Indigo Paints IPO Note
Indigo Paints is coming out with an IPO consisting of a Fresh Issue of Rs.300 Cr and Offer for Sale of up to 5,840,000 equity shares with a Total Size of Rs.1,168- Rs.1,169 Cr. The IPO will open on 20th to 22nd January and the price band is fixed at Rs.1,488 – Rs.1,490 per share for a lot size of 10 shares per lot bid.
Indigo Paints was started in the year 2000 and since then it has become the fastest growing paint company in India. It grew its revenues at a CAGR of 41.9 percent between FY10-FY20 as compared to mere 12-13 precent growth by top four paint companies in the same period. This robust growth was achieved in a highly oligopolistic market on the back of its multi-pronged approach including introducing differentiated products to create an altogether distinct market. Indigo was the first company to introduce category-creator products like Metallic, Tile Coat, Ceiling and Floor Coat Emulsions and many more. Currently, 28 percent of its value sales come from differentiated product categories. Indigo uses a bottom-up approach to tap into newer markets as it enters into Tier 3-4 and rural markets first to capture a larger base of dealers and then moves to Metros and large cities. The current dealer count of Indigo stands at around 11,230 which has grown at a CAGR of 10.4 percent from FY18-FY20 as compared to 70,000 active dealers of Asian Paints for FY20.
As of Sep 2020, Indigo Paints owns and operates 3 manufacturing facilities located in Rajasthan, Kerala and Tamil Nadu. Indigo Paints has consistently tried its best to chip away market share from the top paint makers, with near zero market share in FY15 to around 2.5 perfect market share in FY20 in decorative paints segments which shows it has done some commendable work to penetrate in a highly concentrated market where novice players haven’t dared to enter. But, since the company is commanding high valuations at a PE of 140.6 times (upper band) as compared to its major peers which are currently trading in the range of 125-59 times we are recommending investors to subscribe to this IPO for listing gains only for now.
Strong Financials
The company has grown its revenues at a CAGR of 16percent since FY18-20 and 42percent between FY10-FY19 as compared to the range of 12.1percent to 13.1percent recorded by the top 4 paint companies in India for FY10-20. Similarly, its profits have grown at a CAGR of 55percent from FY18-20 as compared to the range of 10-13percent recorded by the top players. It has also maintained decent PAT & EBITDA margins at 8percent and 15percent as of FY20 compared to its peers which ranged from 7-23percent. Indigo has clocked an average ROE and ROCE of 17.5percent and 36percent for FY18-20 respectively.
Risks
•Extremely High Competition with well-established players
•Skewed market presence (46percent of revenues come from southern regions mainly Kerala)
•Distribution Network Challenges
Despite heavy competition in the paint industry, Indigo Paints has not
only survived but has managed to become the fastest growing paint company (in terms
of Revenues) in India for the year FY20. We
recommend Investors to subscribe to this IPO for listing gains only.
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