Buy Indigo Paints Ltd For Target Rs.1,500 by Motilal Oswal Financial Services Ltd
Miss on revenue; demand pick up a key monitorable
* Indigo Paints (INDIGOPN)’s standalone sales declined 4% YoY in 3QFY25 due to consistent pressure on demand. The paint industry dipped 4% YoY in 3Q. Apple Chemie (subsidiary) clocked a robust sales growth of 21% YoY. Consolidated sales contracted 3% YoY to INR3.4b (miss).
* Putty & cement paint’s value and volume declined 5% and 7%, respectively. Emulsions clocked 2% volume growth and 3% value growth. Premium emulsions remained the fastest-growing retail segment. Enamel and wood coatings’ volume/value dipped 13%/12% YoY. Primer and distempers posted a volume decline of 6% and a value decline of 1% in 3QFY25.
* Consolidated GM contracted 160bp YoY to 46.6% (est. 46.3%) due to product mix and price cuts. Employee costs rose 7% YoY (+80bp), while other expenses were down 9% YoY (-140bp). EBITDA margin dipped 90bp YoY to 16.7% (est. 16.0%).
* INDIGOPN has seen some positive signs in Jan’25 and expects a gradual recovery. It will be driven by favorable crop conditions, a reduction in interest rates, and potential benefits of tax relief in the Union Budget. We model a 13% revenue and 17% EBITDA CAGR in FY25E-FY27E.
* Management is less concerned about competitive pressure from new entrants; instead, it is focused more on industry recovery. The size of the industry and long-term drivers will continue to present opportunities for most established players.
* We reiterate our BUY rating with a TP of INR1,500 (based on 40x Dec’26 P/E), considering its growth outperformance, synergies with Apple Chemie, consistent capacity & distribution expansion, and its favorable valuation multiples vs. peers.
Miss on revenue; cost efficiencies moderate margin contraction
Consolidated performance
* Miss on sales: INDIGOPN’s net sales declined 3% YoY to INR3,426m (est. INR3,715m). Standalone revenue dipped 4% YoY to INR3,275m. Apple Chemie delivered sales growth of 21% YoY to INR151m in 3QFY25.
* Contraction in margins: Gross margin contracted 160bp YoY to 46.6% (est. 46.3%). Employee expenses rose 7% YoY, while other expenses contracted 9% YoY. EBITDA margin contracted 90bp YoY to 16.7% (est. 16.0%).
* EBITDA/PBT/PAT declined: EBITDA declined by 8% YoY to INR572m (est. INR595m). PBT decreased 10% YoY to INR450m (est. INR484m). APAT was down 3% YoY to INR360m (est. INR366m).
* In 9MFY25, net sales increased 3% YoY, while EBITDA and APAT declined 5% and 9%, respectively.
Highlights from the management commentary
* The demand slowdown has persisted over the past year, with festive demand falling below expectations. No significant difference has been observed between urban and rural demand growth.
* INDIGOPN has been minimally impacted by Birla Opus, primarily due to its differentiated product offerings and strong distribution network. The effect on INDIGOPN’s sales is estimated to be ~1%.
* The entry of new players has had a limited impact on existing industry participants. However, as the overall market is experiencing a slowdown, these effects have become more noticeable.
* As of Dec’24, the number of active dealers stood at 18,578, reflecting a sequential decline of 120. During periods of weak market conditions, active buyers tend to reduce their purchases, leading to a drop in dealer count. However, as demand recovers, the number of active dealers is increasing again.
Valuation and view
* Owing to a slow industry recovery and normalization of operating margin, we cut our EPS estimate by 5% for FY25/FY26.
* INDIGOPN's strategic shift to focusing on non-metro towns and increased investments in distribution and influencers as part of its Strategy 2.0 are proving to be a successful endeavor.
* Given the relatively small scale of INDIGOPN (INR13b revenue in FY24) within the paints industry, the company has been able to grow much faster than the industry. Consumers’ rising acceptance of the brand and the expansion of distribution have been driving its outperformance. However, the changing competitive landscape will be a key monitorable. We reiterate our BUY rating with a revised TP of INR1,500 (premised on 40x Dec’26E EPS).
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