Indigo Paints IPO Price Band, Ranking, Equity Shares, Valuation to Brand Ambassador I Important message for retails investors

Indigo Paints Limited (Indigo) is coming out with an initial public offer (IPO). Indigo Paints IPO consists of a fresh issue of equity shares amounting to Rs 300 cr and an offer for sale of Rs 869 - 870 cr. The price band for the said issue is Rs 1488-1490 per share. At the lower and upper end of the price band, the fresh equity issuance stands at 20.1-20.2 lakh shares. Offer for sale amounts to 58.4 lakh shares.

As far as ranking in the market is concerned, Indigo Paints is the fastest-growing among India’s top five paint companies. It is the fifth largest company in the Indian decorative paints industry with the market share of 2%. The company owns and operates three manufacturing facilities located in Jodhpur (Rajasthan), Kochi (Kerala) and Pudukkottai (Tamil Nadu). The company manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints.

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Indigo Paints has enrolled Mahendra Singh Dhoni, a sportsperson with pan-India appeal, as its brand ambassador. Indigo’s revenues and PAT clocked a CAGR of 26% and 88% over FY2018-20. Indigo Paints has the highest gross margins of around 48.5% compared to peers in the industry. Its OPM stood at 14.6% (rising by 800 bps as compared to FY2018).

Indigo Paints Industry analysis:

The Indian paints industry comprises a sizable portion of India’s GDP, valued at Rs 545 bn. The industry has registered a CAGR of approximately 11% during FY2014 to FY2019, almost double the growth rate of India’s GDP. The high-growth trajectory and shift of preference toward odour-free, and dust and water-resistant paints can be attributed to a rise in urbanisation, growth in popularity of branded paints, shortening of re-painting cycles and robust pricing power prevalent in the paints industry.

The decorative paints segment constitutes around 74% of total paint sales, helping the sector grow at a robust rate even at the time of an industrial slowdown. Going forward, the decorative paint market is expected to grow at a CAGR of 13% while the industrial paint market is expected to grow at a CAGR of 9.9% by 2024.

Within the paints industry, the organised sector has a 67% market share, while unorganised players hold the remaining 33%. Until 2015, the unorganized sector had a market share of approximately 35%, which has been penetrated by the organized sector due to challenges faced by smaller players such as demonetisation and implementation of GST.

Indigo Paints Valuation and view:

Indigo Paints’ IPO is valued at 148x its post-issue FY20 EPS of Rs 10.05 (and 130x its annualised FY2021 EPS of Rs 11.4), which is at premium to some of the listed paint companies. Indigo’s revenues and PAT grew at CAGR of 26% and 84% over FY2018-20. Product innovation (largely differentiated products), increase in dealers reach (especially in the large cities) and support for products with adequate brand investments will be the key growth levers in the coming years. Though Indigo’s valuations are at premium to peers, Strong financial track record, promoters experience and confidence to lead the business coupled with industry par return profile makes it an emerging play in the domestic decorative paint industry.

Indigo Paints Strong financial track record with improving cash flows:

Indigo paints revenues grew at CAGR of 25.8% over FY2018-20 to Rs 625 cr. Indigo paints gross margins stood at 48.5% in FY2020 compared to 41.5% in FY2018. Better working capital management aided net working capital days standing low at 20- 23days. The cash generation from operating activities improved by to Rs 72 cr from Rs 48.5cr over FY2018- 20. Higher cash generation took care of the capex programme. Hence debt: equity remained stable at 0.3x. The company has a strong return profile with RoE and RoCE (pre-IPO) standing at 24.2% and 28% respectively.