Should you subscribe to Indigo Paints IPO?

Bavadharini KS | Updated on January 19, 2021

High valuation and stiff competition from larger players are a dampener

BL Research Bureau

Investors can give the Initial Public Offer of Indigo Paints the go-by. At the price band of ₹1,488-1,490, Indigo Paints is valued at a rich 140 times its FY20 earnings and 124 times its annualised earnings of the first six months of FY21. The company’s revenues and profits in the last three years have grown at an annual rate of 16 per cent and 55 per cent respectively to ₹625 crore and ₹48 crore. The valuation seems expensive, considering that the industry has well-entrenched players. Asian Paints and Berger Paints trade at 91 times and 115 times their FY21 earnings respectively, which are in no way cheap. Indigo is a much smaller player (expected market cap is ₹7000 crore). The market share of Indigo Paints is about 2 per cent. Asian Paints, the market leader, holds 42 per cent share, followed by Berger Paints (12 per cent).

Indigo Paints will raise ₹1,170 crore through the IPO of which ₹300 crore is a new issue. This fundraising is expected to help Indigo Paints fund its capacity expansion for water-based paints and bring down its debt (debt to equity ratio of 0.13 times now). The issue is open from January 20 to 22.


The company derives all of its revenue from decorative paints segment with the Southern States contributing almost half the revenues. It manufacturers a range of decorative paints including emulsions, enamels, distempers, primers, cement paints and wood coatings with substantial reach in tier 3 and tier 4 regions, particularly in Kerala. Further, the company offers differentiated products, including dirt-proof coating, polymer putty and super-gloss enamels. These products together contribute to about 29 per cent of the company’s total revenue. This is a value-added segment.

The company plans to expand its manufacturing facility in Tamil Nadu to including manufacturing of water-based paints to cater to the growing demand for these products. As on September 2020, its plant in Tamil Nadu operates at 50 per cent capacity.(capacity utilisation is also seasonal for paint companies).

Weak footing

Given the low-interest rate environment and the push to affordable housing, demand for paints is expected to be sanguine in the near to medium term.

However, a few factors work against the company. With demand in metro and urban cities are yet to recover, large paint players have started increasing their existing presence in smaller towns and rural areas. In the last 2-3 quarters, large players including Asian Paints and Berger Paints witnessed improvement in volumes, particularly in their low-end products, bolstered by semi-urban and rural demand. Large players can reduce prices to gain market share with less impact on the margins, making it difficult for Indigo Paints to sustain.

Like other paint companies, the fall in crude oil prices helped Indigo well in the first half of this year. It improved its operating margin to 19 per cent during the six months ended in September 2020 from 9 per cent, the same period last year. This also indicates that the company is more sensitive to crude oil price changes. For Asian Paints, the margin during September 2020 was at 25 per cent, up from 21 per cent from the same period last year. It has been in the range of 18-25 per cent in the previous 4-6 quarters. A highly competitive market may also not offer Indigo much space for pricing power to pass on raw material cost increases.

Also, Indigo’s product offerings are concentrated in decorative paint business only which caters mostly to demand from the real estate sector, unlike other market players ,which have a presence in both decorative and industrial paints. It can hurt on the earnings of the company if there is a slowdown in housing demand.

Published on January 19, 2021

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