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Opening up newer growth avenues is pleasing

ndigo's performance is best in class. Period. That said, in 3QFY22, it reported gross margin decline of 670bps YoY, lower adspends led to EBITDA growth of 22.8% YoY; only paint company to report growth. Transitory issues like prolonged monsoon, raw material inflation and slight impact of lockdown in Kerala have continued to impact performance. We like (1) it has introduced differentiated paint for bathroom and kitchen which helps to reduce odour and plans to introduce more ‘category-creator’ products in

Q1FY23, (2) There is portfolio premiumization with emulsions growing faster than commodity products like cement paints, putty and distempers and (3) increase in trade investments with expansion of dealer network by 3.6% and tinting machines by 5.7% QoQ. The company is also planning to roll out its products through wholesale channel selectively. We cut FY22-23 earnings estimates to factor in higher input inflation. Maintain HOLD as we expect heightened competitive activity & intensity over FY22 and beyond to have a bearing on the narrative and hence the trading multiples

* Q3FY22 results: Indigo reported revenue growth of 26.6% YoY (2-year CAGR: 24.4%). EBITDA and PAT were up 22.8% and 29.4%, respectively. While gross margin declined 670bps due to higher raw material prices, EBITDA margins declined just 50bps due to lower other expenditure. While ad-spend remained flat in absolute terms YoY, it declined to 11.1% of sales in Q3FY22 from 14.5% in Q3FY21.

* Segment-wise YoY volume growth rates: Emulsions continued to report strong volume growth of 15.9% YoY. Cement paints & Putty reported flat volumes. However, Enamels + Wood coatings and Primer, distempers and others reported volume decline of 4.5% and 3.6%, respectively. While prolonged monsoon impacted revenues in Oct’21, the company reported healthy growth pan India including Kerala. It also reported equally similar off-take in rural and urban markets.

* Higher trade inventory in Q3FY22: As most companies had initiated price hikes of more than 15% in Nov’22 and 4-5% in Dec’21-Jan’22, the dealers have up-stocked the inventory. The excess inventory in trade was normalized only in Jan’22.

* Launches of differentiated products: Indigo has introduced new paint for kitchen and bathrooms which helps to reduce odour. It also plans to introduce new categorycreator products in Q1FY23.

* Plans to selectively introduce products through wholesale channel: While Indigo had not leveraged wholesale channel till now, it plans to introduce its products wholesale in regions where its direct distribution is strong

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