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Monday, 18 January 2021
CM RATING 45/100

Indigo Paints

Fifth largest decorative paint company

Differentiated products, focused brand-building initiatives, extensive distribution network and expanding capacities is expected to continue the growth momentum with margin expansion seen in the past

Started in 2000, Indigo Paints is the fastest growing and among the top five paint companies in India. It is the fifth largest company in the Indian decorative paint industry in terms of revenue from operations for FY 2020. It manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints. This includes introducing differentiated products to create a distinct market in the paint industry, building brand equity for their primary customer brand Indigo, creating an extensive distribution network across 27 states and seven union territories as of September 30, 2020, and installing tinting machines across its network of dealers.

The promoters of the company are Hemant Jalan, Anita Jalan, Parag Jalan, Kamala Prasad Jalan, and Halogen Chemicals Pvt Ltd. Hemant Jalan is the MD and Chairman. He holds a bachelor’s degree in technology in chemical engineering from the Indian Institute of Technology, Kanpur, Uttar Pradesh, a master’s degree in science from Stanford University and a master’s degree in business administration from the University of Chicago. He has over 20 years of experience in the paint industry. Anita Jalan is an Executive Director of the company. She has not received a formal educational degree. She has over 20 years of experience as a director in the company.

As of September 30, 2020, Indigo Paints owns and operate 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 tonnes per annum (mtpa) for putties and powder paints.

Indigo Paints is the first company to manufacture and introduce certain differentiated products in the decorative paint market in India, which includes their metallic emulsions, tile coat emulsions, bright ceiling coat emulsions, floor coat emulsions, dirtproof and waterproof exterior laminate, exterior and interior acrylic laminate, and PU super gloss enamel (togetherIndigo Differentiated Products). To create demand for their differentiated products, the company initially tapped into Tier 3, Tier 4 Cities, and rural areas, where brand penetration is easier, and dealers have greater ability to influence customer purchase decisions. The company subsequently leveraged this network to engage with dealers in Tier 1 and Tier 2 Cities and metros as well.

The company intends to expand its manufacturing capacities at its facility at Pudukkottai in Tamil Nadu, by adding capacities to manufacture water-based paints to cater to the growing demand for these paints. The proposed installed production capacity of the expansion unit is 50,000 klpa and it is expected to be operational during FY 2023

As of March 31, 2018, 2019, and 2020, Indigo Paints distribution network comprised 33, 33 and 36 depots, and 9210, 10246 and 11230 active dealers in India, respectively. As of March 31, 2018, 2019 and 2020, the total number of tinting machines that it has placed across its network of dealers was 1,808, 3,143 and 4,296, respectively.

The company engaged Mahendra Singh Dhoni, a sportsperson with pan-India appeal, as the brand ambassador, to enhance its brand image amongst end-customers. The company concentrated these branding efforts on their differentiated products and then leveraged these efforts to increase distribution and sale of their complete range of decorative paint products. Its advertisement and sales promotion expenses represented 11.22%, 12.63%, and 12.65% of its revenue from operations in FY 2018, 2019 and 2020, respectively

Capacity utilization for liquid paints was 71.80%, 57.64% and 47.49% in FY 2018, 2019 and 2020, and 30.06% and 20.77% in the six months ended September 30, 2019 and September 30, 2020, respectively. Capacity utilization for powder paints was 66.98%, 90.61% and 50.87% in FY 2018, 2019 and 2020, and 110.68% and 57.98% in the six months ended September 30, 2019, and September 30, 2020, respectively.

The Offer and the Objects

The offer comprises a fresh issue of 20,13,423 equity shares at upper price band of Rs 1490 and 20,16,129 equity shares at lower price band of Rs 1488 aggregating up to Rs 300 crore by the company and an offer for sale of up to 58,40,000 equity shares, aggregating to Rs 870 crore at upper price of Rs 1490 and Rs 869 crore at the lower price band of Rs 1488 by the selling shareholders. The company will not receive any proceeds from the offer for sale.

The offer for sale comprises up to 16,70,000 equity shares by Hemant Jalan (promoter selling shareholder) and up to 20,05,000 equity shares by Sequoia IV (Investor selling shareholder) and up to 21,65,000 equity shares by SCII V (investor selling shareholder).

The net proceeds of the fresh Issue are proposed to be utilized as Rs 150 crore towards funding capital expenditure for expansion of the existing manufacturing facility at Pudukkottai, Tamil Nadu by setting-up an additional unit adjacent to the existing facility, Rs 50 crore towards purchase of tinting machines and gyroshakers, Rs 25 crore towards repayment/prepayment of all or certain of its borrowings and balance as general corporate purposes.

The company acquired the Pudukkottai Facility in FY2016 through the acquisition of Hi-Build Coatings Pvt Ltd. As of September 30, 2020, the Pudukkottai facility had an installed estimated production capacity of 13,658 klpa. The company manufactures solvent-based enamels and primers, and wood coatings (both solvent-based and water-based) and certain other products at its Pudukkottai facility. The proposed installed production capacity of the additional Unit is 50,000 klpa and it is expected to be operational during FY 2023.

Strengths

The company is the fastest growing amongst the top five paint companies in India. It is the fifth largest company in the Indian decorative paint industry in terms of revenue from operations for Fiscal 2020.Indigo’s revenue has grown at a CAGR of 42% over FY 2010-FY2019. Even during FY2020, when all companies were affected by the outbreak of covid-19, Indigo managed to post a healthy revenue growth of 16%.

The Indian decorative paint industry presents significant entry barriers. These market entry barriers include the development of an extensive distribution network through relationships with dealers, the ability to set up tinting machines with dealers, as well as significant marketing costs and the establishment of a distinct brand to gain product acceptance.

The company identifies potential product needs from customers and introduces differentiated products to meet these requirements and create a distinct market for its products. For instance, it is the first company to manufacture and introduce certain differentiated products in the decorative paint market in India, which includes metallic emulsions, tile coat emulsions, bright ceiling coat emulsions, floor coat emulsions, dirtproof andwaterproof exterior laminate, exterior and interior acrylic laminate, and PU super gloss enamel (togetherIndigo Differentiated Products). These products are differentiated based on the end-use they cater to as well as added properties that they possess. Revenue generated from sales of Indigo differentiated products represented 26.68%, 27.58%, and 28.62% of its total revenue from operations in FY 2018, FY 2019 and FY2020.

The company manufacturing facilities are strategically located in proximity to raw material sources that reduces inward freight costs, lowering its cost of raw materials

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

Demand for decorative paints in India has been very resilient on the back of repainting, which is 78% of demand vs fresh painting, and reduction in repainting cycle.

Weaknesses

The company’s business is working capital intensive. If the company experience insufficient cash flows from their operations or are unable to borrow to meet its working capital requirements, it may materially and adversely affect its business and results of operations.

The company’s business is subject to seasonal variations and cyclicality that could result in fluctuations in their results of operations.

Restrictions on import of raw materials may adversely impact the company’s business and results of operations.

In FY 2020 revenue generated from sales in Kerala represented 34.56% of its revenue from operations and revenue generated from the southern region (comprising Karnataka, Kerala, Tamil Nadu, Telangana, Andhra Pradesh, Pondicherry), represented 46.33% of its revenues from operations in FY 2020. Any adverse developments in this market could adversely affect its business.

Raw materials include acrylic binders, packaging tins, pigments, alkyd resins and additives that are manufactured using derivatives of crude oil. Prices of these principal raw materials are subject to changes in the prices of crude oil and other petrochemical intermediates, which are linked to international prices and are susceptible to significant volatility from time to time.

Valuation

The Indian paints and coatings market has been consolidated and comprises major players such as Asian Paints, Kansai Nerolac, AkzoNobel and Berger Paints. The Indian paints market has been dominated by the decorative market, contributing approximately 74%, of the total paints market. Asian Paints is the market leader in the decorative paints industry and accounts for 42% of the total market. Berger Paints follows Asian Paints in the decorative category to become the second largest contributor in the market, followed by Kansai Nerolac. Akzo Nobel has slowly expanded its reach in the decorative market by evaluating options in the smaller cities with lesser competition.

Indigo Paints started its operations in CY 2000 and has been present across segments such as interior and exterior emulsions, enamels, wood coatings, putty, primers and ceiling and floor coats. Being the fifth largest player in the decorative segment, it has recently entered bigger markets such as Mumbai and Delhi. Other small paint companies with sizeable presence include Shalimar Paints, Nippon Paint India, Kamdhenu Paints and JSW Paints. Paint companies with lesser presence include Jenson & Nicholson Paints Pvt Ltd, Snowcem Paints, and Jotun Paints.

Indigo Paints revenues fell 5% to Rs 259.42 crore in H1 of FY 2021. However, the operating margins rose 990 bps to 18.5% resulting into 105% increase in operating profit to Rs 48.09 crore. Net profit was up 354% to Rs 27.21 crore. For FY2020, net sales rose 17% to Rs 624.79 crore. The operating margins rose 450 bps to 14.6%, resulting into 68% increase in operating profit to Rs 90.99 crore. Net profit was up 78% to Rs 47.82 crore.

At the higher price band of Rs 1490, the offer is made at around 98.6 times its TTM EPS of Rs 15.1 for the period ended September 30, 2020 on a post-issue equity share capital of Rs 47.57 crore of face value of Rs 10 each. Listed industry peers of the company are Asian Paints, Kansai Nerolac, Akzo Nobel and Berger Paints.

Asian Paints trades at 109.1 times its TTM EPS of 23.7 for the period ended September 30, 2020 at the current market price of Rs 2589. Berger Paints trades at 144.4 times its TTM EPS of 5.4 at the current market price of Rs 777. Kansai Nerolac trades at 89.9 times its TTM EPS of 7.2 at the current market price of Rs 644. Akzo Nobel trades at 57.2 times its TTM EPS of 39.7 at the current market price of Rs 2269.

Indigo paint is aggressively priced compared to other peers. But with higher growth rate and margin expansion along with given expansion program, increasing brand awareness, debt reduction can help the company report higher profits going forward. With scale and rapid growth, ad spend will grow slower than business growth, as it is already on the higher side at around 12.7% compared to peers at around 5.3% and is likely lead to better margin

Indigo Paints: Issue Highlights

Fresh issue (in Rs crore) 300
Offer for sale (in number of shares) 5840000
Offer for sale (in Rs Crore)  
- in Upper price band 870
- in Lower price band 869
   
Price Band (Rs) 1488-1490
For Fresh Issue Offer size (in no of shares )  
- in Upper price band 2013423
- in Lower price band 2016129
Pre issued capital (Rs crore) 45.56
Post issue capital (Rs crore)  
- in Upper price band 47.569
- in Lower price band 47.572
Pre issue promoter shareholding (%) 60.05
Post issue Promoter shareholding  
-On higher price band (%) 54.0
-On lower price band (%) 54.0
Bid Size (in No. of shares) 10
Issue open date 20/01/2021
Issue closed date 22/01/2021
Listing BSE, NSE
Rating 45

  

Indigo Paints: Financials

Particulars 1803 (12) 1903 (12) 2003 (12) 1909 (06) 2009 (06)
Total Income 395.07 535.63 624.79 272.64 259.42
OPM 6.5 10.1 14.6 8.6 18.5
Operating Profits 25.80 54.09 90.99 23.46 48.09
Other Income 1.63 1.63 1.64 0.76 0.82
PBIDT 27.43 55.73 92.63 24.22 48.91
Interest 4.54 4.66 5.60 2.77 2.47
PBDT 22.89 51.07 87.04 21.45 46.44
Depreciation 9.02 17.05 19.61 9.64 11.22
PBT Before EO 13.87 34.02 67.43 11.81 35.23
EO 1.32 0.31 0.00 0.00 0.00
PBT after EO 12.55 33.71 67.43 11.81 35.23
Provision for Tax -0.31 6.84 19.61 5.82 8.02
Profit after Tax 12.86 26.87 47.82 5.99 27.21
Share of loss of JV 0.00 0.00 0.00 0.00 0.00
Net Profit 12.86 26.87 47.82 5.99 27.21
PPA 0.00 0.00 0.00 0.00 0.00
Net profit after PPA 12.86 26.87 47.82 5.99 27.21
EPS (Rs)* 3.0 5.7 10.1 # #
*EPS is on post issue equity capital of Rs 47.57 crore of face value of Rs 10 each
# EPS not annualized due to seasonality of business
Figures in Rs crore
Source: Capitaline Corporate Database