Published on 19/01/2021 5:52:20 PM | Source: Geojit Financial Services Ltd

IPO Note - Indigo Paints Ltd By Geojit Financial

Posted in IPO Reports| #IPO #Geojit Financial Services Ltd

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Innovative and fast-growing player in decorative business…

Indigo Paints Limited (IPL), incorporated on March 28, 2000 is the fastest growing amongst the top five paint companies in India with a market share of ~2%. IPL is engaged in the business of manufacturing a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints. IPL introduced differentiated products through their primary consumer brand of “Indigo” and has an extensive distribution network across 27 states & 7 UTs with 11,230 active dealers.

* IPL is the 5th largest company in the Indian decorative paint industry in terms of revenue from operations for FY20 as per F&S Report.

* Well positioned to compete with other players by their differentiated strategy, strong brand equity and extensive distribution network.

* Decorative paint industry has grown at a CAGR of ~12% from FY14-FY19 and is expected to grow at rate of ~13% in value & ~10% in volume by FY24 driven by increase in disposable incomes and the focus on housing by the government.

* IPL has a strong presence in tier 3/4 towns and rural areas with strong portfolio of differentiated products (~29 % of FY20 sales).

* The strategic location of manufacturing facilities with proximity to raw material sources aided margin expansion (~15% in FY20). As a result of geographic advantages & higher margins from differentiated products, gross margins of IPL (~48% in FY20) are consistently higher than industry average (~38-45% in FY20) from FY18-FY20.

* Intends to expand its manufacturing capacities at Pudukkottai facility in Tamil Nadu with a proposed expansion unit of 50,000 KLPA (kilo liters per annum) and is expected to be operational by FY23E.

* The company spends ~12.7% of its revenue on advertising and sales promotion vs 3- 5% for top 4 players which has helped build strong brand recall especially for its specialized products.

* Despite FY20 being impacted by Covid-19, revenue grew ~17% YoY against the range of (-8.8% to 5%) recorded by top 4 paint companies led by new markets and increased demand for products on the back of their branding and marketing initiatives.

* At the upper price band of Rs.1,490, IPL is available at P/E of 130x (annualized basis on FY21E EPS of Rs.11.4) and seems to be at a premium compared to the listed peers. Inspite of premium valuations, being the fastest growing paint company in India driven by developing niche product to compete market leaders, extensive distribution network, expansion plans, low debt & strong return profile with RoE of 25% in FY20 will make it an emerging player in the industry, we assign a “Subscribe” rating for the issue.

Purpose of IPO

The proceeds from the offer for sale will go to the selling shareholders, while the amount received from the sale of fresh issue will be utilized for funding capex for expansion of manufacturing facility at Pudukkottai, purchasing of tinting machine & gyroshakers, repayment of outstanding borrowings & general corporate purposes.

Key Risks

* Competition from other established and bigger Paint companies.

* ~35% of revenue is generated from Kerala and the southern region represented ~46% of sales in FY20.

* Seasonality and fluctuation in crude oil prices may impact business.


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