Indigo Paints IPO opens on January 20; Should you invest?

Sequoia Capital-backed company claims to be the fifth largest paints manufacturer in India

Staff Writer   /   January 18, 2021
ipo

Indigo Paints Ltd will open its initial public offer (IPO) for subscription on January 20 with a price band of Rs 1,488-1,490 per share. The company is targeting to raise Rs 1,170 crore for the IPO. The Indigo IPO opens on 20th January 2021 and closes on 22nd January 2021. Here are 10 things you must know about this upcoming IPO. 

1. The beginning

From a humble start in 1999-2000, when it set up a cement paint manufacturing unit in Jodhpur, Indigo has become the fifth largest decorative paint manufacturer in India.

The company today has three manufacturing facilities – in Jodhpur, Kochi and Pudukkottai, strategically located in close proximity to the company’s raw material sources.

As of FY20, the company had a distribution network of 36 depots and 11,230 active dealers and a tinting machine population of 4,296 across India. Indigo is currently present in 27 states and 7 union territories as of date.

2. Fresh issue plus offer for sale

The public issue of Indigo Paints consists a fresh issue of Rs 300 crore and an offer for sale of 58,40,000 equity shares by investors Sequoia Capital India Investments IV and SCI Investments V, and the promoters Hemant Jalan. The offer for sale portion can fetch Rs 870 crore at the upper price band of Rs 1,490 per share.

The offer includes a reservation of up to 70,000 equity shares for subscription by eligible employees of the company. Eligible employees will get these shares at a discount of Rs 148 per share to the offer price.

3. How Indigo is different

Compared to the top 4 players, around 28% of the company’s revenue comes from highly differentiated products, which have high gross margins. Such differentiated products take about 4-5 years to gain traction and the company believes that by the time larger players try to enter these categories, Indigo is already the leader in them.

Indigo has entered one state every year since inception. It follows a bottom-up approach for entering a new geography i.e., first it enters tier 3/4 towns & rural areas and then penetrates into larger cities. Around 85 per cent of the company’s sales come from areas with population less than 300,000-400,000, whereas for the large players, about 50-55% sales come from small towns & rural areas.

In terms of dealer base and tinting machines, the company intends to grow at a faster pace in the coming years. At a dealer base of 11,230, Indigo is inching closer to the No. 4 player but has a long way to go compared to the market leader’s base of +70,000. About 40 per cent of Indigo’s dealers have its tinting machines. This ratio stands at 90 per cent for Asian Paints and 65-70 per cent for Berger Paints.

4. Better margins

Given that Indigo generates nearly 28% of its revenue from high gross margin differentiated products where no discounts are offered, the company’s overall gross margin tends to be higher compared to its peers.

Further, since the company’s plants are located in close proximity to raw material sources, inward freight costs are lower, thereby aiding higher gross margins.

In terms of A&SP spends, all the large paint companies have been advertising for emulsions, but Indigo has been focusing on advertising its
differentiated products over the past 4-5 years. In absolute terms, core media spends of Indigo was as high as that of Berger Paints and Kansai Nerolac.

The company claims low attrition rate as it prefers to recruit freshers even for the mid-level management (which has fair amount of responsibility, thereby driving employee performance) and eventually incentivizing them with variable compensation and ESOPs.

5. Fresh issue of shares worth Rs 300 cr use

The proceeds of the fresh issue are proposed to be utilized for financing the project cost towards expansion of the Pudukkottai (Tamil Nadu) plant (likely to commence in August 2022), purchase of tinting machines & gyro shakers and repayment/prepayment of certain borrowings.

6. Finances

Post the IPO, Indigo would be a debt free company.

Sequoia Capital, which invested in FY15, intends to remain invested for another 5-6 years.

Indigo’s average working capital cycle of 23 days is the lowest in the business.

From P&L perspective, Indigo Paints reported net sales of Rs 625 crore in FY20. First half or FY21 net sales is Rs 260 crore, due to Covid impact.

FY20 adjusted profit after tax is Rs 48 crore, a growth ofof 50 per cent. Profit margin in last few years has been between 4-10 per cent.

As per the management, the company has a significantly high level of corporate governance on account of Sequoia being a marquee investor and E&Y being the company’s auditor for the last 6 years.

7. Strategy

Since the conventional method of a top-down approach would have been counter-productive, the company took up a bottom-up
approach while entering new markets.

While large paint players have 12-15 sub-brands, Indigo has followed the one-brand strategy (similar to AMUL).

The company has no intention of manufacturing raw material for captive consumption.

Management finds it logistically feasible for manufacturing activities to remain in its current locations for the next
5-6 years.

Indigo Paints sees the decorative business opportunity in India to be huge and thus has no plans to expand into home-décor/adjacencies/industrial paint businesses. It also does not have any plans to enter other countries for a long period of time. The company also does not have any component of institutional sales.

All large players use Bollywood personalities as their brand ambassadors while Indigo chose M.S. Dhoni.

8. Valuation, mcap

Indigo Paints is targeting a market cap of Rs 7,100 crore at the issue price. This implies a P/E multiple of 66 times FY22 and 44 times FY23 earnings assuming an earnings CAGR of 50 per cent over FY20-23.

In comparison, Asian Paints and Berger currently trade at 62 times and 73 times FY23 earnings, respectively..

9. Tough industry, weaknesses

Indigo Paints is the 5th largest player but it has 2.5 per cent market share only

Although there are fewer competitors, the competition is very stiff since the competing companies are bigger and have larger operational budgets. Hence, a small lapse of judgment can be costly.

Also, Indigo Paints spends a large portion of its revenue on marketing. In 2020, the company spent around 12.7 per cent of its revenue on marketing alone. This can put a strain on its finances in the long-run and seems unsustainable.

The trick for the company would be to continuously execute it’s strategy without flaws.

10. Kerala dependence

Indigo Paints derives a significant portion of sales from the state of Kerala. This puts a lot of emphasis on its business in the state and exposes it to risks.

Just to give you an idea, Kerala is the largest revenue generating state for the company where it ranks third (Asian Paints is the leader, followed by Berger). Around 7-8 states compete for the second and third spot for the Indigo Paints (including states like West Bengal, Bihar, Maharashtra, Uttar Pradesh, etc)

Listing details

IPO Open Date: Jan 20, 2021IPO Close Date: Jan 22, 2021Allotment Date: Jan 28, 2021IPO Listing Date: Feb 2, 2021

Face Value₹10 per equity share
IPO Price₹1488 to ₹1490 per equity share
Market Lot10 Shares
Min Order Quantity10 Shares
Listing AtBSE, NSE

Company Promoters:

Hemant Jalan, Anita Jalan, Parag Jalan, Kamala Prasad Jalan, Tara Devi Jalan and Halogen Chemicals Private Limited.

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