Indigo Paints

Verdict: This looks Green

IPO Snapshot:

Indigo Paints is launching a Rs. 1,170 crore IPO between Wed 20^th Jan to Fri 22^nd Jan 2021, 74% of which is OFS by PE investor Sequoia and promoter Hemant Jalan and balance 26% fresh issue worth Rs. 300 crore, in the price band of Rs. 1,488-1,490 per share. Issue represents 16.5% dilution and is expected to list a day after the budget, on 2^nd Feb 2021.

5^th Largest Company in the Highly Competitive Paint Industry

Indigo Paints is India’s 5^th largest paint maker, clocking FY20 revenue of Rs. 625 crore and the fastest growing (+17% in FY20) in the Rs. 40,000 crore decorative paint industry, a sector posting double digit volume growth for past 2 decades and expected to continue for the next 5 years. With zero industrial paints, which has been a drag for peers of late, Indigo’s differentiated products (like tile coat, bright ceiling paint, PU enamel etc.) and heavy advertising spends (11-12% of revenue vs 3-5% for peers) help it make inroads in a highly competitive industry with high entry barriers.

Fresh Issue to increase Capacity and deepen Distribution

Company has 1 lakh KL liquid paints and 93,118 MT putties/powder paint capacity across Rajasthan, Kerala and Tamil Nadu. Over next 2 years, it is establishing 50,000 KL p.a. water based paint capacity in Tamil Nadu, for Rs. 185 crore, of which, Rs. 150 crore to be invested from IPO proceeds. Fresh issue funds will also deepen distribution via installation of 4,200 new tinting machines (currently 4,600 installed) worth Rs. 50 crore, besides repaying Rs. 25 crore debt, to become a gross debt-free company.

Strong Margins, only trails Asian Paints

FY20 revenue grew 17% YoY to Rs. 625 crore, but operating leverage doubled PBT to Rs. 67 crore. Since high-margin differentiated products account for 28% of revenue, company’s material cost at 51% to revenue is the lowest among all listed peers: Asian Paint 56%, Berger 58%, Kansai 62% and Akzo 54%. Company navigated covid better than peers, with 5% YoY contraction in H1FY21 revenue to Rs. 259 crore, as against 19-21% decline for Asian and Berger Paints. Despite very high advertisement spends, company’s H1FY21 net margin of 10.5% is stronger than Berger (9%), Kansai (10%) and Akzo (5%) and only trails market leader Asian (13%). H2 is seasonally a stronger period for paint companies and Indigo’s higher rural presence leads to positive outlook over the near term.

Growth and Margins justify Valuation

At Rs.1,490 per share, company’s market cap of Rs. 7,088 crore translates into FY22E PE multiple of 61x, lower than Asian and Berger’s 90x as well as Kansai’s 63x. While Akzo’s FY22E PE is lower at 49x, its 20% RoE is lower than Indigo’s 24%. Indigo clocks healthy margins despite lower scale, leaving scope for some more operating leverage going forward. Post IPO, equity will continue to be small at Rs. 48 crore, with 54% promoter holding and a sizeable 29% holding of Sequoia, down from 39%, after a 50%+ IRR in 6.5 years. Free float of just 80 lakh shares may lead to scarcity premium for company’s shares, in an oligopolistic sector in the consumption space, already growing at double digits.

Conclusion:

Bullish outlook on paint sector, coupled with company’s strong margins and future growth make this small cap stock promising. We therefore recommend subscribing to the IPO, both from listing gains as well as long term portfolio holding.

Grey Market Premium (GMP) of Indigo Paints: Grey Market Premium of Indigo Paints is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.