Continuous uptick in demand from the education sector as students return to the physical mode and higher exports due to rising demand from the US will lift the revenues of India’s writing instruments industry by a further 13-15% on-year this fiscal that comes on back of a whopping 33% growth logged last fiscal.

Longer term, the sector will also benefit from India’s demographic dividend and increasing share of organised players.

Operating margin will expand 150-200 basis points (bps) on-year to ~13% this fiscal on account of lower raw material prices. Capacity addition and investments towards product innovation will spur borrowings by manufacturers. But strong cash flows and balance sheets will provide an offset against incremental debt and support credit profiles.

An analysis of five manufacturers rated by CRISIL Ratings, accounting for half of the organised segment revenue, indicates as much.

Says Jaya Mirpuri, Director, CRISIL Ratings, “The demand for writing instruments has breached the pre-Covid levels, with 100% return to physical mode of education from the interim online mode. Also the overall growth in the education sector driven by government initiatives such as the National Education Policy and Samagra Shiksha Scheme focusing on integrated school education from pre-school to Class XII augurs well for the writing instrument sector’s growth.”

In the milieu, exports, which constitute a fourth of the sector revenues, are expected to grow 15-20% this fiscal, supported by tie-ups with international brands for sales in the US as a part of strategy to de-risk from China.

Writing instruments industry will continue to enjoy strong tailwinds from India’s demographic dividend. The median age of 28 years translates to a huge pool of students and a large workforce as the manufacturing and services sectors expand.

Organised segment writing instrument manufacturers - accounting for almost 80% of the industry - will ride this upside. In the past three fiscals, the market share of organised manufacturers rose from ~65% to ~80% of the Rs 10,000 crore industry. They had, in the aftermath of the pandemic, strengthened their distribution and retail channels, and now offer attractive and diverse product portfolios.

Increasing economies of scale have afforded them pricing flexibility, which has reduced the gap between branded and unbranded writing material, while providing superior quality. Unorganised manufacturers, which have relied on cost arbitrage through cheaper imports from China, have lost their edge after the implementation of the Goods and Services Tax and are unable to compete with branded manufacturers in an increasingly quality-conscious market.

Operating profitability is expected to improve 150-200 bps to ~13% this fiscal given that prices of key raw materials (polypropylene for pens and lead for pencils) have slipped ~15% over the past fiscal. This is significant considering raw material accounts for 60-65% of their total cost. The margin improvement would be sharper but for higher distribution costs stemming from footprint expansion.

Says Rushabh Borkar, Associate Director, CRISIL Ratings, “The increased demand will push manufacturers to increase capacity and innovation. Gross block at the industry level is seen up 30% on-year. Though this will increase debt levels, strong cash flows supported by healthy profitability will help sustain credit profiles. Gearing and interest coverage ratio of our sample set will remain comfortable at 0.2 time and 12.5 times, respectively.”

Any unanticipated movement in raw material prices or change in consumer patterns will, however, bear watching.