flair is valued at 27 times FY23 earnings, which is inline with Linc (27 times FY23 EPS) and at cheaper multiple compared to Kokuyo Camlin (62 times).