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Indigo Paints IPO

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Started in the year 2000, Indigo Paints had a modest beginning. It started out with the manufacture of lower-end Cement paints, and gradually expanded its range to cover most segments of water-based paints like Exterior Emulsions, Interior Emulsions, Distempers, Primers, etc.

Todays, Indigo Paints is India’s top paint company and fastest growing amongst the top five paint companies in India. Indigo Paints is the fifth largest company in the Indian decorative paint industry in terms of our revenue from operations for Fiscal 2020.

Products of the company

Indigo Paints manufacture a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints. Apart from this , they also identify potential product needs from customers and introduce differentiated products to meet these requirements, and create a distinct market for products. For instance, they were 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 & Waterproof Exterior Laminate, Exterior and Interior Acrylic Laminate, and PU Super Gloss Enamel (together, “Indigo Differentiated Products”).

As on 31.03.2020, the sales of “differentiated products” contributes 28% in the revenue of Indigo Paints.

How they launch products in the market

They first create demand for its products into Tier 3, Tier 4 Cities, and Rural Areas, where brand penetration is easier and dealers have greater ability to influence customer purchase decisions . Later on once product becomes a hit in rural areas, they subsequently leveraged this network to engage with dealers in Tier 1 and Tier 2 Cities and Metros as well.

Manufacturing Units

They 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 metric tonnes per annum (“MTPA”) for putties and powder paints.

Distribution Network

As of March 2020, Indigo Paints have distribution network comprised 36 depots, and 11,230 Active Dealers and the total number of tinting machines given to distributors are 4,296.

Tinting Machines- It is a machine to mix colors and produce different combination of colors. In color theory, a tint is a mixture of a color with white, which increases lightness, while a shade is a mixture with black, which increases darkness. When we mix colorants, such as the pigments in paint mixtures, a color is produced which is always darker and lower in chroma, or saturation, than the parent colors.

Industry Analysis

The decorative paint industry has grown at a CAGR of 11.5% from Fiscal 2014 to Fiscal 2019, driven by consumption of paints in Tier 2 – Tier 4 Cities. And for the paint industry, Tier 2 – Tier 4 Cities and Rural Areas account for nearly half the total sales. And Indigo Paints focus mainly focus on Tier-2 and Tier-4 cities.

Objects of the Indigo Paints IPO:

A) Offer for Sale (876 Crores) The existing shareholders will sell the shares in the IPO. B) The Fresh Issue (300 Crores) The fresh funds raised will be used for following activities. 1. Funding capital expenditure for expansion of the existing manufacturing facility at Pudukkottai, Tamil Nadu (the “Proposed Expansion”) by setting-up an additional unit (the “Additional Unit”) adjacent to the existing facility. 2. Purchase of tinting machines and gyroshakers. 3. Repayment/prepayment of all or certain borrowing. 4. General corporate purposes

DRHP of Indigo Paints IPO

RHP of Indigo Paints IPO

Indigo Paints IPO Details:

Open Date:	Jan 20 2021
Close Date:	Jan 22 2021
Total Shares:	7840000
Face Value:	₹ 10 Per Equity Share
Issue Type:	Book Building
Issue Size:	1176 Cr.
Lot Size:	10 Shares
Issue Price:	₹ 1488-1490 Per Equity Share
Listing At:	NSE,BSE
Listing Date:	Feb 01 2021

Promoters And Management:

(i) Hemant Jalan is the Managing Director and Chairman of the Company. He holds a bachelor’s of technology degree 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. Previously, he was associated with AF Ferguson & Co. as a consultant. Presently, he is associated with Halogen Chemicals Private Limited as a director. He is a Director on the Board since March 28, 2000. (ii) Praveen Kumar Tripathi is an Independent Director of the Company. He holds a bachelor of technology degree in electrical engineering from the Indian Institute of Technology, Kanpur (Uttar Pradesh) and a post graduate diploma in management from Indian Institute of Management, Ahmedabad. He has several years of experience in sectors such as media planning and advertising, media and market research, brand consulting, communication planning, data analytics and financial services.

Financials of Indigo Paints IPO:

Particulars (Cr)	6MFY21	2020	2019	2018
Revenue	260	625	536	401
COGS	123	321	296	221
Purchase of Goods Trade	5	10	8	5
Change in Inventory	6	-10	-6	4
Gross Margin	52.69%	48.64%	44.78%	44.89%
Employee Cost	22	42	36	30
Other Expenses	54	170	147	108
EBITDA	50	92	55	33
OPM	19.23%	14.72%	10.26%	8.23%
Other Income	1	1	1	1
Depreciation	11	20	17	9
Interest Cost	2	5	4	4
Profit Before Tax	38	68	35	21
Tax	8	20	7	0
Net Profit	30	48	28	21.3
NPM	12%	8%	5%	5%
Shares	4.55	4.55	4.55	4.55
EPS	6.59	10.55	6.15	4.68
Net Worth	224	197	147	127
RONW	13%	24.37%	19.05%	16.77%

IZ Review: 1. Indigo Paints has shown excellent growth in the last 3 years. CAGR growth is 25% from 2018 to 2020. 2. Gross margins have improved from 44% to 48% in the last 3 years. This shows that Indigo Paints is getting good margin on sales. 3. EBITDA Margins have doubled from mere 8% to 15% in the last 3 years. Improvement in Sales along with increase in EBITDA margins will have double impact on growth of bottom-line. 4. Net-Profit is also doubled in the last 3 years. 5. In the FY 2020, CFO is around 72 Crores on EBITDA of 92 Crores. That means 78% of EBITDA is being converted in cash. Anything above 70% is considered good. 6. ROCE in FY20 stands at 47% which is awesome. Anything above 30% is great. 7. Debt on books is just 38 Crores on 224 Crores of Nett-Worth. D/E is less than 1. 8. EPS (FY20) = 10.55 and P/E = 142x 9. Mcap = 6825 Crores and Sales = 625 Crores. So, Mcap/Sales = 10x.

Comparison With Peers:

A) Asian Paints is the peer of the company. Asian Paints is 30x in size as that of Indigo Paints. Let us see some financials facts of Asian Paints to draw the conclusion. 1. Asian Paints revenue growth in the last 3 years is at 9%. Indigo Paints at 25%. (Superior Growth owing to small size of operation) 2. Asian Paints has superior EBITDA and PAT margins at 21% and 13%, respectively as compared to Indigo Paints at 14% and 8%, respectively. 3. Asian Paints has generated closed to 3000 Crores of Free-cash in the last 3 years as compared to Indigo Paints which obviously being very small in operation has generated mere 11 Crores of free-cash. 4. Mcap to Sales of Asian Paints stands at 13x and whereas for Indigo Paints it stands at 11x (post-issue). So, Indigo Paints has not left anything on the table. B) Berger Paints is the second peer. Let us see some financials facts of Berger Paints to draw the conclusion. 1. Berger Paints revenue growth in the last 3 years is at 11%. Indigo Paints at 25%. (Superior Growth owing to small size of operation) 2. Berger Paints has slight edge on EBITDA and PAT margins at 17% and 10%, respectively as compared to Indigo Paints at 14% and 8%, respectively. 3. Berger Paints has generated closed to 727 Crores of Free-cash in the last 3 years as compared to Indigo Paints which obviously being very small in operation has generated mere 11 Crores of free-cash. 4. Mcap to Sales of Berger Paints stands at 12x and whereas for Indigo Paints it stands at 11x (post-issue). Conclusion: The growth wise Indigo Paints has edge over Peers. But valuations wise it has not left anything on the table.

Recommendation on Indigo Paints IPO:

Indigo Paints has very good management to take the company to new heights. The company has shown excellent growth in the last 3 years. The paint industry is bound to grow as real estate sector uptick cycle has started. However, as far as valuations are concerned nothing is there on the table. but...but....remember this is the bull market. So, ride with the wave till madness is going on in the dalal street.