In today’s Finshots, we tell you the story of one of India’s biggest pen and pencil makers.

The Story

Flair Writing just had a phenomenal IPO pop — it jumped 65% when its shares were listed on Friday morning. And this was expected. I mean, while Flair wanted to raise around ₹600 crores during its IPO last week, it was oversubscribed by a whopping 47 times. There was overwhelming demand.

Now you might be wondering why on earth would anyone invest in a company that makes pens and pencils. I mean, everything’s digital these days, right? Schools have turned to tablets for learning. You’ll mostly whip out an app on your phone to take notes at a conference. Even official documents only need an e-sign. The pen-and-paper world seems to be dying a slow death.

So why were investors so excited about Flair?

Well, truth be told it doesn’t seem to be a Flair phenomenon alone. See, there are other listed pen or pencil companies in India. There’s Linc and Kokuyo Camlin that have been around for a while. And investors have been lapping them up too. Linc’s share price is 70% higher this year. And Camlin has delivered returns of 85%.

So let’s just get it out of the way then — the "pen and pencil" isn’t dead. Not yet.

In fact, researchers have been trying to revive the lost form of ‘good handwriting’. They are trying to prove why putting ink and lead to paper is important for students. And these days, there are enough studies that say if you write, you form better reasoning and memory skills. World over, schools are sitting up and taking notice of this too. They want to go back to these old ways of learning. As an article in The Economist recently pointed out, even though the US doesn’t mandate ‘handwriting’ instruction after the first grade, more states have decided to do it past that age anyway. Even in Sweden, schools are pushing for more handwriting and fewer devices.

So yeah, pens and pencils might just be seeing a renaissance. And in India, this industry is already worth nearly ₹7,000 crores.

Now you’d think that in such an industry, the unorganised players would be ruling the roost. But that’s actually not the case. Nearly 80% of the industry is with the organised folks. And Flair, which has been around for nearly 5 decades, is one of the top 3 pen makers in the country. This means that multiple generations of Indians have been accustomed to the brand. Flair’s probably got brand recall. And maybe even some loyalty.

Perhaps that’s why Flair has actually grown at 14%, while the overall writing industry has grown its revenues by just 5.5% in the past six years. Not to forget that the massive distribution base would have helped its cause too. It has the largest network of sellers in the country — over 320,000 of them. Flair is present in every nook and cranny of the country.

But wait…what about the bottom line? After all, this is an uber competitive space and companies can’t really jack up the prices for pens and pencils as they please, right?

That’s true, but if you look at Flair’s profit margins, it’s head and shoulders above its peers. For instance, while Linc has a PAT margin of 7.7%, Flair reports a PAT margin of 12.5%.

How is it doing this, you ask?

Well, one way of ensuring that is by going across the value chain of pens. There’s a pen to cater to every need. Want a budget or mass market pen? Pick up a Flair. Trying to be a little more premium? Then Germany-based Houser is the brand for you. And if you don’t mind splashing a few hundred bucks on a pen that’ll make you look good, you have the French brand, Pierre Cardin. Basically, Flair struck licensing deals with international brands over the past decade. And since this is where the margins are higher, it is now doubling down on increasing the number of products in these segments.

Oh, it’s also a contract manufacturer for other pen brands. That means it simply manufactures the pen, stamps another company’s logo on it and hands it over to them.

So yeah, Flair has made quite the mark in the writing industry.

And if all this wasn’t enough, Flair thought, “Why stop at just writing tools?” It has begun experimenting with steel bottles and other products such as casseroles and storage containers. It’s still just 1% of the top line so we’ll ignore that for now. But it’s worth keeping an eye on this in the future. After all, this is what Cello World has been doing too. It started off in the pen business. But gradually diversified into making glassware and plastic home products too — think buckets and even cupboards.

Put all this together and you see why people were excited when the company announced its IPO last week.

Okay, so the IPO was super successful. Which means the stock has gotten more expensive now. So is Flair still worth your time?

Well, let’s look at the Price to Earnings (P/E) ratio which simply tells us how much people are willing to pay for every ₹1 of profit the company makes. Now during the IPO, Flair was available at a P/E of 24 times based on its FY23 earnings. That was very reasonable. But after listing, the P/E has zoomed to 38 times. On the face of it, that seems expensive now. At least, relative to what it was just a week ago. But if you look around, you’ll see that its rival Linc is trading at a P/E of 28 times and Camlin at nearly 65 times. Suddenly, it doesn’t seem that bad, right?

But there are some pockets of concern or risks too.

For starters, we don’t quite know how the diversification bet into houseware will turn out. It’s still early days. And just because Cello has found success doesn’t necessarily mean that Flair will too. The investments towards building manufacturing capacity could end up being a dud.

Then there’s the matter of how quickly Flair is able to sell its inventory. It ends up holding stock for nearly 150 days before it gets converted into a sale. Whereas Linc gets rid of stock within 90 days and Camlin does it in a little over 100 days. Now, typically this could indicate that the company hasn’t read the pulse of the market and they’re manufacturing stuff that people don’t want. But we do know that Flair’s revenues have been rising at a fast clip. So, what gives? Well, we don’t know for sure but maybe the company simply overextended itself. Maybe it saw the rising sales and doubled down on producing more stock just to keep itself ready.

But the other issue here is that the company still needs money to run daily operations. It needs working capital. And if money is stuck in inventory, it doesn’t help. For instance, the number of working capital days for Flair stands at 160. Whereas for Linc and Camlin, it’s just at 67 and 93. So Flair could end up needing to borrow money for the short term to keep things ticking.

Now this hasn’t hurt the company all that much so far but it still might be worthwhile to keep an eye on these metrics.

And once the buzz of the IPO ends, we’ll have to see if the interest in the five-decade old pen maker still holds.

Until then…

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