Linc Ltd (NSE:LINC) Q1 FY23 Earnings Concall dated Aug. 16, 2022
Corporate Participants:
Deepak Jalan — Managing Director
N.K. Dujari — Director Finance
Analysts:
Navin Agrawal — SKP Securities — Analyst
Zaki Nasser — Private Investor — Analyst
Subhankar Ojha — SKS Capital — Analyst
Sanjeev Sancheti —
Presentation:
Operator
Ladies and gentlemen good day and welcome to Q1 FY23 Earnings Conference Call of Linc Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agarwal, Head Institutional Equities at SKP Securities Limited. Thank you and over to you, sir.
Navin Agrawal — SKP Securities — Analyst
Good afternoon ladies and gentlemen. It is my pleasure to welcome you to this earnings conference call on behalf of Linc Limited and SKP Securities. We have with us Mr. Deepak Jalan, Managing Director, Mr. N.K. Dujari, Director Finance, and Sanjeev Sancheti, Uirtus Advisors LLP their IR partners. We will have the opening remarks from Mr. Deepak Jalan, and Mr. Dujari will feed in with the financial overview followed by Q&A session. Thank you and over to you, Mr. Jalan.
Deepak Jalan — Managing Director
Thank you Navin. Good afternoon and very warm welcome to Linc Limited Q1 FY2023 earnings conference call. This is Deepak Jalan, Managing Director of Linc Limited. I will take you through the business and operational highlights of the quarter gone by while our CFO, Mr. Dujari will share the financial metrics. During the quarter, the company delivered a strong top-line growth. Our operating revenue for quarter one grew by over 77% as against the same quarter of the previous year, clocking an operating income of around INR98 crores, however the first quarter being traditionally a weaker quarter for the industry, revenue on quarter on quarter basis was lower by 11.4%. With Pentonic sales going strong and with plans of introducing new product, we expect strong top-line growth in the coming quarters as well. In the popular segment of writing instrument, more specifically the pen segment, the company continues to have a strong presence with market share of about 8%.
Company’s focus on INR10 plus segment since the launch of Pentonic brand has helped the company grow at a faster pace. One of the USPs of the product is perceived value due to its unique design has gone a long way in establishing Pentonic as one of the strongest brand in its segment.
In little over three years, Pentonic now contribute over 30% of company’s core revenue as against only 7% in FY19. Due to higher GPN of over 40% for Pentonic, the company’s average GPN which was below 22% in FY18 has steadily increased to more than 25% in quarter one FY23. The company has been witnessing sharp increase in input cost during the last few quarters due to continuous rise in crude and polymer prices. Q1 also saw all round cost increase however the company was able to pass on the cost increase by increasing the selling prices with effect from April. Consequently gross margin improved from 22.9% in quarter 4 FY22 to 25.4% in quarter one FY23.
Operating EBITDA margin increased both year on year basis and quarter on quarter basis. I am glad to share that the input costs have started to come off and prices of key input are expected to remain wining in the coming quarter which should help us in further improving our margin and profitability going forward. Linc 2.0 with the five prone strategy that we have embarked upon as was discussed in our previous call, we believe the company will not only grow rapidly over the next few years, but will also be able to expand its margin with judicious business mix and economies of scale. Let me touch upon the five prone strategy briefly which is adopted by the company. Number one, increased touch point, India has over 10 million non-stationery outlets like kiranas, medical store, paan plus stores etc., and from nowhere in FY20, the company has reached to almost 1.25 lakh such outlets directly, thus taking its total touch points to over 2.3 lakh outlets including the stationery outlet. The company expects to expand its overall reach to more than 5 lakh outlets by FY25. Number two, focus on higher margin product. As informed earlier also, our focus is more on the higher value and higher margin product and we will soon be launching pens at INR20 and at INR40 under the Pentonic portfolio. Number three, inroads into stationery product, company’s foray into full range of stationery product through exclusive tie-up with the Delhi is progressing well and we expect to generate a minimum of INR100 crores of revenue in three to four years’ time. Fourth point is stepping up of existing capacity. To meet this targeted demand, we are planning to increase our manufacturing capacity at Gujarat by putting up additional manufacturing facility adjacent to our existing factory. The fifth point, ESG, on ESG front company is taking the falling initiatives substituting plastic wrappers with bulk packing and paper boxes, this initiative saved about 60 tons of plastic in FY22. We employ more than 1200 female workers in our manufacturing facility. We also employ and provide training to a small number of specially abled work force. We support several NGOs who provide education to the less privileged sections of the society. The company is actively working on projects like recycling of used pen, consumers are encouraged to change the refill rather than buying a new pen under its refill more campaign. These efforts will go a long way in contributing towards reducing carbon footprint of our planet. Now I would like to hand over the call to Mr. Dujari to provide updates on financial numbers. Thank you.
N.K. Dujari — , Director Finance
Thank you Mr. Jalan. Good afternoon ladies and gentlemen. Many thanks for joining the quarter one FY23 Linc Limited Earnings con call. I will give a brief overview of the financial numbers for the quarter before we open for Q&A. During quarter one FY23, company’s operating revenue grew by 78% from INR55 crores in quarter one FY22 to INR98 crores, however as explained earlier, operating income fell by 11% quarter on quarter as the first quarter is traditionally weaker for the writing instrument industry. Operating EBITDA in quarter one FY23 increased by over 480% to INR8 crores versus INR1.4 crores with an operating EBITDA margin of 8.2%. As already explained earlier, operating EBITDA and EBITDA margin increased in spite of all around increase in cost as the company was able to increase the selling price of its legacy products under Linc pen from April 2022, higher input cost has kept the margins under pressure in FY22, however input prices have started softening from second quarter and we expect prices to stabilize at lower levels in these ensuing quarters. These along with increase in selling prices [Indecipherable] well for the company’s margin and profit. Quarter one FY23 profit before tax stood at INR5.9 crores up from loss of INR1.6 crores in the same quarter of the previous year. Quarter one FY23 EPA stood at 2.95 [Phonetic] versus negative 0.82 [Phonetic] in the same period last year.
Company continues to use it free cash flow judiciously and in the process has been able to reduce its net debt significantly in the last four years. In fact, the net debt reduced from over INR65 crores in FY18 to less than zero as on June 30, 2022. The company is extremely focused in using its resources judiciously and has embarked upon modular expansion plan in Gujarat. While the basic infrastructure is being created to double its capacity to 20 lakh [Indecipherable] per day some of the critical equipment and machine will be added in modular fashion in sync with the demand needs. With the total project cost expected to be INR50 crores the first phase of expansion which will increase the capacity by 5 lakhs pens per day will cost only INR35 crores and will be operational by quarter four FY24. The expansion will be largely funded by internal accrual and small level of not more than INR15 crores. On the back of expanded capacity and with customer demand expected to be high, the company is well set to achieve a top-line of over INR600 crores by FY25 with CAGR of over 20%. During this period, share of Pentonic revenue is expected to go to over 32% while Deli is expected to contribute around 15%. With pandemic behind us, cost of raw material starting to soften strong growth prospect increased penetration through Kinara network and focus on Pentonic, we should be able to achieve annual operating EBITDA margin of over 12% by FY25. With low cost modular expansion and judicious use of debt, we also expect ROI to cross 18% by FY25. We continue to remain focused on our long term goals of sustainable growth profitability and strong deleverage balance sheet. With this, I leave the floor open for Q&A. Thank you.
Questions and Answers:
Operator
Thank you very much. We will now begin the question and answer session. [Operator Instructions] Our first question is from the line of Zaki Nasser an individual investor. Please go ahead.
Zaki Nasser — Private Investor — Analyst
Hello, can you hear me?
Operator
Yes, sir, we can hear you.
Zaki Nasser — Private Investor — Analyst
Am I audible here?
Sir, first of all, Deepak ji, I would like to congratulate you and your team on the fantastic quarter numbers given by, sir. My first question is sir, broadly according to our investor presentation we have three broad verticals, one is our own pens, one is the Deli portfolio and another is your tie-up with Uniball. Sir, would you slightly I mean give a small explanation how you see these three spanning out in the future, sir, on your journey towards INR600 crores?
The second question would be, sir, lot of — broadly there is lot of talk about reduction of pens, usage of pens due to computerization. Your thoughts on this aspect of argument, sir? Thank you.
Deepak Jalan — Managing Director
Yeah. So Zaki, coming to the first question of our revenue target of INR600 crores by FY25, we estimate that the contribution of Deli and Uni together should contribute about 25% of our total revenue. So 75%, we are expecting from Linc and Pentonic both by way of exports and the local market and so about INR150 crores from Uniball and Deli, we are expecting. Coming to the next question of future of pen, I would say, so I am actually getting this question for last more than 10 to 15 years that what is the future of pen? But as you would know that, even though there has been lot of digitalization, the pen is still needed and I have even observed in the developed countries like the US and even Europe, the pens are still — so there is actually no degrowth even on those market. So of course it is flat but there is no negative growth while there has been growth rather close to double digit growth in the developing countries, like say for example Africa or even in our own country, we have a decent single digit growth even though we have a single digit growth in India but it is a decent single digit growth. So I do not foresee any challenge or any threat to the future of pen at least for many years.
Zaki Nasser — Private Investor — Analyst
Thank you, thank you, sir and best wishes for balance of the year.
Deepak Jalan — Managing Director
Thank you, thank you, Mr. Nasser ji.
Operator
Thank you. [Operator Instructions] The next question is from the line of Subhankar Ojha from SKS Capital. Please go ahead.
Subhankar Ojha — SKS Capital — Analyst
Hi thanks for the opportunity. Sir, two questions. One, can you give me the capex number once again? And what capacity you are adding in your Gujarat facility? That is one and secondly, can you quantify the price hike that you have taken in order to pass on the cost pressure?
Deepak Jalan — Managing Director
So Mr. Dujari will share the capex details and so far the price increase, we have been able to increase price by about — on average about 5% on our product. So yeah, when I say average, means, on some product, we have been able to increase prices by even 10% but on some products, the price increase has been even lower than 5% but on average, it has been about 5%. And coming to the capex…
N.K. Dujari — , Director Finance
The total capex we are expecting from the — for the new facility is around INR50 crores, so we will split that in two phases. In first phase, we will spend INR35 crores for the basic infrastructure and the machines and in the second phase, we will spend around INR15 crores on the machine. So in the first phase, we will expand the capacity by 5 lakh per day and in the second phase, again we will expand the capacity by another 5 lakh per day. So this is beyond our normal capex. This is only the capex for the new facility.
Subhankar Ojha — SKS Capital — Analyst
And you said, this will be operational FY24?
N.K. Dujari — , Director Finance
Yeah, FY24 quarter four, we should be operational. First phase should be operational by quarter four FY24.
Subhankar Ojha — SKS Capital — Analyst
All right. And by when, do you plan to launch this new product of INR20 and INR40 Pentonic variety?
Deepak Jalan — Managing Director
So that — the INR40 pen is going to be, actually we are already behind schedule. It should have been launched by now, but it should definitely be launched in the next one month and the INR20 product we intend to launch latest by fourth quarter maybe even in third quarter but latest by fourth quarter.
Subhankar Ojha — SKS Capital — Analyst
Do you have any promotion — any advertisement budget in terms for this two products or even otherwise? And can you quantify how much do you plan to spend?
Deepak Jalan — Managing Director
Yeah, yeah, so, generally we have a budget of about 3% of our revenues towards advertising spend which we — so whenever there is a new launch, the majority of the budget is inclined toward a new launch. So this is how generally we do our advertisement spend.
Subhankar Ojha — SKS Capital — Analyst
All right. All right. Thank you. Thank you so much sir and good luck for the coming futures.
Deepak Jalan — Managing Director
Thank you, Mr. Ojha. Thanks.
Operator
Thank you. [Operator Instructions] The next question is a followup from the line of Subhankar Ojha from SKS Capital. Please go ahead.
Subhankar Ojha — SKS Capital — Analyst
Yeah. Thanks again. So, this Deli, can — I mean you were saying expect INR100 crores of revenue? Can you give some number in terms of some colour? What figure you are doing right now? And how do you plan to ramp it up?
N.K. Dujari — , Director Finance
In the last quarter — I’m Dujari here. In the last quarter gone by, we have done a figure of around INR5 crores from Deli brand.
Subhankar Ojha — SKS Capital — Analyst
INR5 crores.
Deepak Jalan — Managing Director
Yeah. It’s just INR5 crores in the first quarter. So this year we are expecting anything between INR30 crores to INR40 crores and so which will be actually a handsome growth over last year and as we also estimate that by FY25, we should touch INR75 crores and then the next step would be reaching INR100 crores in the following year. So that’s the kind of the journey or trajectory we have — we intend to take.
Subhankar Ojha — SKS Capital — Analyst
All right. All right. All right. Thank you again sir.
Deepak Jalan — Managing Director
Yeah.
Operator
Thank you. [Operator Instructions].
Navin Agrawal — SKP Securities — Analyst
Friends, this is Navin Agarwal from SKP. I believe the presentation shared by the management and the opening remarks by Deepak ji have been detailed enough. So in case there are any followup questions which do not come to your mind right now, request you to share them with either Nikhil or myself or coordinates I mentioned on the invite, we will take them up with the management and get back to you.
So since there are no further questions, I would like to hand over the conference to Mr. Sanjeev Sancheti for closing remarks. Sanjeev over to you.
Sanjeev Sancheti —
Thank you Navin. Thank you Navin, thank you everybody for joining this call. If you have any more questions please do reach out to Mr. Navin or to Mr. Dujari, the number of Mr. Dujari is there on investor presentation. Please feel free to ask any question we will be happy to address them. Thanks a lot and have a great week ahead. Thank you.
Operator
Thank you very much. On behalf of SKP Securities Limited that concludes this conference. Thank you for joining us and you may now disconnect your lines.
Deepak Jalan — Managing Director
Thank you and have a nice day.