The three-day initial public offering (IPO) of Indigo Paints will open for public subscription on Wednesday, January 20, and will close on January 22. The price band has been fixed at Rs 1,488-1,490 per share for the initial share sale.
At the upper end of the price band, the public issue is expected to fetch Rs 1,170.16 crore, which comprises Rs 300 crore through fresh issuance of shares and Rs 870.16 crore through offer-for-sale. Half of the issue is reserved for qualified institutional buyers, 35 per cent for retail investors, 15 per cent for non-institutional bidders and there is a reservation of up to 70,000 equity shares for subscription for employees, who will get a discount of Rs 148 per equity share to the offer price.
Proceeds from the fresh issuance of shares would be used for expansion of the existing manufacturing facility at Pudukkottai in Tamil Nadu, for purchasing of tinting machines and gyro shakers and repayment/prepayment of borrowings.
Set up in March 2000, Indigo Paints has quickly grown into India’s fifth-largest decorative paint company, aided by its focus on differentiated products and increasing its presence in tier-2/3/4 cities and rural areas. According to analysts, the company’s revenues (ex-acquisitions) have grown at a compound annual growth rate of 29 per cent in the past five years, making it the fastest growing paint company in that period.
Here’s what leading brokerages suggest regarding the offer.
Elara Capital — Subscribe
We believe Indigo will sustain sales CAGR of 26 per cent over FY18-20 by accelerating dealer additions and seeding tinting machines into existing dealers (38 per cent of active dealers vs peers’ 67 per cent) by expanding into new states and launching 4-5 specialized products every year. Headroom for dealer additions of 3x and tinting machines of 5x is huge and viable. At the upper band, the post money market cap stands at Rs 7,010 crore valuing it at 146x P/E and 11.3x EV/sales in FY20. With scale and rapid growth, we expect ad spend to grow slower than business growth, as it is already on the higher side at 12.7 per cent than peers’ 5.3 per cent and likely lead to better margin. We believe the issue is priced attractively, and, hence, we recommend ‘Subscribe’.
Angel Broking — Subscribe
Indigo Paints has a track record of consistent growth in a fast growing industry with entry barriers. The company has differentiated products leading to greater brand recognition and enabling expansion into a complete range of decorative paint. It also has leveraged brand equity and distribution network to populate tinting machines. Strategically located manufacturing facilities with proximity to raw materials helps to report better gross margins. We are positive on the long term prospects of the industry as well the company, we recommend ‘SUBSCRIBE’ to the Indigo Paints IPO for long term as well as for listing gains
Samco Securities — Subscribe
Indigo Paints is the fastest-growing paints company in India in terms of revenues, in a highly oligopolistic paint market. The company has introduced differentiated product categories such as Metallic and Tile coat emulsions. It has made its brand name despite strong entry barriers due to experienced players such as Asian Paints. Indigo Paints has roped in Mahendra Singh Dhoni as its brand ambassador and the company is actively present in the public eye due to their aggressive advertising and promotional (A&P) spends accounting to around 12.7 per cent of their revenue as compared to peers who spend close to 4-5 per cent.
Financials have been extremely strong for this paints player with minimal debt on its books. There are a few challenges in terms of setting up a wide distribution presence amidst well established players, its skewed market presence in South India especially Kerala and rich valuations at a PE of 140x compared to sector average of 95x. Therefore, investors can subscribe to Indigo Paints for listing gains only at the moment.
LKP Research — Subscribe
Indigo is the fastest growing paint company which has grown at a much faster pace in the last decade than any other paint company in India. The company has adopted a differentiated approach to market and sell its products in the industry which is dominated by the larger players. Indigo has been able to expand its Ebitda/PAT margins from 6.4 per cent and 3.2 per cent, respectively, in FY18 to 14.6 per cent and 7.7 per cent, respectively, on the back of economies of scale and better raw material sourcing. The company’s ROE & ROCE has also improved significantly to be at par with the industry leaders in the last five years.
Sharekhan — Unrated
Indigo Paints’ IPO is valued at 148x its post-issue FY20 EPS of Rs. 10.05 (and 130x its annualised FY2021 EPS of around Rs. 11.4), which is at premium to some of the listed paint companies. Indigo’s revenues and PAT grew at CAGR of 26 per cent and 84 per cent, respectively, over FY18-20. 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.