How Good is Indigo Paints IPO?

1 1 How Good is Indigo Paints IPO?

Indigo Paints IPO opens on 20 January and closes for subscription on 22 January. On Tuesday, the company just completed its Rs.348 crore anchor investment placement to a clutch of marquee investors like Government of Singapore, Fidelity, Goldman Sachs, HSBC, Government Pension Fund of Canada, SBI MF, HDFC MF and ICICI Pru MF. What should investors do with the IPO and should they subscribe to it? Let us start by understanding the basic details of the IPO.

Indigo Paints IPO: What you must know

ParticularsIPO DetailsParticularsIPO Details
Issue Opens on20 January 2021Basis of Allotment Date28 Jan 2021
Issue Closes on22 January 2021Initiation of Refunds29 Jan 2021
Nature of IssueBook BuildingCredit to Demat01 Feb 2021
Price band for the IPORs.1488 – Rs.1490IPO Listing Date02 Feb 2021
Fresh Issue PortionRs.300 crorePre issue promoter share60.05%
OFS PortionRs.876 crorePost issue Promoter54.00%
Total Issue sizeRs.1176 croreQIB Allocation50%
Minimum application10 shares Rs.14,900HNI Allocation15%
Max application for Retail130 shares Rs.193,700Retail allocation35%

Data Source: IPO documents

Indigo Paints operates in the decorative paints segment which is a high growth segment in India. Here is how Indigo Paints proposes to use the proceeds of the issue.

  • Expansion of manufacturing facility at Pudukkotai in Tamil Nadu
  • Purchase of tinting machines and gyro shakers
  • Repay existing borrowings or rolling over at lower cost
  • General corporate purpose expenses

There is a little more about this company that you must know. It is not only the fastest growing paint company in India but also the fifth largest decorative paints company. No less an investor than Sequoia Capital has been seeding this company since its early days. Indigo also differentiated with special products like metallic emulsions, bright ceiling coal emulsions, tile coat emulsions, dirt proof emulsions and water proof emulsions.

2 2 How Good is Indigo Paints IPO?

What about the financials of the company?

For the year ended March 2020, the company reported total sales revenues of Rs.625 crore and net profit of Rs.48 crore. Over the last 2 years, the company’s sales have been growing at 20% annually and its profits have grown four-fold in the last 2 years. The paints business is a high growth business and the decorative paints segment normally grows with the growth in income levels and purchasing power.

To that extent, the purchasing power was surely dented in the current financial year due to the pandemic but the impact on the company performance has been fairly limited. In terms of valuations the stock is substantially richly priced compared to the industry leaders like Asian Paints and Berger Paints, which also operates predominantly in the decorative paints segment.

If you look at the last 3 financial years between 2018 and 2020, Indigo Paints posted an average EPS of Rs.7.68 and an average Return on Net Worth or RONW of 19.89%. Leverage of the company is quite low as its debt-equity ratio stands at an extremely conservative 0.13: 1. The scope for growth in the decorative paints segment is huge as the company only has 2% market share against the sort of double-digit share enjoyed by the 4 largest players in the segment.

Valuation take and investment view

Interestingly, Indigo Paints is being valued in the current issue at around 125-130 times P/E ratio, which is a tad more than most of the current industry leaders. If you look at the others, Asian Paints trades at a P/E ratio of 114X, Berger Paints trades at a P/E ratio of 125X, Kansai Nerolac trades at a P/E ratio of 82X and Akzo Noble trades at a P/E ratio of 60X. Clearly, the valuation of Indigo Paints is richer than it peers at the IPO price because even if you take the paints segment overall, the average P/E is around 81X only.

One thing the company is perhaps betting on is the growth prospects considering that its market share is very small and has the potential to grow exponentially. One example was the pandemic period wherein the company grew at over 16% while the leading 4 companies mentioned above only managed to grow at around 3-4%. That has perhaps given it the confidence.

One may keep all the aforesaid in mind along with his or her investment span, risk appetite etc., before decide on subscribing to the IPO.

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