Buy Indigo Paints Ltd for the Target Rs 1,450 by Motilal Oswal Financial Services Ltd
Growth accelerates; operating leverage drives margins
* Indigo Paints (INDIGOPN) reported standalone revenue growth of 19% YoY (on a flat base), with double-digit value and volume growth. Management indicated that the strong demand momentum of 4QFY26 continued in 1QFY27, with Jul demand being better than Jun. INDIGOPN did not see any material change in trade inventory as secondary growth was equally healthy. The company remains focused on growing significantly ahead of the industry, supported by premiumization, deeper distribution and a renewed focus on high-end wood coatings. Apple Chemie reported strong revenue growth of 40% YoY. Consolidated revenue grew 20% YoY (base of - 0.7%) to INR3.7b (est. INR3.9b).
* Gross margin contracted 130bp YoY to 44.6%, as RM prices, despite cooling from peak levels, remained elevated YoY. However, lower A&P spending (4.3% vs 6.8% in 1QFY26) and operating leverage drove EBITDA margin expansion of 240bp YoY to 16.8% (beat). INDIGOPN highlighted that 2Q GM could remain weak due to product mix deterioration and high-cost inventory.
* Management continues to prioritize accelerated revenue growth, even at a marginal cost to profit, through influencer-led BTL activities and deeper engagement with dealers and painters. Premium emulsions continue to gain share, while the company plans to strengthen its presence in high-end wood coatings with new products slated for phased launches in Sep-Oct. With no major capex planned until FY29, improving capacity availability and operating leverage should support growth and cash generation going forward.
* We model a CAGR of 15%/17% in revenue/EBITDA over FY26-28E. We model an EBITDA margin of 18.3%/18.6% for FY27/FY28. We reiterate our BUY rating with a TP of INR1,450 (based on 30x FY28E EPS), considering its growth outperformance, synergies with Apple Chemie, consistent capacity growth and distribution expansion, and its favorable valuation multiples vs. peers.
Highlights from the management commentary
* INDIGOPN experienced double-digit revenue growth for the first time in two years. The volume growth also stood at double digits despite price hikes.
* The company aspires to grow significantly ahead of industry growth.
* Its 2QFY27 gross margin may remain volatile due to high-cost inventory, but management expects industry margins to normalize over time.
* The company will increase its focus on wood coatings. It expects to launch new products in the market during September and October in a phased manner.
* Management stated that no major capex is planned until FY29 as the heavy investment cycle is now largely complete.
Valuation and view
* We raise our EPS estimates by 4-5% for FY27 and FY28.
* INDIGOPN's strategic shift toward focusing on non-metro towns and increased 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.
* We model a CAGR of 15%/17% in revenue/EBITDA over FY26-28E. We model an EBITDA margin of 18.3%/18.6% for FY27/FY28. We reiterate our BUY rating with a TP of INR1,450 (based on 30x FY28E EPS), considering its growth outperformance, synergies with Apple Chemie, consistent capacity growth and distribution expansion, and its favorable valuation multiples vs. peers.
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