Buy Indigo Paints Ltd For Target Rs.1,150 by Motilal Oswal Financial Services Ltd
Healthy demand; weak margin delivery
* Indigo Paints (INDIGOPN) reported standalone revenue growth of 14% YoY (in line with the industry), led by pricing growth. Management indicated healthy demand momentum in Oct’26. A late Diwali is likely to support the Oct demand, while Nov-Dec demand would be sensitive to macro stability (geopolitically driven). The company aims to grow ahead of the industry (1.5-2x), supported by premiumization, a deeper distribution, and a focus on premium wood coatings. Apple Chemie reported strong revenue growth of 35% YoY. Consolidated revenue grew 15% YoY to INR3.6b (est. INR3.7b).
* Gross margin contracted sharply by 640bp YoY to 38.3%, at an all-time low, hit by an unfavorable product mix (200-250bp impact) and high-cost raw material carried from last quarter. EBITDA margin contracted 630bps YoY to 8.6% (est. 14.3%). Management indicated that most high-cost inventory was consumed in 2Q and expects sequential margin recovery from 3Q onward. We model an EBITDA margin of 16.9%/17.9% for FY27/FY28.
* INDIGOPN continues to prioritize accelerated revenue growth, even at a marginal cost to profit growth, through influencer-led BTL activities and deeper engagement with dealers and painters. With no major capex planned until FY29, improving capacity availability and operating leverage should support growth and cash generation going forward. We reiterate our BUY rating with a TP of INR1,150 (based on 25x Sep’28E EPS).
A sharp miss on margins hurts 2Q performance Consolidated performance
* Healthy revenue growth: Indigo Paints reported consolidated revenue growth of 15% YoY (base +4%) to INR3,588m (est. INR3,674m). Gross revenue grew 19%, but an unfavorable product mix led to higher discounts, restricting net revenue growth to 15%.
* Segmental performance: In 2QFY27, Primers, distempers, and others led with 29% value growth and 9% volume growth. Putty & cement paint posted 13% value and flat volume growth. Emulsions saw a recovery and delivered 13% value and 10% volume growth. Enamels and wood coatings delivered 18% value and 8% volume growth.
* Margins below our estimate: Gross margin contracted 640bp YoY to 38.3% (est. 43%), hit by an unfavorable product mix and high-cost raw material inventory carried over from 1QFY27. Employee expenses grew 18% YoY, and other expenses rose 12% YoY. A&P expenses were 5.4% of revenue (vs 5.3% in 2QFY26). EBITDA margin dipped 630bp YoY to 8.6% (est. 14.3%), hurt by gross margin compression and higher A&P spending. EBITDA fell 33% YoY to INR310m (est. INR524m).
* Weak profitability growth: Other income declined YoY as adverse bond yield movements weighed on treasury returns. PBT decreased 51% YoY to INR167m (est. INR411m), while APAT decreased 47% YoY to INR133m (est. INR306m).
Highlights from the management commentary
* Management expects to grow at 1.5-2x the industry growth rate, rather than the previously perceived 2-3x.
* The industry has announced two price hikes in 3Q, with one already implemented and the second anticipated in the third week of Nov’26.
* The company highlighted that the industry leader is gaining disproportionately during price hikes, as dealers tend to stock up more on leading brands. However, the leader's recent growth also reflects recovery from two years of negative growth and the rebuilding of its dealer network.
* INDIGOPN’s new water-based plant at Jodhpur, with an annual capacity of 90,000 KL, commenced trial production in Sep’26. Full operations are expected by the end of Nov’26.
Valuation and view
* We cut our EPS estimates by 8% for FY27 and 5% for FY28 as the margins saw a sharp contraction. However, management indicated that most high-cost inventory was used up by August, and margins started recovering from September. Margins may remain under pressure in the near term, but the impact is expected to be less severe.
* INDIGOPN's strategic shift toward focusing on non-metro towns and increasing investments in distribution and influencers as part of its Strategy 2.0 is proving to be a successful endeavor. That said, the company continues to focus on the premium and emulsion segments, with a deliberate shift away from the economy segment.
* INDIGOPN continues to prioritize accelerated topline growth, even at a marginal cost to bottom-line growth, through influencer-led BTL activities and deeper engagement with dealers and painters. With no major capex planned until FY29, improving capacity availability and operating leverage should support growth and cash generation going forward. We reiterate our BUY rating with a TP of INR1,150 (based on 25x Sep’28E EPS).
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