Indigo Paints IPO analysis!

Indigo Paints is set to raise up to ₹1,170 crore via IPO which opens on 20th January, Wednesday. Here are the details:

About Indigo Paints

• Indigo Paints has rapidly grown to become the fifth-largest player in the decorative paints industry in India.
• The company manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints.
• The company has built an extensive distribution network across 27 states and 7 union territories as of September 30, 2020, and installing tinting machines across their network of dealers.

Peers

• Indigo Paints operates in a very competitive, oligopolistic market. Comparables for Indigo Paints include Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel India, and other smaller players.
• Indigo Paints has a 2% market share.

• The top 4 players dominate the market with a combined 65% share in FY19, as the industry presents significant entry barriers. Entry barriers include the development of an extensive distribution network, heavy marketing costs and brand recall.

Key metrics

• As of September 2020, Indigo Paints has a total of 4,603 tinting machines across its dealer network. In terms of tinting machines-to-dealer ratio (0.38). This is better than Akzo Nobel, but worse than other peers Asian Paints (66%), Kansai Nerolac (62%). This ratio provides an approximate penetration of the tinting machine for each company.
• Revenues from differentiated products have consistently comprised ~27-28% of total revenues for Indigo in the past three years. As of September 2020, Indigo has a portfolio of seven differentiated products.

Financials

• Indigo Paints Revenue from operations have grown at a CAGR of 41.9% between FY10 and FY19, compared to the range of 12.1% to 13.1% recorded by the top 4 paint companies in India. 
• The Covid-19 crisis has led to disruptions in the supply chain due to shutting down of manufacturing facilities. The company’s revenue dropped 4.8% on year to ₹259 crore in Apr-Sep 20 period.
• The company’s profits have grown by 4x to ₹48 crore between FY18-20 period.
• The company’s ad-spends at 13% of sales, are significantly higher than peers, indicating that the company is focussing aggressively on growth.

About the issue

• Issue  details 
• Issue open: 20th - 22 Jan 2021 
• Price band: ₹1,488- ₹1,490
• Issue Size: ₹1,168- 1,169 cr
• Issue Size: Fresh Issue of Equity Shares aggregating up to ₹300 crore and Offer for sale of 5,840,000 Equity Shares
• Reservation for QIB - 50% , Retail -35%, Non institutional Investors -15%. 70,000 shares are reserved for employees. They also get a discount of ₹148 per share.
• Bid lot: 10 shares, and in multiples of 10 shares
• Post issue market cap ₹7,079 cr- 7,088 cr

INDmoney Recommendation

At the higher end of the price band, Indigo Paints IPO is aggressively priced at a PE ratio of 142 times FY20 earnings per share. This is similar to its highly valued listed peers Asian Paints (115) and Berger Paints (126), (on a trailing 12 months basis for peers). However, Indigo Paints has a better growth potential due to its lower base and market share.

The company’s market share would only increase to a low 4.4% from 2% currently, even if it grows at double the rate of the industry (18% for Indigo vs 9% for the industry). Given strong fundamentals, good return ratios, and attractive growth prospects we remain positive on the prospects of the issue.