Stock Note Camlin Ltd

Non Durable Household Products

September 12, 2011

CMP - Rs.73.10
Open Offer by Kokuyo, Japan

Price Chart
CAMLIN LIMIT-Dly .21/07/10-09/09/11 B-523207 Price TREND 85 80 75 70 65 60 55 50 45 40 35 10 S O N D 11 F M A M J J A S

Buy at CMP and tender in open offer (Good Interest Play) Medium Risk
Background
Camlin manufactures art materials and stationery in India. It offers a range of products, such as artist materials, hobby colors, scholastic colors, scholastic stationery products, office products, and writing instruments under inter alia the Camel and Camlin brands or trademarks. It also exports its products to the United States, Thailand, Bangladesh, the Russian Federation, and Nepal. Incorporated to take over the business of Dandekar & Company, which was set up in 1931, Camlin got its present name in 1988. Camlins manufacturing facilities are spread across 4 locations Tarapur, Vasai and Taloja in Maharashtra and Samba, Jammu in Jammu & Kashmir. Majority of the products are manufactured at these manufacturing plants and the balance is procured from various small-scale units who cater to the Companys requirements. In FY11, it posted a top-line of Rs 359.2 cr and net profit of Rs 8.6 cr.

Offer Details
Offer Opens Offer Closes Dispatch of Consideration 09 Sep 2011 23 Sep 2011 13 Oct 2011 523207 CAMLIN CAMLN IN Rs 73.1 6.9 1 6.9 501.5 18.8 92440 85.9/36.7 1.5

Stock Details
BSE Code NSE Code Bloomberg Price (Rs) as on 9/9/2011 Equity Capital (Rs Cr) Face Value (Rs) Eq. Shares O/s (Cr) Market Cap (Rs Cr) Book Value (Rs) Avg Monthly Volume 52 wk H/L EPS for FY11

Recent Public Announcement

Camlin and Kokuyo Co.Ltd, Japan have entered into definitive agreement to form a joint venture that will bring together Camlin, one of the strongest Indian brands in the stationery industry with 80 year history and having an annual turnover of over US$80 mill, and Kokuyo Co. Ltd, a leading company in Japan with over 100 years of experience in stationery and furniture products, design and construction of office and store interiors, mail order business, lifestyle retail and distribution and having an annual turnover of over US$3,200 mill. Kokuyo will buy 50.3% stake Camlin for over Rs 365 cr in three tranches, after which the Indian firm will be converted into a joint venture. The Transaction will bring together two highly recognized stationery companies with complementary product portfolios and will facilitate sustained long-term growth for both companies. The Transaction, to be executed in 3 tranches, comprises of: Preferential allotment 6,934,000 shares by Camlin representing 10.0% of the Equity Capital at Rs 85 per share to Kokuyo. Purchase of 14,044,850 shares representing 20.3% of the Equity Capital at Rs 110 per share from Promoters by Kokuyo Mandatory open offer of up to 20% of the share capital (13,857,370 shares) of the Company to be acquired by Kokuyo Co., Ltd. in accordance with the SEBI Takeover Regulations, for a price of Rs 110/-per share. The Offer Price of Rs. 110 has been arrived considering the following: The average of the high and low of the closing prices for every week for Rs. 55.04 the last 26-weeks prior to the date of the PA on NSE. The average of the daily high and low of the intra-day trading prices for the Rs. 77.50 last 2-weeks prior to the date of the PA on NSE The negotiated price Rs. 110.0 On July 11, 2011, Camlin made the preferential allotment in favour of Kokuyo of 69.34 lakhs at Rs. 85 each. Kokuyo had made the public announcement of the offer on June 1, 2011 pursuant to which the offer was supposed to open on July 26, 2011 and close on August 16, 2011. However post getting approvals, on September 5 2011 it revised its offer schedule that will now open on September 9, 2011 and close on September 23, 2011.

Shareholding Pattern
(as on 30 June 2011) Foreign Institutions Non Promoter Corp Hold Promoters Public & Others Total 13.7 0.2 14.9 38.1 32.9 100.0

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Kokuyo will appoint four new directors in the joint venture, and two existing directors - Dilip Dandekar and Shriram Dandekar (executive director) - will continue to contribute to the expansion of the new Camlin business. Both companies have been jointly marketing notebooks since April 2011 to test Camlin's distribution network. The continuing Promoters and their respective affiliates shall not transfer their Shares, or any other rights or interests in such Shares, to any person for a period of 3 (three) years after the JVA Completion Date. At any time after 3 (three) years from the JVA Completion Date, in the event that the continuing Promoters or the Acquirer desire to transfer their Shares after the JVA Completion Date, the other of them shall have the right of first refusal on such Shares. The JVA also prescribes the procedure for exercising the right of first refusal by the parties. However, neither the quantity of Shares nor the price for the transfer of Shares has been fixed under the JVA. In addition, the Acquirer and the continuing Promoters are required to comply with certain other transfer restrictions contained in the JVA. Shareholders who have acquired Shares of the Target Company but whose names do not appear in the register of members of the Target Company on the Specified Date (June 10, 2011) or those who have not received the Letter of Offer, may also participate in this Offer.

About the Acquirer

Kokuyo S&T Co.Ltd. is the Acquirer and Kokuyo Co.Ltd. is the PAC(person acting in concert) for the purpose of this Offer. Kokuyo Co Ltd was incorporated on July 10, 1920 in Japan. Kokuyo Co Ltd. is the holding company of Kokuyo S&T Co Ltd. As of December 2010, Kokuyo Co Ltd. has 22 consolidated subsidiaries in and outside Japan and, as a group, employs nearly 5,000 employees worldwide. Kokuyo Co Ltd as a group, has two business segments: stationery business and furniture business. The stationery segment provides notes, albums, binders, forms, and pencils. The furniture segment provides desks, tables, chairs, cabinets, lockers and store fixtures. The shares of Kokuyo Co. Ltd. are listed on Tokyo Stock Exchange, Osaka Stock Exchange and Nagoya Stock Exchange. The CMP of its shares is Yen 572 (TTM P/E 70.2). Particulars (Rs in crs) Total income PAT Equity Capital Reserves & Surplus Networth RONW Dividend Earning per share Book Value per share Kokuyo S&T Co.Ltd Kokuyo S&T Co.is an unlisted company in Japan and wholly owned subsidary of Kokuyo Co Ltd. Kokuyo S&T Co. manufactures and purchases a variety of products including paper products, stationery and PC related products, and sells through all kinds of channels, including channels for stationery stores, volume retailers and convenience stores. Manufacturing sites of Kokuyo S&T Co., Ltd. are located in Shiga and Tottori of Japan, Thailand and Vietnam. As of December 2010, Kokuyo S&T Co., Ltd. employs more than 500 employees. Particulars (Rs in crs) Total income PAT Equity Capital Reserves & Surplus Networth RONW CY08 4768.2 98.3 167.1 1174.1 1327.7 7.4% CY09 4201.9 151.6 167.1 1276.6 1436.4 10.6% CY10 3787.9 182.8 167.1 1383.6 1539.3 11.9% CY08 18261.3 -667.7 882.5 8737.0 8900.3 -7.5% -14.8% -56.5 748.9 CY09 14942.6 33.1 882.5 8671.3 8803.1 0.4% 298.2% 2.8 741.4 CY10 14674.5 45.4 882.5 8617.9 8722.8 0.5% 217.7% 3.8 734.1

(Source : Offer Document)

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Dividend Earnings per share Book Value per share

50.0% 16383.9 221287.2

50.0% 25270.0 239399.2

50.0% 30466.9 460692.7

(Source : Offer Document)

Positives From The Offer

The Indian Stationery market, valued at US$ 2.2 Billion annually has been rapidly growing post liberalization of economy. Increased allocation of funds on educational sector has led to a higher consumption of stationery and allied products and also a shift from substandard quality products to superior quality branded products. This has attracted increased presence from both local and global players. The acquisition fully supports Kokuyos strategy to expand into emerging markets that represents a great growth potential and proposes to establish its presence in India through the transaction. Through this, it would gain acquisition of national distribution channel and brand in India, joint development of products, sales of Camlin's products in other Asian regions, introduction of the management system developed in Japan and undertake other business development opportunities depending on characteristics, purchasing powers and state of infrastructure. The joint venture would create long-term value for all the stakeholders. Through this deal, Kokuyo will utilize Camlin's brand and distribution capacity; contribute their knowhow in notebooks, paper products, files and writing goods areas in which they excel and contribute their product development capability which created many of its value added products, design ability, manufacturing technology and distribution infrastructure system. Kokuyo, also intends to improve competitiveness in manufacturing and procurement through cost reductions and improvements to Camlins manufacturing portfolio.

Investment Rationale
A study of the current shareholding pattern of Camlin (detailed table provided below) shows that the free float is 56.4% and this is the maximum percentage of total outstanding shares that could be tendered in the open offer. However, only 20% of the total equity capital, i.e 13,857,370 shares will be accepted in the open offer. In such an eventuality of over subscription, the acquirer will make proportionate acceptance from the shares offered. If all the outstanding free float shares (excluding unexercised ESOP) were to be tendered in the open offer, the acceptance rate could be as low as 36%. However, we feel that the acceptance ratio could be much higher than the theoretical 36% and could be as high as 45-50%. This is because of the lethargy of most shareholders in tendering shares in the open offer, tax disadvantages faced by local investors in tendering the shares in the open offer (STT not payable on shares offered in open offer and hence concessional tax rate of 0%/15% on long term/short term capital gains not applicable), regulatory issues in the case of foreign investors, and hope / expectations of Camlin doing well going forward. Shareholding Pattern (no of shares) Promoters (Indian & Foreign) Koyuko's stake Mutual Fund / UTI FIIs Financial Institutions/Banks/Govt Bodies Corporate Public ESOP dilutive Total Current 23284680 0 55000 8115449 112520 9130557 20366331 0 61064537 % 38.1% 0.0% 0.1% 13.3% 0.2% 15.0% 33.4% 0.0% 100.0% Emerging 9239830 20978850 55000 8115449 112520 9130557 20366331 1288313 69286850 % 13.3% 30.3% 0.1% 11.7% 0.2% 13.2% 29.4% 1.9% 100.0%

(Source : Offer Document )

Some of the non-promoter shareholders as on 30/06/2011 include: Golden Oak Mauritius (9.91%), Anagha Advisors LLP (7.14%), Sanjay Sathye (1.97%), Sushila Dandekar (1.90%) Ulhas Gala (1.5%) and OHM Stock Brokers (1.15%) The outstanding equity of Camlin before the deal was 6.11 cr shares which has now increased to 6.92 cr shares to account for the preferential shares issued to Koyuko (0.69 cr equity shares) and outstanding ESOPs (0.13 cr shares). We are not considering outstanding ESOPs to the extent they are unissued till date (0.9%) to be tendered in the

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open offer so the effective total capital of the company for the offer has been taken as 6.86 cr shares. Not all shares held by non-promoters may be tendered in the open offer, partly due to procedural/tax issues and/or due to hope of the company doing much better in future under the joint venture. The fact the stock has seen a 52 wk high of Rs 85.9 could mean some shareholders may not want to exit at a loss and could hold on in the hope of a rise in the price post the acquisition. The table given below displays the rates of return (in % per annum) that could be earned over the 32-day period assuming various exit prices for the unaccepted shares. Annualized Returns in % per annum Post exit Price (Rs) 50 55 60 Percentage of Acceptance 36.1 -22.5 27.4 77.2 40 14.0 60.9 107.7 45 60.9 103.8 146.7 50 107.7 146.7 185.7

Hence, median fixed returns of 14% to 107.7% per annum can be earned for the period of 32 days depending on the ratio of over-subscription and post offer price. Every one-rupee increase in acquisition price would depress the returns p.a. by about 16%. While every two-day delay in purchase or shortening of investment period would raise the returns p.a. in the 29.2%-156.4% range, assuming 36.1 - 50% acceptance and an exit price of Rs. 55. The following table lists out the absolute return per shares expected to be earned by buying shares of Camlin from the market, tendering it in the offer and selling the balance unaccepted shares in the market based on expectations of oversubscription and post offer price. Absolute Table of Returns per share of investment Post exit Price 50 55 60 Percentage of Acceptance 36.1 -1.4 1.8 5.0 40 0.9 3.9 6.9 45 3.9 6.7 9.4 50 6.9 9.4 11.9

As the open offer closure date nears, one could book the gains in the market itself if the price has run up sufficiently by then. On the other hand, if one wishes to continue to hold the balance shares, they would cost Rs. 52, if 36.1% shares are accepted. While at present we do not have any fundamental rating on the stock, investors could take a view on holding on to the stock especially in view of the fact that the joint venture could infuse positive dynamics for the company. However one would be advised to go through the concerns mentioned in this report before making up ones mind on holding the shares for the medium term.

Q1FY12 Performance at a Glance

For the quarter ended June 2011, company reported a dull performance with lower sales and margin pressure. Net Sales was down 6.7% y-o-y to Rs 112.4 cr. Operating Margins were down 196 bps to 11% mainly on higher cost on purchases and higher other expenditure as a percentage cost to sales. Operating profits was down 21% y-o-y to Rs 12 cr. Interest costs have risen to Rs 2.3 cr, up 52% over the corresponding quarter. PAT for the quarter is down 34.2% y-o-y to Rs 6.3 cr.

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Valuations & Recommendation

The offer price of 110/- is at nearly 27% premium of CMP Rs 73.1 (52 week high / low 85.9 / 36.7). Camlin is presently quoting at 48.7x PE on FY11 EPS of Rs 1.5. Given the positive outlook for the stock post the JV announcement with Kokuyo, investors could buy from market for the short-term and tender in the open offer. Investors can download the following documents from the link given below: Open offer announcement June 1 2011 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Camlin_Ltd_010611.pdf Rescheduled open offer announcement Sep 5 2011 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Camlin_Ltd_050911.pdf Open Offer Application Form has been attached along with this report.

Risks and Concerns

Rise in Prices of Raw Materials, Packing materials have continued to make an adverse impact on the margins of the some of the products, but the Company expects to increase selling prices of these products over a period of time thereby maintaining the margins. Continued Competitive pressure that could affect company's competitiveness. However new product introductions, aggressive promotions, increasing marketing effort is planned to mitigate this. Any delay in the open offer dates (or a withdrawal of the open offer) could have significant implications on our estimates of Camlin open offer interest calculations and may not be favorable for a short-term investor. Camlins product sales are highly seasonal. For Camlin, the first quarter ending June and fourth quarter ending March, are the two main periods of sales growth Sales growth has been sluggish in the last five quarters. The first quarter in FY12 which is an indicator for yearly performance has shown decline in sales and profit growth over FY11. PBIDT margins have been uneven throughout the year. It has fallen from 13% in Q1FY11 to 5.9% in Q2FY11, 2.9% in Q3FY11, 3.8% in Q4FY11 and 11% in Q1FY12.

Financials
Particulars (Rs in crs) Total income PAT Equity Capital Reserves & Surplus Networth RONW Dividend Earnings per share Book Value per share FY09 283.7 6.1 6.0 47.5 53.5 11.4% 30.0% 1.0 8.9 FY10 331.0 11.6 6.0 55.7 61.7 18.9% 50.0% 1.9 10.3 FY11 359.2 8.6 6.1 64.0 78.6 10.9% 25.0% 1.5 12.9
(Source : Offer Document)

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Analyst: Siji A. Philip (siji.philip@hdfcsec.com) RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 3075 3450 Corporate Office
HDFC Securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional Clients

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