Indigo Paints- Be surprised!

Before making a decision on whether to invest in Indigo Paints IPO, let’s take a step back and understand why should we invest in the paint industry.

  • India’s per capita paint consumption has increased by a CAGR of 6.8% in the last seven years from 2.6 kg in Fiscal 2012 to 4.1 kg in Fiscal 2019. Currently, the global average consumption of paint is approximately 14 kg to 15 kg per capita leading by the USA, Singapore, and Canada. However, the per capita consumption of paints and coatings in India is still low, indicating a significant opportunity for market penetration in India.
  • The average re-painting of the housing cycle has gradually reduced from an interval of 7 to 8 years in 2010 to 4 to 5 years in 2019 (mostly interior painting). Earlier the major factor for re-painting the house was the life of the paint coat i.e., repainting was done only when paint withered. However, this trend has been changing gradually with some consumers giving more importance to aesthetics, change in looks and appearance of their premises at regular intervals even while the condition of the existing paint is good.
  • Reduction in GST rate from 28% to 18% for paints has increased the volume of decorative paints.
  • Initiatives are taken by the Indian government policies like Pradhan Mantri Awas Yojana, Smart city mission, AMRUT has helped to increased the demand for paint and re-painting in the future.
  • The Indian paint industry has witnessed a steady change in consumer preferences, from the traditional whitewash to high-quality paint categories like emulsions and enamels. This premiumization trend is expected to continue and provide stability & growth to the Indian paint industry.
  • Demand for automobiles is increasing which helps to boost the demand for industrial paints.
  • Pick up in construction and housing demands also boosts the demand for paint.
  • In the longer run, the paints industry is expected to grow on account of an increase in disposable income, rising urbanization, rural economy, increasing trend of nuclear families, and improving lifestyles.

Basic information about Indigo Paints

  • The company was promoted by Hemant Jalan, Anita Jalan, Parag Jalan, Kamala Prasad Jalan, and Halogen Chemical Pvt. Ltd in the year 2000.
  • Indigo Paints is engaged in the business of manufacturing paints and is the fastest growing amongst the top five paint companies in India. It’s the fifth-largest company in the Indian decorative paint industry in terms of our revenue from operations for Fiscal 2020.
  • Their main competitors are Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel. Other competitors also include other small paint companies with a sizeable presence include Shalimar Paints, Nippon Paint India, Kamdhenu Paints, and JSW Paints. Paint companies with a lesser presence include Jenson & Nicholson Paints Private Limited (JNPL), Snowcem Paints, and Jotun Paints.
  • Its product portfolio includes interior and exterior emulsions, enamels, wood coatings, putty, primers, and ceiling and floor coats.
  • Unlike the bigger players, Indigo Paints entered the market consisting of small cities, towns, and Rural Areas. Now they are leveraging their brand in Metros and Tier 1 Cities.
  • Indigo Paints has achieved this position in a highly competitive Indian decorative paint industry on the back of their multi-pronged approach. This includes introducing differentiated products (like metallic emulsions, tile coat emulsion, bright ceiling coat, floor coat emulsion) to create a distinct and niche market in the paint industry, building brand equity for their primary consumer brand i.e. “INDIGO”, creating an extensive distribution network across 27 states and 7 union territories as of September 30, 2020, and installing tinting machines across our dealer network.
  • As of September 30, 2020, Indigo Paints owns and operates 3 manufacturing facilities located in Rajasthan, Kerala, and Tamil Nadu, with an aggregate, estimated installed production capacity of 101,903 kilolitres per annum for liquid paints and 93,118 metric tonnes per annum for putties and powder paints.
  • They have engaged Mahendra Singh Dhoni as their brand ambassador rather than a Bollywood celebrity for better connect & pan-India appeal.

Why Indigo Paints is coming up with IPO?

The initial public offering (IPO) of Indigo Paints will hit the markets on January 20 and close on January 22, 2021.

The price band has been fixed at Rs 1,488–1,490 per share, according to its red herring prospectus.

  • The issue opens on: Jan. 20
  • The issue closes on: Jan. 22
  • Face value: Rs 10 apiece
  • Minimum Bid: 10 shares.

Its IPO structure looks like this —

The extra cost of ₹ 355.49 million will be funded from internal accruals by the company.

Below is the current holding in the company. The rows highlighted in green are the selling shareholders.

Let’s take a look into its financials —

Strengths

  • The majority of the revenue comes from the emulsion product category. They also launched many differentiated products under this category. In order to meet the growing demand for water-based paints, they are planning to expand their Pudukkottai (TN) facility to include capacities for manufacturing water-based paints. It’s a good sign to understand the company’s future growth.
  • Growth of revenue from operations in CAGR terms has increased the most for Indigo Paints. The COVID pandemic hasn’t affected the company as much as it has affected its peers due to demand from rural areas or smaller towns of India. Look at the table below —
  • The company’s gross margin is also in line with its peers. One of the key factors that helped Indigo Paints garner a high growth rate is the company’s prominence in product innovation. The company’s innovative products have helped them expand their distribution reach, as most retailers aspire to stock their unique products.
  • The management team is very strong. Hemant Jalan is the Managing Director and Chairman of the company. He has over 20 years of experience in the paint industry.
  • The stock’s face value is Rs. 10 which is higher than Asian Paints, Berger Paints, and Nerolac Paints. When a company will start paying dividends, it’ll be good for investors in the long-run.

Risk

  • The paint industry has homogeneous products, which makes it difficult for customers to differentiate. So it is very important for a company to create a brand. Asian Paints, Berger Paints, Nerolac are already a brand now. In order to gain the same traction from the market, Indigo Paints has to spend lavishly on marketing and promotion of its product. That’s why the company’s advertising expense is very high compared to its peer, which hurts profit margin. Mr. Hemant Jalan in one of his interviews has also mentioned that advertisement expenses will increase in the future but at a modest rate. Below are the company-wise advertising and promotion expenses, as a percentage of sales:-
  • The company’s profit after tax margins is far less than its peers due to high marketing and freight cost. Indigo Paints’ outward freight costs are higher as compared to the others as its plants are closer to the raw material sources and it has to port longer distances for product delivery.
  • Return on equity — ROE is a measure of management’s ability to generate income from the equity available to it. It’s very low for Indigo Paints as compared to its peers.
  • A significant portion of its sales are derived from Kerala, and any adverse development in this market could adversely affect business. In Fiscal 2020 revenue generated from sales in the state of Kerala represented 34.56% of our revenue from operations and revenue generated from the Southern region represented 46.33% of our revenues from operations in Fiscal 2020.
  • Installing tinting machines has been crucial in improving reach and enabling dealers to meet customer requirements, thereby reducing the expense of inventories. The stiff resistance for installation of these machines is encountered by dealers due to lack of physical space at their counters. As a result, most dealers tend to install tinting machines of only recognized players. Hence, it’ll be very challenging for Indigo Paints to increase the market share.
  • As demand in metro and urban cities is still recovering, large paint players have started increasing their existing presence in smaller towns and rural areas. In the last few quarters, Asian Paints and Berger Paints witnessed improvement in volumes, particularly in their low-end products, bolstered by semi-urban and rural demand. Large players can reduce prices to gain market share with less impact on the margins, making it difficult for Indigo Paints to sustain.
  • Indigo Paints P/E ratio for FY20 is 146.8, which shows that the company is overvalued.

My take on this IPO

  • As we have seen above, the company’s Price-to-Earnings ratio is higher than its peers which makes this stock costlier at this point.
  • Indigo’s product offerings are concentrated in the decorative paint business and the decorative paint business is more dependent on real estate, which makes its revenue stream more prone to volatility in the real estate sector. As of now, they don’t have any plans to expand into home décor and industrial paints businesses.
  • There are good chances that the company will be a big name in the paint industry due to its innovative and differentiation approach, but there is a long way to go.

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