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Indigo Paints IPO Review and Analysis in Detail

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Basis Structure of Indigo Paints IPO

 

Another IPO which has lined up in this IPO festival is Indigo Paints IPO. This IPO is expected to hit the primary markets in early 2021.

The company filed its draft papers in January 2020 and the Indigo Paints IPO size is about ₹ 1000 crores.

The Indigo Paints IPO is of the book-building nature. This means the shares that are being offered are quoted with a price band. The other kind of offering is called fixed price offering, and this is characterized by a fixed price for the shares that are on offer.

There will be both a fresh issue segment and an offer for sale segment to the offering.

The fresh issue segment has been sized at ₹ 300 crores. It will include those shares which are being newly issued by Indigo Paints. This amount has been earmarked to fund the expansion in the manufacturing facilities in Tamil Nadu and the purchase of other required machinery.

A part of the proceeds from the fresh issue will also be used to repay some of the borrowings of the company. About ₹ 25 crores will be utilized in this purpose.

The offer for sale segment has been sized at ₹ 700 crores. This includes those shares which are being sold by existing shareholders. These shares are not being diluted by the company. In this case, the transaction is between the existing shareholders and the new shareholders.

The table below summarizes the details about the Indigo Paints IPO. Details about the Indigo Paints IPO share price, Indigo Paints date 2020, Indigo Paints IPO listing date and more have been included.

IPO Details

After the IPO, the Indigo Paints shares will be listed on both NSE and BSE.

 

About the Company

 

Indigo Paints was established in the year 2000. It is currently the fifth-largest decorative paint company in India, in terms of operational revenue.

The company has three manufacturing facilities in Rajasthan, Kerala and Tamil Nadu. The facility in Tamil Nadu is relatively new, and much of the proceeds from the IPO will be utilized in the expansion of this facility.

As of September 2020, Indigo Paints had a total capacity to manufacture 1,01,903 kilos of liquid paint every year.

 

Customers

 

Indigo Paints operates on a B2C business model.

The company has an extensive network of distributors and dealers stretching across the country. It has a greater presence across the tier 3 and tier 4 cities, along with rural areas of India.

As of 2010, Indigo Paints’ distribution network comprised over 11,000 active dealers.

 

Products & Services

 

The products of Indigo Paints can be divided into four sub-categories.

1. Cement Paints and Putty

2. Emulsions

3. Enamels and Wood Coatings

4. Primers, Distempers and Others

The graph below shows the revenue split-up among the different product categories.

Product Category

 

Promoter Shareholding Pattern

 

The table below lists out the shareholding pattern for Indigo Paints prior to the IPO.

Promoter Shareholding

 

Financial Overview of Indigo Paints IPO

 

The table below lists out the important financial figures for Indigo Paints from 2017 to 2020. All the figures are in Rs. Crores.

Financial Overview

Based on the financial figures, Indigo Paints shows clear growth trends. Between 2017 and 2020, the total revenue increased at a CAGR of 29.24%. As for the total assets, that showed a CAGR of 19.61%.

Total Revenue

Net Profit

2017 was not a profitable year for Indigo Paints. It reported a net loss of Rs. 17.58 crores. Between 2018 and 2020 however, the net profit of Indigo Paints showed a CAGR of 57.63%.

As for long-term debt, Indigo Paints does have a debt burden. However, a part of the proceeds from the fresh issue segment of the IPO has been earmarked to repay the debt burden.

 

Industry Analysis

 

The market for paints and coatings has been growing steadily over the years. Between 2014 and 2019, the industry recorded a CAGR of about 11%.

The Indian paint industry is valued at approximately ₹ 54500 crore and is expected to grow to amount to ₹ 97100 crores by 2024.

Market Split-Up

Market Split-Up 2

Indigo Paints primarily operates in the sub-category of decorative paints. Currently, this segment makes up of 74% of total paint sales. The decorative paint market is expected to grow at a CAGR of 13% while the industrial paint market is expected to grow at a CAGR of 9.9% by 2024.

Growth in decorative paints

India's per capita paint consumption 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. The graph below shows the increase in per capita consumption of paint in India over the years.

Growth in per capita consumption

Although on a domestic level, the per capita consumption of paint has increased in India, as compared to the rest of the world, it is still very low. This indicates a significant opportunity for market penetration in India.

Global per capita consumption

Unlike the major entities, Indigo Paints entered the market of small cities, towns and Rural Areas (Tier 3 –4) and effectively established itself as a market leader in selected categories within a short period of time, and is now venturing 137 into metros and Tier 1 Cities.

There is a significant untapped opportunity in Metros and larger cities that can be capitalized by Indigo Paints by expanding its distribution network.

The Indian decorative paint industry has been dominated by four major entities, with an aggregate market share of 65% in 2019. The graph below shows the market share of the top companies in this segment.

Market share

Asian Paints is the market leader in the Indian decorative paints category with a market share of 42%. Indigo Paints is 5th largest with 2% market share.

The market structure is such that most of the competition faced is from the established market leaders. The possibility of smaller firms entering is low.

The industry is characterized by significant barriers to entry. This is primarily due to the nature of the manufacturing and distribution process.

Manufacturing requires a significant initial capital outflow – factories need to be set up, raw materials need to be acquired and expensive machinery needs to be purchased. Apart from that, there is the requirement of a proper distribution network for the sales process.

Therefore, the chances of competition from new entrants is low here.

 

Peer Comparison of Indigo Paints IPO

 

The table below shows the key financial parameters for the comparison of Indigo Paints with its peers.

Peer Review

Based on the revenue growth, Indigo Paints far exceeds its peers. However, the revenue contraction that we have seen in the other companies can be due, in part, to the effects of COVID-19 and the ensuing lockdown.

We also need to keep in mind that Indigo Paints is smaller in size than the other companies mentioned here. It is thus expected that Indigo Paints will have a faster growth rate.

Based on the other parameters, Indigo Paints’ performance is on the same level as its peers.

 

Strengths of Indigo Paints IPO

 

Among the strengths of Indigo Paints, there is the fact that the debt burden is low. Not only that, a part of the proceeds from the IPO will be used to repay the debt burden, thus strengthening the company’s books.

The decorative paints industry is one in which marketing and branding efforts goes a long way. Visibility plays a huge role here, and Indigo Paints has invested a lot to build their brand image. The cricket superstar Mahindra Singh Dhoni is the brand ambassador of the company.

Apart from that, the financial figures of the company indicate that its growth rate is the fastest among its peers. Despite the effects of COVID-19, the company’s operational revenue grew at 16.65% in the past year.

 

Weaknesses of Indigo Paints IPO

 

Indigo Paints faces stiff competition from its few peers. These other companies are bigger, have a larger scale of operations and a larger operating margin. Any missteps from Indigo Paints can therefore be easily utilized by its peers.

A significant portion of the revenue of Indigo Paints is spent on marketing. In 2020 alone, the company spent 12.7% of its sales proceeds on marketing. This will, of course, place a strain on the company’s budget.

 

Valuation of Indigo Paints IPO

 

The table below lists out the most important valuation parameters for Indigo Paints and its listed peers.

Valuation

In the decorative paints category, the average P/E ratio is in the region of ₹ 94.10. As a thumb rule, if the P/E ratio of the company is below the industry average, then that company is undervalued.

As per the pricing band, the P/E ratio for Indigo Paints is 140.43. This means the company is overvalued.

If we put the intelligent investors’ formula which has been derived by Benjamin Graham itself, we get,

FY20 Profit = ₹47.81 crore

Growth Rate = 8%

Value = 47.81 * (8.5 + (2*8))

          = 47.81 * 24.5

          = ₹1171.34 crores

According to the Intelligent Investor formula, the value derived above is the intrinsic value of the company on the basis of the earnings growth. If we consider a 10% margin of safety, the value comes out as follows.

By deduction of the margin of safety = 1171.34 – 10%

                                                          = ₹1054.21 crore

As per the basis structure, the market capitalisation of Indigo Paints is ₹1168.16 crores. Thus we see, even on the basis of the Intelligent Investor formula, the IPO is overvalued.

 

Frequently Asked Questions

 

1. How to apply in Indigo Paints IPO through Zerodha?

Simply log onto the Zerodha website or the Zerodha mobile app. Select the Indigo Paints IPO from the IPO menu. Select the number of lots and submit your bid.

2. When Indigo Paints IPO will open?

The subscription window for the Indigo Paints IPO will open on January 20 and will close on January 22.

3. What is the lot size of Indigo Paints IPO?

The lot size of Indigo Paints is 10 shares. This means you have to bid on a minimum of 10 shares. If you want to bid on more than 10 shares, you will have to do so in multiples of 10 – that is, 2 lots for 20 shares, 3 lots for 30 shares and so on.

4. How to apply for Indigo Paints IPO?

There are two ways to apply for an IPO. You can apply either through UPI or through ASBA (net-banking).

In order to apply, simply log on to your brokerage house’s website, select the IPO for which you want to apply, select the number of lots that you want to bid for, and submit your bid.

5. When is Indigo Paints IPO listing date?

The listing date for Indigo Paints shares is February 2, 2021.

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