Indigo Paints IPO Financial Analysis (Subscribe)

Strengths

Launches differentiated products by identifying niche product opportunities on the basis of customer requirements.
Focused brand-building initiatives to gradually build brand equity which results instrong distribution network, brand recognition and ability to leverage our dealer relationships to install tinting machines.
Posted decent margins even after Covid as compared to its peers.
Experienced management and strong promoter background.

Challenges

65% of the decorative paint industry is dominated by the four major players. Hence, faces stiff competition and paint industry is a high capital intensive business.
Significant portion of sales derived from the state of Kerala.In Fiscal 2020, revenue generated from sales in the state of Kerala represented 34.56% of revenue from operations and revenue generated from Southern region (comprising states of Karnataka, Kerala, Tamil Nadu, Telangana, Andhra Pradesh, Pondicherry) represented 46.33% of our revenues from operations in Fiscal 2020. Any natural calamity or change in social economic policies of the region could adversely impact the business.
Higher advertising and promotion cost to build its brand. Also has high outward freight cost as compared to the peers.

Business Profile

Indigo Paints manufacture a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints. The company has an extensive distribution network across 27 states and seven union territories as of September 30, 2020. As of March 31, 2018, 2019, and 2020, distribution network comprised 33, 33 and 36 depots, and 9,210, 10,246 and 11,230 active dealers in India, respectively. As of September 30, 2020, Indigo Paints had an employee base of 666 employees.

The company has introduced certain differentiated products in the decorative paint market in India, which includes Metallic Emulsions, Tile Coat Emulsions and Bright Ceiling Coat Emulsions among various others (called as Indigo differentiated products). Revenue generatedfrom sales of Indigo Differentiated Products represented 26.68%, 27.58%, and 28.62% of the total revenue from operations in Fiscal 2018, 2019 and 2020, respectively. Indigo utilises a number of avenues to promote the brand and products, including traditional media outlets, relationship with celebrity brand ambassador, and network of dealers.

As of September 30, 2020, the company owns and operates three manufacturing facilities located in Jodhpur (Rajasthan), Kochi (Kerala) and Pudukkottai (Tamil Nadu) with an aggregate estimated installed production capacity of 101,903 kilo litres per annum (“KLPA”) for liquid paints and 93,118 metric tonnes per annum (“MTPA”) for putties and powder paints.

The product portfolio comprises of

Emulsion paints,
Enamels and Wood coating
Cement paints and Putty
Distempers, primers and others.
Indigo Differentiated products

The products are categorised into four price points: Platinum Series, Gold Series, Silver Series and Bronze Series.

Indigo Paints Financial Review

Total revenue from operations reduced 4.8% to Rs 260.24 crore in H1FY21 from Rs 273.30 crore in H1FY20. But PAT increased to Rs 27.2 crore H1FY21 from 5.9 crore in H1FY20. Revenues reduced during the six months due to the nationwide lockdown imposed due to the pandemic but at the same time profits increased with reduced expenses. Financial performance for the last three fiscals has remained strong. For FY20, revenues increased by 16.65% to Rs 624.8 crore from Rs 535.63 crore driven by entering new markets, and increased demand for the products.PAT has also increased to Rs 47.71 crore as against Rs 27.03 crore in FY19. Operating and the net margins show an increasing trend since the last three fiscals. The margins can be seen from the table below.

Debt to equity is low at 0.23 in FY21. Indigo Paints posted a strong return on net worth of 24.21% in FY21.

Table 1 - Financials and Ratios (Amount in Rs Crore)
Title	H1FY21	FY2020	FY2019	FY2018
Total Revenue	260.24	626.44	537.26	403.1
Revenue from Operations	259.42	624.8	535.63	401.48
PAT	27.19	47.71	27.03	13.16
EBITDA	48.92	92.64	55.73	27.43
Total Assets	411.29	421.96	373.18	297.39
Cash and Bank	12.15	5.68	14.02	4.62
Cash generated from Operations	53.16	72.34	51.59	23.84
Operation Margin(%)	18.86%	14.83%	10.40%	6.83%
Net margin(%)	10.45%	7.62%	5.03%	3.26%

Valuation of Indigo Paints and peer comparison

The P/BV of Indigo paints at NAV of Rs 43.69 (FY20) comes at 34.10. At the upper price band of Rs 1490 and EPS being 10.61 for FY21, P/E is 140.43 which is higher than the industry P/E at 115.33.

Table 1 - Comparative Analysis of Indigo Paints with Competitors
Particulars	Indigo Paints	Asian Paints	Berger Paints	Kansai Nerolac paints	Akzo Nobel India Ltd.
Face Value per share	10	1	1	1	10
Total Income for FY20	626.44 Cr	20,515.56 Cr	6,434.34 Cr	5,305.5 Cr	2,699.4 Cr
Basic EPS	10.61	28.25	6.76	9.67	52.13
NAV per share	43.69	105.61	27.39	69.77	271.85
Return on net worth	24.27%	27.39%	24.66%	13.72%	19.18%
P/E	-	97.48	115.33	64.19	47.41

Outlook

The Indian paint industry has been witnessing a gradual shift in the preferences of people from traditional whitewash to high-quality paints like emulsions and enamel paints, which is providing the basic stability for the growth of the Indian paint industry. The pandemic has impacted the sales for the H1FY21 for the overall paint sector but the decorative paint segment might see a recovery. The Indian decorative paints market is expected to record a growth rate of approximately 13% in value and 10.2% in volume through 2024, driven by an increase in the disposable income of individuals and families, and various housing schemes. Further, healthy profitability and a strong balance sheet would continue to support the credit quality of the paint makers.

Indigo Paints is the fifth-largest company (market share of about 2%) in the Indian decorative paint industry in terms of revenue from operations for FY 20. The company has grown by investing in brand building and has outperformed its peers Asian Paints, Berger Paints, and others. CAGR from FY10-FY19 for Indigo has been 41.9% as compared to 12.8% of Asian Paints and 4.9% of Berger Paints. Also, the company has performed better during the pandemic with its revenue from operations falling by 5% as against 20% fall for Asian Paints.

The company’s prominence in product innovation has directed the company towards a higher growth rate. Indigo&rsquo's innovative products have helped them expand their distribution reach, as most retailers aspire to stock their unique products. The company has also leveraged on word-of-mouth publicity to create a niche space in the market. Hence, investors might subscribe to this IPO.

Reviewer recommends Subscribe to the issue.

Review By CA Priyanka Choudhary on 7th Jan 2021

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

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