INDIGO PAINTS - IPO RESEARCH REPORT

IPO Details:
Offer Price	INR 1,488.00 – 1,490.00
Date Of Opening	20 Jan. 2021
Date of Closing	22 Jan. 2021
Min. Application(Share)	10 Share
Issue Size	INR 1170 Cr.

Summary of business:

Company is engaged in the business of manufacturing paints and are the fastest growing amongst the top five paint companies in India. The fifth largest company in the Indian decorative paint industry in terms of revenue from operations for Fiscal 2020. They Achieved this position in a highly competitive Indian decorative paint industry on the back of their multi-pronged approach. This includes introducing differentiated products to create a distinct market in the paint industry, building brand equity for their primary consumer brand, creating an extensive distribution network, and installing tinting machines across dealer network.

Let’s renovate and “be surprised”: Key Strengths

• Track record of consistent growth in a fastest growing industry with significant entry barriers: Indigo is the fifth largest company in the Indian decorative paint industry in terms of revenue from operations for Fiscal 2020. Their revenue from operations have grown at a CAGR of 41.9% between Fiscal 2010 and Fiscal 2019, compared to the range of 12.1% to 13.1% recorded by the top four paint companies in India (such calculation is based on respective audited financial information and has not been adjusted for accounting changes). Despite Fiscal 2020 being impacted by COVID-19, revenue from operations have grown by 16.65% between Fiscal 2019 to Fiscal 2020, against the range of 8.8 % to 4.9% recorded by the top four paint companies in India.
• Differentiated products leading to greater brand recognition and enabling expansion into a complete range of decorative paint products: It is the first company to introduce certain category-creator products, including Metallic Emulsions, Tile Coat Emulsions, Bright Ceiling Coat Emulsions and Floor Coat Emulsions in the decorative paint market in India. Other products that they introduced include Dirt-proof & Waterproof Exterior Laminate, Exterior and Interior Acrylic Laminate and PU Super Gloss Enamel, that comprise value-added product portfolio. These category-creator and value-added products comprise portfolio of Indigo Differentiated Products and are differentiated from other products based on their end-use specifications and in terms of certain added properties. Accordingly, revenue generated, i.e., invoicing as per contracted price, from sales of Indigo Differentiated Products represented 26.68%, 27.58%, and 28.62% of total revenue from operations in Fiscal 2018, 2019 and 2020, respectively.
• Strategically located manufacturing facilities with proximity to raw materials: As of September 30, 2020, they operated three manufacturing facilities in India, located in the states of Rajasthan, Kerala and Tamil Nadu. They plan their capital expenditure in advance and have periodically carried out capacity expansions at their facilities to cater to the increased demand for products. The aggregate estimated installed production capacity has increased progressively over the years from 46,608 KLPA and 48,944 MTPA as of March 31, 2018 to 101,903 KLPA and 93,118 MTPA as of March 31, 2020. The manufacturing facilities are strategically located in proximity to raw material sources, which reduces inward freight costs and results in lower cost of raw materials. For instance, the facility at Jodhpur (Rajasthan) is used to manufacture water-based paints and cement-based paints and putties. For water-based and cement-based paints manufactured at Jodhpur, Rajasthan, the principal raw materials are white cement, minerals including lime, dolomite, calcite and talcum, and acrylic emulsions. These raw materials are available abundantly within Rajasthan and in its neighboring state of Gujarat.
• Extensive distribution network for better brand penetration: This helped them engage with a larger base of dealers across Tier 3, Tier 4 Cities and Rural Areas, which they subsequently leveraged to expand into larger cities and metros such as Kanpur (Uttar Pradesh), Kochi (Kerala), Thiruvananthapuram (Kerala), Patna (Bihar) and Ranchi (Jharkhand). They first approached dealers in these markets with Indigo Differentiated Products, being products with greater marketability, to improve penetration of brand and strengthen relationship with dealers. Then, they capitalized on these relationships to distribute a wider range of decorative paints. As of March 31, 2018, 2019, and 2020, our distribution network comprised 9,210, 10,246 and 11,230 Active Dealers in India, respectively.

 

Net Proceeds:

Particulars	Amount (Rs. In million)
Gross Proceeds of the Fresh Issue	3000
(Less) Offer related expenses in relation to the Fresh Issue (1)	N/A
Net Proceeds (1)	N/A

(1)    To be finalised upon determination of the Offer Price and updated in the Prospectus prior to filing with the RoC.

 

Use of IPO proceeds:

Particulars	Amount (Rs. in million)
Funding capital expenditure for the Proposed Expansion	1500
Purchase of tinting machines and gyro-shakers	500
Repayment/prepayment of all or certain of our borrowings	250
General corporate purposes (1)	N/A
TOTAL	N/A

(1)    To be finalised upon determination of the Offer Price and updated in the Prospectus prior to filing with the RoC. The amount utilised for general corporate purposes shall not exceed 25% of the Net Proceeds.

 

In this IPO, Company also coming up with Offer for sell of INR 870 Cr.

Selling Shareholders:

Name of Selling Shareholder	Number of Equity Shares held	Percentage of the pre-offer paid-up Equity Share capital (%)	Maximum number of Offered Shares (OFS)
Sequoia IV	85,34,960	18.74	20,05,000
SCII V	92,08,675	20.21	21,65,000
Hemant Jalan	1,02,37,500	22.47	16,70,000
TOTAL	2,79,81,135	61.42	58,40,000

 

Public Issue:

Particulars	%
QIB	Not more than 50%
Non-Institution	Not less than 15%
Retail	Not less than 35%

 

Few Risk Factors are described below:

1. An inability to protect, strengthen and enhance existing brand could adversely affect our business prospects and financial performance.

2. Engage in a highly competitive business and any failure to effectively compete could have a material adverse effect on business.

3. Company is not able to identify or effectively respond to evolving preferences, expectations or trends in a timely manner, and a failure to derive the desired benefits from our product development efforts may impact our competitiveness and profitability.

4. Their Ability to grow our business depends on relationships with dealers and the community of painters, and any adverse changes in these relationships, or inability to enter into new relationships, could negatively affect business and results of operations.

5. They do not enter into long-term arrangements with dealers and any failure to continue existing arrangements could negatively affect business and results of operations.

6. Company’s proposed capacity expansion plans relating to manufacturing facilities are subject to the risk of unanticipated delays in implementation and cost overruns. Under-utilization of manufacturing capacities and an inability to effectively utilize expanded manufacturing capacities could have an adverse effect on business, future prospects and future financial performance.

7. A significant portion of sales are derived from the state of Kerala and any adverse developments in this market could adversely affect business.

8. There are outstanding litigation proceedings filed by and against our Company. Any adverse outcome in such proceedings may have an adverse impact on our reputation, business, financial condition, results of operations and cash flows.

Company-wise Market outlook:

Decorative Paints Companies	Market Share
Asian paints	42%
Berger Paints	12%
Kensai neroclac	7%
Akzo Nobel	5%
Indigo paoints	2%
Others	32%

 

Valuations, Return, Margin & growth: (Rs. and %)

Cash flow = Net Operating cash flow is improving very well- 2018= 238 Million, 2019= 516 Million, 2020= 723 Million. 

Price to earnings Ratio = EPS= 10.61, IPO share price- 1,490. 140 = P/E

ROCE= 27.50 (top 3)

ROE= 27.4 (top 3)

Operating margin= 14.6%

PAT Margin = 10.5%

YoY Revenue growth=  16.6% (top 1)

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Yachana & Sahil

20/01/2021 : 0412 hrs