Flair IPO: Rewriting the pen sector’s growth story?

Various studies around the world have suggested better learning and stronger brain activity using traditional writing tools compared to smart digital writing devices. A 2014 study by US researchers Pam Mueller and Daniel Oppenheimer showed that longhand notes lead to better learning against typing out on a laptop.

Writing instruments have an estimated global market size of well over $15 billion, with India as one of the leaders. In the Indian stationery market, writing instruments grab the biggest pie, and within this, pens occupied the largest share (44%) in value terms in 2022-23, according to the draft red herring prospectus (DRHP) filed by Flair with the market regulator.

The pens market is primarily flooded by mass market products priced between ₹5 and ₹15. The higher-value category, priced above ₹100, had just 5-10% market share, the DRHP said.

A high concentration of organized players is expected to pen a new growth story in the next five years, possibly outpacing their unorganized counterparts. This better showing would be reflective of the market share gains of the organized players during the pandemic, which forced the closure of many unorganized players due to weak demand for products and limited access to capital, according to a CRISIL report cited by the DRHP.

Margins worry?

While this inspiring growth is a good augury, there may be some pockets of concern. A majority of players in this highly competitive industry operate in the mass market products—targeted at students—limiting their ability to increase prices. “Most of the organized brands have not been able to increase prices for almost a decade as unorganized players sell their pens at prices as low as ₹2-3, and there is hardly any brand differentiation," said an HDFC Securities research note on Linc Ltd, a key listed player in this space. This has adversely impacted margins. Between 2016-17 and 2018-19, Flair’s operating profit margin declined nearly 400 basis points (bps), while it contracted 250 bps and 60 bps for Linc and DOMS, respectively, the DRHP showed. However, margins saw some improvements as the pandemic ebbed. Enhanced focus towards high-margin products—mid-premium and premium segments—and a better product mix is expected to drive profitability in this space.

Innovate to differentiate

The market struggles suggest that manufacturers will need to continue innovating to stay on top of the digital competition. In the pre-pandemic period, between 2016-17 and 2019-20, the writing and creative instruments industry witnessed an annualized growth of 5.6% driven by product innovation, design modifications and brand development by leading players, the DRHP said. With a diversified range of products across various price points, Flair has a product portfolio of 699 different products as of 31 March 2023 and it also intends to expand its corporate gifting business. Linc’s Pentonic brand, a minimalistic instrument launched in 2019, now contributes over 30% of the company's revenue. Going forward, catering to the changing consumer preferences and achieving environmental sustainability goals could be a recipe for innovation. Packaging also plays an important role—visually appealing packaging designs also help brands stand out in a competitive market.

Global footprints

The Indian writing instruments industry is worth ₹10,000 crore, and is expected to grow nearly 8% annually. To grow, it will not only rely on the traditional manufacturer-distributor-retailer model but also have to expand global reach. India’s average annual exports of writing and creative instruments were nearly ₹1,800 crore in the last seven years, growing at around 9% annually, according to the DRHP. Three-fourths of these exports came from pens alone. Exports had a 20% revenue share for Flair in 2022-23, with the US, United Arab Emirates, Yemen, Colombia and Japan contributing 61% to its export sales.

Strategic expansion of exports is subject to hurdles from multiple economic and political barriers. But that said, a fast-growing student base and strong pockets of growth from the rural hinterland offer immense potential. The pen is definitely not going to meet its demise anytime soon.