IPO Note - Indigo Paints Ltd By Nirmal Bang
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BACKGROUND
Company Overview Indigo Paints Ltd (IPL) is the fifth largest company in the Indian decorative paint industry. It is the fastest growing company amongst the top five companies. It is able to achieve this position in a highly competitive Indian decorative paint industry on the back of its multi-pronged approach.
This includes introducing differentiated products to create a distinct market in the paint industry, building brand equity for the primary consumer brand of “Indigo”, creating an extensive distribution network across 27 states and seven union territories as of September 30, 2020, and installing tinting machines across the network of dealers.
Objects of the Issue
The issue of Rs 1170 cr comprised of Rs 300 cr fresh issue and Rs 870 cr Offer for Sale. The company intends to incur capex, repayment of debt from the fresh issue.
Investment Rationale
* Increasing Contribution from Differentiated Products
* Making inroads in the oligopolistic market
* Building Distribution Network
* Healthy Financials – (a) Strong revenue growth (b) Scope for further improvement in margins (c) Robust Balance Sheet
Valuation and Recommendation
Between FY18-20, Indigo Paints Ltd’s revenues have grown at CAGR of 26% while EBITDA/PAT grew by 88%/93% respectively on the back of improving profitability.
EBITDA margins have improved from 6.5% in FY18 to 14.6% in FY20 and further to 18.5% in 1HFY21. As the company is still in growth phase, we believe, it is likely to maintain the higher than the industry revenue growth. With reduction in A&P spend (as% to sales), EBITDA margins are expected to improve further and likely to be in vicinity of market leader.
However, the Issue price of Rs 1490/share captures the near-term financial performance. We expect IPL to report Rev/EBITDA/PAT to grow at a CAGR of 18%/28%/31% respectively. The stock is trading at 65.5x FY23E on our estimates as compared to Asian Paints/Berger Paints’ 61.1/73x consensus earnings.
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