Kokuyo Camlin Ltd Management Discussions.
The global economic growth is estimated to have softened to 3.6% in 2018 owing to confluence of several factors across the major economies (Source: IMF).Economic confidence and sentiment indicators in the USA are near to historical highs, despite the wide range of tariff hikes and the build-up of trade tensions that intensified over the course of 2018.Chinas growth declined following a combination of needed regulatory tightening to rein in shadow banking, environmental concerns and an increase in trade tensions with the United States. The Euro zone lost momentum as consumer and business confidence weakened. This was coupled with disruption in the Germanys auto segment amidst the introduction of new emission standards and stressed macro-economic scenario in the Italian region. The unforeseen natural disasters like earthquakes, typhoons, heat waves and weakening of private consumption led to a lower than expected growth in Japan.
The growth in the emerging markets is expected to have remained stable at around 4.5% in 2018 with a room for further improvement over the medium term. The emerging and developing Asia is expected have recorded an average GDP growth of around 6.5%. This was largely driven by the Indian GDP growth acceleration,offsetting the Chinese slowdown.
The global economic growth is expected to soften further to 3.3% in 2019, before returning to 3.6% in 2020. The growth in the US is expected to remain flat owing to the fading impact of the fiscal stimulus. Other advanced economies will witness growth firm up in second half of 2019 on the back of recovery of financial stress. The UKs economy is expected to slow down by 200 bps to 1.2% in the 2019 owing to low business confidence following uncertainties amidst the ongoing Brexit negotiations. In the case of a disorderly exit of the United Kingdom of Great Britain and Northern Ireland from the European Union (EU) from Brexit, the British economy runs the risk of larger domestic disruptions because of the lack of a broad legal framework.
With declining growth in the advanced economies, the projected pick-up in global growth in 2019 and 2020 is entirely dependent upon projected improvement for the emerging market and developing economy group. Chinas economic growth is expected to remain moderate due to weak exports, tightening regulation in financial sector and trade tension with the US. The growth in Asia Pacifics developing economies is expected to remain solid as it continues its pace across the region, despite the squabble between the US and its trading partners. India continues to remain the major growth driver, backed by improvement in domestic demand and several policy reforms.
The Indian economy reported a healthy 8.2% growth in the first quarter of 2018-1 9, on the back of domestic resilience and positive impact of the reforms. However, the subsequent quarter saw the growth easing out to 7% levels on the back several challenging macro-economic issues. These include rising global volatility, trade disputes between US and China, depreciating rupee, higher crude oil prices and capital outflows. The overall growth during the year remained broad based with industrial and agricultural segments reporting satisfactory outcomes. On the demand side, domestic consumption remained the primary growth driver with subdued and controlled inflation dynamics.
Despite turbulent backdrop, India continued to remain resilient and retained its positioning as the fastest growing major economy in the world. According to IMFs April 2018 Economy Outlook,India is anticipated to have achieved 7.1% growth in 2018-19. The country moved up by 23 places in the World Banks Ease of Doing Business Index 2018 and got 77th rank. The Indian economic fundamentals have strengthened since 2015 with the combined impact of strong Government reforms such as demonetisation, implementation of Goods and Services Tax (GST), the inflation-targeting monetary policy framework, the Insolvency and Bankruptcy Code (IBC) and liberalised foreign direct investments. Besides, ambitious projects like Make in India has further given a boost to the countrys manufacturing segment.
Key Governmental Initiatives and their Impact on the Economy
The Goods and Services Tax (GST)
The GST revenue collections witnessed a figure of R 106,577 crores in March 2019. It was marked as the highest monthly collection since the introduction of GST, as per the Ministry of Finance. The data as on March 31, 2019 also showed that the overall GST collections for the whole year stood R 1,177,369 crores.
The steep increase in the GST collections is quite a welcome outcome for the economy. Some major reasons for the growth could be reconciliation of outward and inward supplies, intelligent data analytics, related tax leakage detections and consequent GST payment by businesses. The initial inhibitions and worries around GST have settled down and in the long run, it will only help corporates as a single tax window.
Introduction of e-way bill
The Government has successfully rolled out the E-way bill system for tracking inter-state movement of goods under the GST from April 1, 2018. Earlier, e-way bills were subject to state-specific rules and had to be generated through different state-specific portals.
Under GST, E-way bill is governed by a uniform set of rules applicable throughout the country. It is generated electronically on the e-way bill portal. This has led to seamless and faster movement of goods within a state and across different state borders, leading to speedy movement of goods across the country with lower delivery time and costs.
According to World Bank estimates, Indias GDP growth is expected to accelerate moderately to 7.5% in 2019-20. The growth will be driven by continued investment-strengthening initiatives, with a greater focus on infrastructure development, improved export performances and sustained rise in consumption. India has already surpassed France to become the sixth largest economy. According to the PwC report, India in 2019 is likely to become the fifth largest economy surpassing the UK. The country is enroute achieving upper-middle income status on the back of digitisation, globalisation, favourable demographics, and reforms. Together, these augur well for a healthy growth path for the economy.
Industry Overview Indian Stationery Industry
When it comes to stationery, it can be classified into paper products, writing instruments, computer stationery, school stationery and office stationery. It is used for both formal and personal correspondence. The Indian stationery industry is worth around R 20,000 crores and has been on an upward trajectory owing to rise in per capita expenditure on education as well as increasing demand from corporates and enterprises. The industry has firmly put its feet into the market with constant innovation and customer-centric offerings. There has been a strong emphasis in the research and development initiatives towards developing new products and cost- effective offerings.
The Indian stationery market was largely scattered and greatly dominated by the unorganised sector. However, the recent Government reforms has brought several unorganised players under the organised ambit. This will benefit the industry and consumers over the coming years. According to 6Wresearch, India Stationery Market revenues are projected to grow at a CAGR of 10.5% during 2018-24.
Different type of stationery offerings
|It includes popular stationery products like notebooks, erasers, pencils, rulers, sharpeners, writing boards, exam boards, graph book, pencil boxes, geometry boxes, notebooks cover, glue sticks, maps, children paper clips and binders, pencil grippers, calculators and many more.||It includes products such as white board markers,paint markers, permanent markers correction products, book/ magazine racks, business organisers, card holders, cash boxes, clip boards, dampers, desk calendars, desk organisers, document holders, glues, glue sticks, letter openers, message pads, stick ups, plastic paper clips, paper trays, paper weights, pen holders, trays, stands, pen holders, cases, pocket planners, punches, rubber bands, scales, rulers, scissors, stamp pad inks, stamp pads, staple removers, staple pins, staplers, tapes and dispensers, telephone diaries and many more.||This category includes ball pens, correction fluids, pens, tapes, synthetic, PVC Erasers, fountain pens, gel pens, highlighters, inks, markers, pencils, micro tip pens, pen refills, pen sets, pencil leads, roller pens, sharpeners, marking pens.||It comprises printer toners, computer CDs, computer paper, printer ink, printer cartridges, CD covers.|
Large student base: The Indian Stationery market holds tremendous growth potential as the country has nearly 22-24 crores students studying and requiring notebooks and other stationery materials.
Growing importance of education: India is one of the
fastest growing markets with rising per capita expenditure on education. Besides, the Government has also been laying equal importance towards spend in this segment.
Emergence of start-ups: Several start-ups have emerged across the nation, leading to a considerable increase in demand for office stationery.
Improvement in literacy rates: Continuous improvement of literacy rates coupled with development of distribution channel in rural areas marks great opportunity for the segment.
Changing demographics and consumer preferences:
Growing urbanisation, economic growth, improving living standards coupled with shift in consumer preference towards superior quality products will drive the growth for Indian stationeries.
Government Initiatives to Boost Education in India
The Indian Government has initiated several steps to enhance the education quality of the young and growing population of India. It aims to achieve a 30% gross enrollment ratio - the number of students enrolled in a higher level of education as a proportion of all those of the eligible official age over the near term.
Some of the notable initiatives such as National Policy on Education and Sarva Shiksha Abhiyan promotes low cost and qualitative compulsory education for all. Further, the overall funding for school and higher education has gone up by 10% to R 93,847.64 crores. In addition, the allocation for the National Education Mission is being increased from R 32,334 crores in 2018-19 to R 38,572 crores in 2019-20.
The Union Budget, 2018-19, proposed to treat school education holistically without segmentation from pre-nursery to Class 12. Samagra Shiksha - an overarching program for the school education sector extending from pre-school to class 12 has been, prepared with the broader goal of improving school effectiveness measured in terms of equal opportunities for schooling and equitable learning outcomes. It subsumes the three Schemes of Sarva Shiksha Abhiyan (SSA), Rashtriya Madhyamik Shiksha Abhiyan (RMSA) and Teacher Education (TE).
Stationery is such a product segment which is required by everyone from schools to organisations. With the increasing number of schools being built, the education sector is rapidly becoming an important target group. Also, with companies expanding their presence, it is essential that they provide their workforce with the proper tools to make their jobs easier. Right from providing them with desk organisers, document holders, planners and stick notes to pens and highlighters, permanent markers and other stationery products to suit their requirement and aid in improving their efficiency. It is important to ensure that products are of good quality and priced competitively. The industry is in brand creation era whereby competition will turn from pure price competition to multi-faceted brand competition consisting of service, management and shopping environment.
With majority of the market moving from the un-branded to the branded segment coupled with the Governments initiatives, the outlook for the stationery industry in India continues to remain positive and the total market share of the organised players are expected to rise substantially in the years ahead. India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer behaviour and expenditure pattern, according to a Boston Consulting Group (BCG) report. It is also estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by the year 2040, according to a report by Price water house Coopers. This will further lead to a huge value migration play in the distant future.
In the Indian stationery market, the name CAMLIN is like a synonym for stationery. With its strong-rooted existence of over eight decades, the Company has touched across households and generations in India. Over the years, it has been identical with quality products for schools, offices and art market. The Company has two of the most recognised brands in the country - CAMEL and CAMLIN.
In 2011, Kokuyo Co Ltd, a leading stationery manufacturer from Japan acquired majority stake in Camlin Ltd and it was rechristened as Kokuyo Camlin Ltd.
It operates with its plants across various locations such as Patalganga,Tarapur, Jammu and Taloja . The fully integrated state-of-the-art manufacturing plant at Patalganga, spread across 14 acres was built with an investment of approximately Rs 100 crores. It happens to be one of the biggest stationery plants in the Kokuyo Group, with producing over 150 SKUs annually.
The wide range of products manufactured and marketed by the Company include inks, colours, writing instruments, technical and drawing instruments, office stationery, markers,notebooks and scholastic and hobby art materials.
Key Developments during the Year Automation the key to efficiency
Kokuyo Camlin is known for its superior quality products. The Company is consistently investing in developing state-of-the-art machinery, automation of processes and building on special purpose machines at its Patalganga plant.
The Patalganga plant, is already equipped with latest Japanese machineries. Apart from that a lot of investments are focused towards further automation which will lead to almost error free products with precision and improved quality. Kokuyo is also investing time and capital towards making the facility equipped with latest safety measures creating a conducive, safe and healthy environment for its people.
Nurtured on the strong foundation of its corporate philosophy, customer comes first at Kokuyo Camlin. In order to serve them better with newer offerings, the Company has continuously focused in improving and upgrading its manufacturing facilities. The 60-year old Tarapur plant is being renovated with new layout and structural changes. It will infuse new life in the factory which will help boost production and efficiencies.
Cost control measures implemented
The Company has put a lot of emphasis on cost control initiatives through one i) maintaining input costs ii) centralisation of production of certain products. The Company has a strong dedicated team and internal processes which controls the SG&A overheads. The Company took a conscious call to shift manufacturing of certain products across different plants under one Patalganga plant. This has led to optimisation of resources, better efficiencies and lowered costs.
The Company also received a recommendation letter for ISO certification for all its facilities under revised standards. The recommendation is in itself a big achievement for the Company. The ISO certification means the Company has met the requirements of Quality Management System. ISO is focused on meeting customer expectations and delivering customer satisfaction. It also guarantees that the products are safer and reliable to use.
Fresh ideas, focused Management
The year under review saw the appointment of the new CEO Mr. Satish Veerappa. New leadership symbolizes new ideas, initiatives and infusion of fresh energy which will drive the organisation to the next level. Mr. Satish Veerappa is very much inclined towards strengthening the pillars of performance, deliver outcomes on innovation. Delivering value through stronger innovation coupled with significantly enhancing operational efficiency will be the thrust areas in the near future.
Innovation at every step
Innovation means invention of completely new products or processes. New breakthroughs in different areas. At Kokuyo Camlin innovation is an essential element and forms the core. . The Companys main priority has been to focus on creating value for the customers and in turn, create a sustainable growth for all its stakeholders. In order to improve the overall profitability, emphasis was given on innovation and efficiency. This had led to creation of innovative products like 2 in 1 geometry box, brush pens and child grip crayons among others, creating more value and fetching high margins. Such products will drive margins and help encounter threats of the unorganised segment. They will also help in strengthening the brand equity of Camlin in the long run.
Some of these innovative and high-quality products include:
2-in-1 geometry box: A unique geometry box is an ergonomically designed, sleek yet tough and transparent box. It is made from high quality unbreakable plastic, with slot for pencils and geometry instruments, organised in separate compartments, while offering space for more components. With this product children need not carry two boxes - pencil box and geometry box separately. A result of two years of rigorous work by R&D, marketing and other functions to understand the unmet needs of consumers and develop a product which aims at reducing the burden of heavy school bags and making learning process more fun for school children .
Child grip crayons: These are specially designed crayons for toddlers to improve their fine motor skills and enhance grip development, while they enjoy the colouring experience. These washable crayons are going to create a new segment for the youngest consumers of Camlin as it will help them in developing perfect grip something parents would value a lot.
Finger crayons: They fit snugly into the toddlers fingers and helps in the development of finger muscles while they enjoy colouring. Another extension of grip development category is this crayon will help little consumers have maximum fun with colouring.
Brush pens: It is combination of colours, brush, water and palette, all in one convenient product, making colouring easier and fun. On the back of outstanding response received from the consumers the Company is expanding the number of shades under this product category and is extending the same under the artist segment.
Adult colouring book: It is a stress-buster therapy to discover the creative and expressive side of each individual through these books. Besides, it also helps to unplug from daily routine and pursue it as a hobby.
Triangular Colour Pencils - Based on consumer understanding of the perfect grip and smooth colouring experience, Camlin launched yet another innovative product. These are new colour pencils in triangular shape and superior colour effect leading to a unmatched colour experience to the consumer.
The year was marked by granular focus of Kokuyo Camlin in widening its market reach, consumer reach and product portfolio. During the year, the Company had launched several innovative, value-added products for the customers. This was communicated largely through social media channels to reach out to the right audience targeted. As social media helps in precise targeting, engaging the right customers as well as it was cost-effective, generating higher returns. In addition, on social media we have given emphasis on user-generated content which is co-creation. This helps us have stronger connect with the consumers making content far more effective and meaningful. There were several other initiatives taken on the social media front. Recently, the Company achieved a milestone of one million fans on their Facebook page, through its sustained efforts. Also, the Company tried to provide brand experience to the end users - the kids, through Kidzania and other in-shop activities.
Created better value by understanding the real needs of the consumers
Conducted good quality market research
Enhanced the packing of the products for the visual appeal
Capitalised the strength of social media
Benchmarked with the international products to achieve the highest quality
The Companys focused approach towards its product offerings, customers, markets, innovations, market penetration and efficiency has helped it achieve the best performance in their journey so far. With continuous focus on high margin and high-quality products the Company recorded robust sales growth accompanied by improvement in gross profit and operating margins. The Company also deployed various solutions for inventory management which led to improved inventory handling timely delivery, and adequate inventory levels at any given point of time. This has not only improved the inventory cycles and working capital but also helped in preventing loss of sale due to low inventory levels.
The Company continued to emphasis on improving the overall efficiency, maintaining ideal level of inventory and reducing cost across the organisation. The analysis of major items of the financial statements is shown below:
Revenue from operations
|Revenue from operations||68,877.20||63,840.80||7.89%|
|Foreign exchange earned||1,663.85||1073.91||54.93%|
Increase in Revenue is mainly due to volume growth in Sales across various product categories.
The Change in % since last year there was a maturity of Key Man Insurance Policy amounting to R 244.50 Lakhs Cost of Material
|Cost of Material||26,262.51||23,676.41||10.92%|
Employee benefit expenses
|Employee benefit expenses||9,316.00||8,019.13||16.17%|
Increase in expense is due to annual increment, one-time expense for leave valuation and labour charges due to change in Maharashtra Shops & Establishment Act, 1948.
Going forward, there will be a lot of focus and investment towards the new product development and upgrading the existing ones. This will help in strengthening the brand further in the stationery space. With Patalganga plant being functional and fully automated, it will help in enhancing the quality of the products and reduce the cost. The 60-year old Tarapur facility, is being refurbished with new layout and structural changes. This will infuse new life in the factory which will help boost production and efficiencies.
Going forward, the focus will be on incremental growth by tapping markets that were not doing so well. Also, the Company will aim at the states across the country that have scope for robust growth opportunities. There will be continuous efforts to add value for the consumers by offering them premium quality products.
Risks and Concerns
Business cyclicality risk: The Companys primary business segment includes products which have a higher acceptance in schools and colleges. Thus, a major chunk of the revenue generated is exposed to the cyclicality risk as demand for the products peak during the beginning of a new school season while demand remains flat for the rest of the year. Thus, any set back on the part of the Company during the peak period could seriously dent the companys profit.
Mitigation: The Company diligently tracks the school season timings across various parts of the country and accordingly launches new products, plans production and re-stocks the distribution channel and the retailers. Thus, the company not only ensures adequate supply of its product during the peak period but also ensures that its product is within the hands reach. Further the Company has also enhanced its presence in the office stationery segment over the years, which have around the year steady demand, thus reducing its dependence on only one segment. More emphasis on products which are not seasonal will also be considered.
Product portfolio risk: Though the company has large number of SKUs across various customer segments, an aggressive market environment may erode the competitiveness of the Company.
Mitigation: The Company is one of the largest manufacturers and seller of stationery products in India. With a rich industry experience of over 80 years, the Company has successfully positioned itself as a one-stop shop for ones all office and school stationery related needs by adding a number of products under its brand name. Also, cross functional team is being created to get direction on products that are unprofitable and obsolete for phasing them out.
Raw material risk: Non-timely availability of raw materials may impact the production and which in turn may have an impact on the sales and profitability of the Company. At the same time fluctuating raw material process may also impact the bottom-line.
Mitigation: we have started the process of multiple vendor development and also Improve inventory management to ensure lean inventory and also create backup suppliers for key raw materials
Brand risk: In a highly crowded and competitive marketplace, Camlins brand might lose recall, resulting in sluggish off take, lower realisations and reduced profitability.
Mitigation: With an industry presence of more than 80 years, the Company has been highly successful in creating a strong brand image for itself and today the name "Camlin" is household name to office and school stationery product. The Company growing market share over the years is an apt example of its growing brand image. Company will plan to launch virgin, new and challenger brand for new age products.
Network risk: A weak marketing team and a fragile distribution network could seriously impact the Companys profitability. Untimely delivery of orders because of a weak distribution system can hamper the brand name of the Company.
Mitigation: The Company has in place a widespread network through its association with more than 1,500 active dealers and distributors who in turn supplies directly and indirectly Camlins product to more than 300,000 retailers across the country. The deep-rooted distribution network of the Company covers all the states of India and union territories.
Production risk: The stationery industry is predominantly a mass market business marked by high production volumes and low margins. The Companys inability to produce sufficiently to meets its demand in the market might lead to not just loss in profitability but also a reputational damage.
Mitigation: The Company over the years has also made a strong manufacturing presence within the industry and is one of the largest producers of the stationery products in India. With state-of-the-art manufacturing facilities in India the Company has a production capacity to mitigate such risk .The recently added Patalganga plant of the Company has further enhanced its production capacity thus placing it in a leadership position in terms of production.
Internal Control Systems
The Company has in place structured and well-defined internal control systems commensurate with the size and nature of business it operates in. These systems, policies, procedures and guidelines cover various operational aspects. Your Company stringently follows all procedures, ensures accuracy of financial information and compliance at all levels, and adheres to the laws, rules and statutes of the land. It periodically undertakes internal audit, which is under the review of its Audit Committee. Your Companys well- defined MIS system further ensures that all expenses are within the budgetary allocations and immediately flags off any mismatch for attention and corrective measures.
In a dynamic business environment, every element of business is getting transformed. Successful transformation can be achieved only with the help of the employees of the organisation. The Company has a strong Performance Management System in place which helps in identifying the training needs of the employees at regular intervals. We have taken various initiatives towards empowering and incentivising our people, which include the following:
i) Rewards & Recognition Program: To recognise and felicitate employees making significant contribution towards innovation and productivity
ii) Building Values through Customer Insights: We
conducted workshops for the R&D team. This workshop was designed to train the teams to develop strategies and processes of generating consumer insights with consumer interaction
iii) Supervisory Development Program: Self introspection program for a better understanding of self and the work culture around. This resulted in positive behavioural change and paved way for enhancing competitiveness.
iv) 7QC Tools &Problem-Solving Techniques: This workshop was designed to orient employees to resolve problems and conduct root cause analysis in a scientific way.
This year we also conducted a survey to identify the employee needs from three different analytical perspectives: a) how to engage employees, b) employees perception of the Company: their work experience and c) what is driving engagement.
The survey has given a great success imparting great insights for our senior leadership team towards the way ahead in building competencies and leveraging strengths.
As on 31st March, 2019, your Company had a total strength of 1,183 employees.
Estimate and expectations stated in this Management Discussion and Analysis may be forward-looking statements within the meaning of applicable securities, laws and regulations. Actual result could differ materially from those expressed or implied, important factors that could make difference to your Companys operations include economic conditions in the Government regulations, tax laws, other statutes and other incidental factors.