Indigo Paints IPO| Should I Subscribe?

Detailed Analysis of Indigo Paints IPO

Introduction

Indigo Paints Ltd, the fifth largest player in the Decorative Paints Industry in India, is coming out with Rs.1,170 Cr IPO, is open from January 20, 2021. Here is a 7 point analysis of Indigo Paints IPO covering IPO details, company overview, Financials, Peer comparison, Company’s strengths and Risks and the Valuation aspect.

Indigo Paints IPO Analysis

IPO Details

• The total issue size of the IPO is Rs. 1,170 Crore. Out of which, fresh issue accounts for Rs. 300 Crore and offer for sale is Rs. 870 Crore.

• The grey market indicates that there could be premium of Rs. 600-700 i.e. there is a possibility of 50%-60% listing gains. This could be a good catch for applicants on the hunt for listing gains.

• In the OFS, venture capital and PE investors like Sequoia Capital India Investments IV and SCI Investments V are offloading 20.05 Lakh and 21.65 Lakh equity shares respectively. These early investors are only selling a part of their holdings which is a positive sign.

• The promoters are also liquidating 16.70 Lakh equity shares. Hence, post-issue the promoter stake will drop to 54% from 60.05% pre-issue.

• Proceeds of the fresh issue will primarily be utilized for – expansion of the existing manufacturing facility at pudukkottai, tamil nadu to manufacture water-based paints (Rs.150 cr), purchase of tinting machines,  gyroshakers (Rs.50 cr) and repayment certain of borrowings (Rs.25 cr) and other general corporate purposes.

• Post repayment of borrowings the company will become a debt free company.

Company Overview

• Indigo Paints was founded in 2000 and started with manufacture of low-end cement paint. Fastforward, today they are the 5th Largest player in the Decorative Paints Industry in India (in terms of Revenue FY20).

• Their chief competitive advantage are – key focus on Differentiated Products and increasing presence tier 2/3/4 cities as well as rural areas.

• They have 3 manufacturing facilities located in Jodhpur, Kochi and Pudukkottai (Tamil Nadu). They manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties & cement paints.

• Indigo paints are the 1st company to manufacture & introduce floor coat emulsion, metallic emulsions, tile coat emulsion, bright ceiling emulsion, dirt-proof  & water-proof exterior laminate, exterior & interior acrylic laminate, pu super gloss enamel. Together these are known as Indigo Differentiated Products.

• They possess an extensive distribution network across 27 States & 7 Union Territories. As of Sept-20 they have total 4,603 Tinting Machines across 10,988 Active Dealers.

Financial Performance

Revenue from operations

• Indigo Paints has witnessed a robust growth of 24.7% CAGR in revenues. Their revenues from operations for FY20 stood at Rs. 625 Crores.

• Their revenues for H1FY21 have declined by a mere 4.8% on a year on year basis to Rs. 259 Crores.  This is relatively much better in comparison to the overall industry performance in the same period. The reason for this resilience is their presence tier 2/3/4 cities as well as rural areas.

• If we talk about revenue mix, the company derives 99% of its revenues from decorative segment and the remainder 1% from industrial. Currently, decorative segment is their focus point and center of attention, however, in the future, the company may witness higher revenue contribution from the industrial segment. 

• The company’s geography wise revenue mix is well spread. Over the last 3 years, revenues from south have reduced to 46.33% from 53.8% in FY18 which is a good sign. Indigo paints has slowly been expanding their footprints in new markets across East, West & North.

Operating Profit & Margin

• Indigo’s EBITDA margins are almost at par with smaller peers like Kansai Nerolac and Akzo Nobel (around 15%). Strong margins have resulted in higher profits. Robust CAGR growth in EBITDA is due to lower base.

• With higher growth in EBITDA, the EBITDA margins are likely to improve from operating leverage i.e. sales growth will directly add to profit as fixed costs stay the same.

Net Profit

• Indigo Paints Profit After Tax (PAT) has had a stellar 92.8% CAGR over the last 3 years.  Cherry on top of the cake is that their PAT margins have expanded phenomenally, from 3.2% in FY18 to 10.5% in H1FY21.

• With all other business being impaired due the COVID-19 pandemic, this company has proved its mettle and is on track to further deliver stronger numbers from support of tier 2/3/4 cities as well as rural areas.

Return Ratios -RoE and RoCE

• Consistently improving Return Ratios on robust growth in EBIT & PAT.

• The trend flattened in H1FY21, due to dampened sales (-4.8% YoY) amid COVID-led lock-down.

Peer Comparison

• Decorative Paints Industry Size is Rs.40,300 Crore and Top 2 players i.e. Asian paints and Berger paints  own 74% market share, as the industry presents significant entry barriers like – development of an extensive distribution network, heavy marketing costs and brand recall.

• Indigo Paints market share is 2%, with 99% revenue from decorative paints. While Asian Paints market share is 42% with 95-97% revenue from decorative paints.

• Indigo paints has got its foot in the door and with the low base effect coming into play the company will gaining more markets share from unorganized players in tier 2/3/4 cities as well as rural areas.

• Asian Paints has strong performance across all operating parameters due highest market share in sales volume as well as advantage of operating leverage.

• Top 4 players adversely impacted by muted March-sales in COVID-lock-down, while Indigo paints reported positive growth due to lower impact due to major presence in Tier 2/3/4 cities & Rural area.

Key Strengths and Risks

Valuation

• Overall the paint sector is quite premium valued sector in India.
• Indigo paints has launched the IPO to a very low discount to the top 2 players – Asian Paints and Berger Paints.

Conclusion

Company has healthy financials and return ratios. Looking at the grey market premium, people are bullish on the company. If it lists at a 50-60% premium, then it will reach the market cap of a mid-cap company. Listing gains are quite visible. Let’s see how things unfold in the days ahead.