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Weak performance; watchful for industry trends

* INDIGOPN’s standalone sales growth decelerated to 6% YoY (from 12% in 4QFY24 and 18% in FY24) due to subdued industry sales (down 2% YoY) and demand weakness in Kerala (~25% revenue mix). Apple Chemie (subsidiary) clocked robust sales growth of 47% YoY, which resulted in consolidated sales growth of 8% YoY to INR3.1b (5% miss).

* Consolidated GM contracted 70bp YoY/230bp QoQ to 46.6% (est. 48.3%) due to high discounts, increase in RM prices and price cuts. Employee costs were up by 24% YoY (+130bp), further denting operating performance. EBITDA margin contracted 180bp YoY/670 QoQ to 15.2% (est. 18.4%).

* The management has seen revenue recovery in Jul’24, with a much better growth rate compared to the past six months. GM is likely to improve with a price hike (2%). We estimate EBITDA margin of 17.8%/17.6% in FY25/FY26.

* INDIGOPN is sustaining growth outperformance among peers and successfully navigating through intense competition. Industry growth has been weak for the last six months and we are watchful for any reversal in this trend in 2HFY25. We reiterate our BUY rating with a TP of INR1,700, considering its growth outperformance, synergies with Apple Chemie, consistent capacity & distribution expansion, and its favorable valuation multiples vs. peers.

Miss on all fronts

Consolidated

* Subdued sales growth - Net sales growth was weak at 8% YoY to INR3,110m (est. INR3,259m) in 1QFY25. Standalone revenue rose 6% YoY to INR2,939m. Apple Chemie delivered robust sales growth of 47% YoY to INR171m.

* Category wise growth - Putty and cement paints achieved value growth of 9% and volume growth of 8%. Enamels and wood coatings saw 5% volume growth, but value declined 1% due to company-initiated price reductions. Emulsion witnessed flat volume growth, but value declined by 3%. Primer and distempers witnessed volume growth of 24% and value growth of 29%

* Miss on margin - Gross margin contracted 70bp YoY and 230bp QoQ to 46.6% (est. 48.3%) due to price cuts. As a percentage of sales, employee costs increased by 130bp YoY to 9.7%, while other expenses contracted 20bp YoY to 21.7%. EBITDA margin contracted 180bp YoY and 670bp QoQ to 15.2% (est. 18.4%).

* EBITDA/PBT/PAT declined: EBITDA declined 4% YoY to INR474m (est. INR600m). Depreciation was up 51% YoY due to the commissioning of a new plant in Tamil Nadu. PBT decreased by 16% YoY to INR357m (est. INR477m). PAT declined 16% YoY to INR262m (est. INR358m).

Highlights from the management commentary

* The company sustained industry-leading growth, but industry growth has been decelerating for the last 4-5 quarters. The industry witnessed a 2% decline in 1QFY25 vs. 1% growth in 4QFY24.

* The company is not worried about rising competition from new entrants; there are already many established and scalable players.

* It expects to take a price hike (2%) to pass on higher costs, which will lead to GM recovery.

* There is seasonality in the product mix. Sales of distempers and enamels grow in 2Q, while emulsions show higher growth in 3Q and 4Q. Sales of putty and primers remain steady throughout the year.

* Apple Chemie business expanded to Maharashtra, Telangana, Tamil Nadu, Orissa, West Bengal, Madhya Pradesh, Delhi (NCR), Bihar, and Karnataka.

Valuation and view

* We cut our EPS estimates by 7% for FY25, with no material change in FY26.

* Indigo'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 successful endeavor, as evidenced by its outperformance to industry growth by 3x-4x for the two consecutive quarters.

* Given the relatively small scale of INDIGOPN (INR13b revenue in FY24) in the large paints industry, the company has been able to grow much faster than the industry. Rising brand acceptance by consumers and the expansion of its distribution network have been driving the outperformance. However, the changing competitive landscape will be a key monitorable. We reiterate our BUY rating with a revised TP of INR1,700 (40x Jun’26E EPS).

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