Indigo Paints’ initial public offering (IPO) is set to hit the market on Wednesday amid a frenzy over its unlisted shares in the grey market. Analysts said that one could subscribe to the issue of the Paintmaker’s superior performance and scope for market share expansion, seeking valuation demand.
The company was least affected by Covid-19 compared to peers, due to its presence in smaller cities, he said and suggested that spending in the form of advertising could fall further by a percentage of revenue, leading to further profitability will go.
The IPO includes the issuance of shares up to Rs 300 crore and the sale of 58,40,000 equity shares by private equity firm Sequoia Capital with two of its funds – SCI Investments IV and SCI Investment V – and promoters. The price band for the Hemant Jalan issue has been fixed at Rs 1,488-1,490 per share.
The paintmaker had a distribution network in 27 states at the end of the September quarter. On the valuation front, shares of Indigo Paints are being offered at 98.5 times the 12-month EPS, 113.78 times that of Asian Paints, 128.23 times that of Berger Paints and 84 times of Kansai Nerolac,
Indigo paint gives a higher trade margin of 17–20 per cent compared to 15 per cent for Asian Paints but has built a strong reputation, which gives it pricing power. The brokerage said the business model gave the company an industry-leading gross margin (adjusted for outward freight cost) of 37.9 per cent in FY16, up 280 bps in FY20, higher than Burger Paints, Kansai Nerolac’s 520 BPS and Asian Paints is equal to 37.7 per cent.
Due to its small size, Indigo is the fastest-growing among the top five paint companies in India. Overall, it is the fifth-largest company in the decorative paint industry in terms of revenue.
a) The company has incurred high advertising spend over the last 4-5 years and is now leveraging its brand equity to strengthen the presence of tinning machines for retailers.
b) IndiGo’s average working capital cycle of 23 days is the lowest in the business.
c) In the last 2-3 years, the company has been aggressively expanding its geographic footprint and increasing its brand potential.
d) Post IPO, Indigo will be a debt-free company.
e) Sequoia Capital intends to remain invested for the next 5-6 years.
f) The company has no intention of manufacturing raw materials for captive consumption.
g) Management finds it reasonably possible for manufacturing activities to remain in their current locations for the next 5-6 years.
h) Compared to cities like Kochi, Kanpur, Patna, Ranchi, Thiruvananthapuram, etc., work is still going on on the rural front in places like Maharashtra, Telangana and Gujarat.
i) During H1FY21, while no conscious cost reduction measures were taken and the company also implemented wage increases in June, Ebitda margins expanded during this period due to lower advertising expenses in April and May, which typically an ad-heavy period.