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Shifting focus to larger and more competitive urban markets; maintain REDUCE

Result Synopsis

Indigo Paints growth in Q4 was largely driven by price increase with volume growth being very low. In some of the product categories, it even saw a volume decline as there was over stocking in the channel caused by steep price increases in Q3. It saw good traction in markets like Kerala which recorded strong double‐digit growth. The company which has traditionally been doing well in tier 3 and 4 markets has now shifted its focus on tier 1 and 2 cities (ex‐metros), where it wants to improve its dealer engagement and sales per dealer in the urban markets. It is also aggressively expanding its distribution by adding depots and tinting machines in its pursuit to significantly outgrow the paints industry. INDIGOPN has recently added two new depots in Delhi and Himachal Pradesh to cater to the northern markets. We believe INDIGOPN will have to fight hard and increase its investments to gain traction in the urban markets where the incumbents have a strong foothold.Gainingmarket share in urban areas is a long‐drawn process where larger peers are very strong.  

Considering increased investments in gaining traction in the urban markets and stiff competition from the newer players with large investments, we feel gaining market share in urban markets will take time and company will have to efficiently deploy its capital. We believe increased investments and higher A&P spends to gain foothold in urban markets will keep margins under check and high RM inflation will result in INDIGOPN having lower surplus for marketing spends. Considering higher investments that company will require to be make and increase competition with new players and bigger incumbents in urban markets, we continue to maintain REDUCE rating. We expect FY22‐24E Revenue/EBITDA/PAT CAGR of 28%/40%/56% respectively and maintain our REDUCE rating with TP of Rs1,709 valuing it at 40x FY24 EPS as current CMP does not offer any upside potential.

Result Highlights

Quarter summary – Growth in Q4 was largely driven by price increase with volume growth being very low. Select product category saw volume decline. Company has further undertaken minor price increase in May and another round of price hike is expected next week.  

Margin – Gross margin at 43.6% contracted 300bps yoy; however, it showed improvement of 70bps on sequential basis. Price increases on account of higher commodity prices have resulted in sequential improvement of gross margins.

Distribution and Capacity expansion – Company is aggressively expanding its distribution and now wants to target urban areas (Ex‐metros). It is consistently increasing its tinting machine counts and have also added two new depots in New Delhi and Himachal Pradesh. Expansion of its manufacturing facility in TN is expected to be completed by Q3FY23.

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