Indigo Paints Limited - Issue Opens - Progressive Share Brokers
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Indigo Paints Limited
Issue Opens Wednesday, January 20, 2021
Issue Closes Friday, January 22, 2021
Price Band (in Rs) 1488/1490
Bid Lot 10 shares and multiples thereafter
IPO UPDATE
Indigo Paints Limited
Indian Paint Industry Overview: SNAPSHOT
The Indian paint industry is valued at approximately Rs545bn and is expected Issue Opens Wednesday, January 20,2021
to grow to Rs971bn by 2024. There is a strong co-relation between the
Friday, January 22, 2021
Indian paint industry and the GDP growth of India. It has historically almost Issue Closes
doubled India's GDP growth rate. The industry has registered a CAGR of
approximately 11% during FY14 to FY19. Price Band (Rs) 1488/1490
The Paint industry has a three-stage setup comprising of raw material 10 shares and multiples
Bid Lot
supplier, manufacturers and sellers. Most sales are driven through dealer thereafter
and distributor networks, which sell onwards to local buyers. Hardware Face Value Rs10
stores are usually the retailers in the paint and coating industry, while the
other major retailers may have paint and coating segments within their Listing BSE & NSE
broad range of offerings. Direct sales are a minor component of overall sales.
Type of Issue Offer for Sale & Fresh Issue
India Per Capita Paint Consumption: Fresh Issue 3,000
India's per capita paint consumption increased by a CAGR of 6.8% in the last
Offer Size (Rs Mn) OFS 8,702
seven years from 2.6kg in FY12 to 4.1kg in FY19. Compared to the global
average consumption of approximately 14kg to 15kg per capita, the per Total 11,702
capita consumption of paints and coatings in India is low, indicating a *Implied Market Cap
significant opportunity for market penetration in India. 70,878
(Rs Mn)
Exhibit 01: India’s Per Capita Consumption of Paints & Coatings v/s key P/E (based on FY20 Earnings)* 148.2
Global Economies (in kg), 2019
*Note: Implied Market Cap & P/E are calculated at upper price
band of Rs1490
Issue Allocation
Reservations % of Net Issue
QIB 50
NIB 15
Retail 35
Total 100
Employee Reservation: Upto 70,000 Equity Shares
Employee Discount: Rs148/- per share
Object of the Offer
Source: Company RHP, Progressive Research
Funding capital expenditure for expansion of
existing manufacturing facility at Pudukkottai,
Exhibit 02: Per Capita Consumption of Paints & Coatings India
Tamil Nadu by setting-up an additional unit
adjacent to the existing facility
Purchase of tinting machines and gyroshakers
Repayment/prepayment of all or certain of the
borrowings
General corporate purposes
Source: Company RHP
Please Turn Over Page No 1IPO UPDATE
Indigo Paints Limited
Industry: (contd.)
Exhibit 03: Market size of the Indian paints market by product type, in value (Rsbn) and in volume (MMT), for 2014, 2019
and 2024 (forecast)
Source: Company RHP
The high growth trajectory and shift of preference towards odour free, dust and water resistant paints can be attributed to the
rise in urbanization, growth in the popularity of branded paints, shortening of the re-painting cycle and robust pricing power
prevalent in the paint industry. An increase in demand is expected for both the decorative and industrial paints with massive
infrastructure initiatives by the Government of India.
The decorative segment has grown at a CAGR of 11.5% from FY14 to FY19, driven by the increase in consumption of paints in
Tier 2-4 cities, that account for nearly half the total sales. The decorative paints segment represents around 74% of the overall
paint market in India and includes wall finishes for interior and exterior use, enamels, wood finishes and ancillary products such
as primers and putties. Over the past five years, the share of decorative paints has increased from 67% to 74% (FY19).
Exhibit 04: Market size of Indian decorative paints market, in value (Rsbn) & in volume (MMT), for 2014, 2019 & 2024
(forecast)
Source: Company RHP
The Indian decorative paints market is expected to growth at a CAGR of approximately 13% in terms of value and 10.2% in terms
of volume through 2024 driven by a number of factors including increase in the disposable income of individuals and families and
various housing schemes. The Government schemes and policies like ‘Housing for All’ will also be a major driver for growth of
fresh painting. With more such initiatives targeted for the regional population, the demand from smaller cities and towns is
estimated to grow faster benefitting companies like Indigo Paints, which already has an established presence in these
geographies.
Please Turn Over Page No 2IPO UPDATE
Indigo Paints Limited
Industry: (contd.)
Exhibit 05: Indian decorative paints industry, segmented based on sub-product type, in terms of value (Rsbn), for 2014, 2019
and 2024 (forecast)
Source: Company RHP
Entry Barriers:
The Indian decorative paint industry has significant entry barriers. These market entry barriers include the development of an
extensive distribution network through long-term relationships with dealers, the ability to set up tinting machines with dealers,
as well as significant marketing costs and the establishment of a distinct brand to gain product acceptance.
About the Company:
Indigo Paints Limited (Indigo Paints) is engaged in the business of manufacturing paints and is the fastest growing amongst the
top five paint companies in India. It is the fifth largest company in the Indian decorative paint industry in terms of revenue from
operations for FY20. It manufactures the complete range of decorative paints including emulsions, enamels, wood coatings,
distempers, primers, putties and cement paints. It is the first company that started manufacturing certain differentiated products
like Metallic Emulsions, Bright Ceiling Coat Emulsions, Tile Coat Emulsions, Dirtproof & Waterproof Exterior Laminate, Floor Coat
Emulsions, Exterior and Interior Acrylic Laminate and PU Super Gloss Enamel. The multipronged approach by the company
includes introducing differentiated products to create a distinct market in the paint industry, building brand equity for the
primary consumer brand, creating an extensive distribution network and installing tinting machines across the dealer network.
The company sells its products under the brand of 'Indigo', through its distribution network across 27 states and seven union
territories (as on September 2020). Indian cricketer Mahendra Singh Dhoni is its brand ambassador.
Business Operations:
The portfolio of decorative paint products comprises emulsion paints, enamels, wood coatings, distempers, primers, putties and
cement paints. The company manufactures and sells most of its products under the “Indigo” brand of paints. The products are
categorised into four price points namely Platinum Series, Gold Series, Silver Series and Bronze Series. The portfolio of Indigo
Differentiated Products comprises category-creator products and value-added products and are differentiated from other paint
products based on their properties and the end-use they are designed to cater to. These products account for approximately
28% of the sales in FY20. To create demand for their differentiated products, Indigo Paints initially tapped Tier 3, Tier 4 Cities,
and rural areas, where brand penetration is easier and dealers have greater ability to influence customer purchase decisions
(Source: F&S Report). They subsequently leveraged this network to engage with dealers in Tier 1 and Tier 2 Cities and Metros as
well.
Indigo’s slow and steady distribution which meant addition of only one state every year and focusing on smaller markets has
helped build a decent dealer network of 11,000 dealers vs 25,000-30,000 for Berger and Kansai.
Please Turn Over Page No 3IPO UPDATE
Indigo Paints Limited
About the Company (contd.):
Competitive Strengths:
Track record of consistent growth in a fast growing industry with significant entry barriers
Differentiated products leading to greater brand recognition and enabling expansion into a complete range of decorative
paint products
Focused brand-building initiatives to gradually build brand equity
Extensive distribution network for better brand penetration
Leveraged brand equity and distribution network to populate tinting machines
Strategically located manufacturing facilities with proximity to raw materials
Strategies:
Continue to focus on developing differentiated products to grow market share
Further strengthen the brand to consolidate position as a leading paint company in India
Deepen penetration in existing markets and expand presence in select new territories by populating tinting machines
Expand the manufacturing capacities
Proposed Expansion Plans:
The company will utilise funds from its fresh issue for the expansion of the manufacturing facility at Pudukkottai in Tamil Nadu,
purchasing tinting machines and gyroshakers and repaying borrowings. In order to meet the growing demand for water-based
paints, the company has proposed to expand its Pudukkottai facility to include capacities for manufacturing water-based paints,
distempers and primers on a land parcel that it owns which is adjacent to the existing manufacturing unit. Consistent with past
practice, it will look to add capacity in a phased manner to ensure that it utilizes capacity at optimal levels. Post completion of
the proposed expansion plans, the expansion unit is expected to have an estimated installed capacity of 50,000 KLPA and is
expected to be operational during FY23. The company is also in the process of carrying out capacity expansion plans at its
existing Jodhpur facility. These additions are being carried out at both Unit I and Unit II with respect to liquid paints such as
emulsions and primers, and powder paints such as putties.
Financials:
During FY20, Indigo reported revenue of Rs6,248mn net profit of Rs478mn. The operating leverage doubled the PBT to Rs670mn
for the same period. The company has clocked 47% sales CAGR over FY15-20 (organic growth CAGR: 40%+; relative market share
has moved from near-zero to 2.5% over FY15-20 in decorative paints). The company has incurred high ad spends in the last 4-5
years and is now leveraging its brand equity to strengthen the presence of tinting machines across retailers. The average working
capital cycle of 23 days is the lowest in the business. Over the last 2-3 years, the company has been aggressively expanding its
geographical footprint and increasing its brand salience. Post the IPO, Indigo would be a debt free company. Compared to the
peers, in FY20, Indigo reported ROE of 24.3% which is slightly lower than Asian Paints and Berger Paints India but better than
Kansai Nerolac Paints and Akzonobel. The firm has doubled its PAT margins from 3.2% in FY18 to 7.7% in FY20 while peers like
Asian Paints and Berger Paints India were able to increase margins by 2.5% and 3.4%, respectively. As the differentiated products
account for 28% of the sales, the company’s material cost at 51% to the revenues is the lowest among all the listed peers. The
balance sheet remains healthy with D/E ratio merely at 0.13x as on 1HFY21.
Exhibit 6: Financials Snapshot
Revenues (Rs mn) FY18 FY19 FY20 6M ending Sept,2020
Sales 3,951 5,356 6,248 2,594
EBITDA 258 541 910 481
EBITDA Margin % 6.5 10.1 14.6 18.5
Net Profit After Tax 129 269 478 272
Net Profit Margin % 3.3 5.0 7.7 10.5
Earning Per Share 2.9 6.0 10.6 6.0
RoNW (%) 10.1 18.2 24.3 12.1
Source: Company RHP, Progressive Research
Please Turn Over Page No 4IPO UPDATE
Indigo Paints Limited
Risks & Concerns:
Inability to protect, strengthen and enhance the existing brand could adversely affect business prospects and financial
performance
The continuing impact of Covid-19 pandemic on business and operations is uncertain
It is a highly competitive business and any failure to effectively compete could have a material adverse effect
The company does not enter into long-term arrangements with dealers and any failure to continue the existing
arrangements could negatively affect business and results of operations
The proposed capacity expansion plans relating to manufacturing facilities are subject to the risk of unanticipated delays
in implementation and cost overruns
A significant portion of the sales are derived from the state of Kerala and any adverse developments in this market could
adversely affect business
The business is working capital intensive. If the company experiences insufficient cash flows from operations or is unable
to borrow to meet the working capital requirements, it may materially and adversely affect business and results of
operations
Improper storage, processing and handling of raw materials and finished products may cause damage to inventory
leading to an adverse effect on business, results of operations and cash flow
The business is subject to seasonal variations and cyclicality that could result in fluctuations in results of operations
Outlook and Recommendations:
Indigo is the 5th largest player in the highly competitive paint industry. With zero industrial paints, (which is a drag for the peers
off late) the differentiated products and heavy advertising spends of the company would help it make inroads in the highly
competitive industry with high entry barriers. Indigo Paints clocks healthy margins despite the lower scale leaving scope for some
more operating leverage going forward. The company stands strong to grow in the oligopolistic sector of the consumption space
which is already growing in double digits. The IPO is valued at 140x FY20 and 123x FY21 annualized earnings, which appears to be
priced aggressively, but then the growth prospects look to be better than peers. Considering factors like the expansion
programme, increasing brand awareness, debt reduction, cost controlling measures and huge opportunity from affordable
housing segment, the company does justify the premium valuations. With a positive outlook on the paints sector, we feel that
the company with its strong margins and future growth potential is a promising candidate both from the listing as well as long
term portfolio addition perspective. We thereby recommend a Subscribe to the IPO.
Page No 5IPO UPDATE
Indigo Paints Limited
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