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Reasons for slowdown in FY22 and likely revival in FY23-24

While Indigo’s most segments reported strong volume growth in FY22, its volumes/store declined slightly in FY22 owing to multiple reasons such as (1) aggressive rollout of new stores, (2) slowdown in Kerala impacted by covid and state elections. Kerala’s 18% population was impacted by covid (India: 3%) and it resulted in higher restrictions; state elections in Apr-May’21 also disrupted labour (painter) market. We note there was revival in Kerala in H2FY22, (2) increase in competitive pressures with higher trade margins/ schemes and (3) Indigo raised prices ahead of industry. While Kerala revenues underperformed industry over FY20-22, Rest of India revenues grew higher than Industry.

Ahead, we believe Indigo is on a strong footing to outperform industry volume growth as (1) it has invested in outlet expansion at CAGR of 18.7% over FY20-22. The company plans to focus on improving output/store with help of influencers (painters), (2) Tinting machines have grown at CAGR of 28.5% over FY20-22 and it will lead to higher sales of regular products and emulsions and (3) Indigo continues to invest in differentiated products with launch of Anti odour paint for Kitchen and Bathroom in FY22 and plans to introduce ‘category creator’ products in FY23. We believe growth in revenue per store will be key matrix to track in FY23 and any maturity in stores will lead to outperformance vs industry. Retain HOLD.

* FY22- A tale of two geographies: Kerala accounted for 30% of revenues in FY21 and 28.5% in FY22. Kerala revenues grew just 19% in FY22 whereas Rest of India revenues were up healthy 27.9%. Over FY20-22, Kerala revenues grew at CAGR in high single digits whereas Rest of India revenues have grown in excess of Industry. However, Kerala market and Indigo’ revenues improved in H2FY22.

* Multiple issues impacted Kerala: Kerala market was impacted by multiple one-offs as well as some structural issues. Kerala’s 18% population suffered from covid (India: 3%) and it resulted in higher restrictions impacting paints industry. State elections in Apr-May’21 also disrupted the labour market for 2-3 months impacting paint industry. Higher competition as well as ‘ahead of industry’ price hikes by Indigo also likely impacted the volume growth.

* Time to reap benefits of investments: Indigo’s revenue/store increased just 5.4% indicating volume decline per store in FY22. This is attributable to strong investments in new outlets. Its outlets and tinting machines have grown at CAGR of 18.7% and 28.5%, respectively over FY20-22. Expansion of tinting machines will help to sell regular products and emulsions. It has also expanded product portfolio of differentiated products with launch of anti odour paint for Kitchen and Bathroom.

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