Indigo Paints IPO II Details of the forthcoming IPO explained by HDFC Securities

Making inroads into the oligopolistic paints industry remains a herculean task, given strong distribution moats of the top few. Against this backdrop, Indigo Paints (founded in 2000) has been consistently chipping away market share within the ecosystem. The company has clocked 47% sales CAGR over FY15-20 (organic growth CAGR: 40%+; relative market share has moved from near-zero to 2.5% over FY15-20 in decorative paints). The pandemic-led demand destruction is likely to have the least impact (within peer set) on Indigo Paints as its exposure to big cities is negligible (Predominantly operates in Tier 2-4 cities.

Indigo Paints’ (IP) bait-and-switch strategy seems to be working:

Indigo Paints turned a corner when it shifted focus from selling plain-vanilla cement paints to selling untapped paint solutions such as metallic paints, Floor Coat paints, Unique Ceiling coat paints, Roof Tile coat paints, and PU enamels (the bait). These innovative paint solutions gave the company a foot in the ‘dealer’ door, which has since been used effectively to populate its tinting machines and sell faster-moving mainstream paint products (the switch). Emulsions now account for 45% of sales. However, of this, a sizable portion is specialised emulsions (20% of revenue). The success of the strategy is reflected in the company’s relative market share gain (among Top 7) from near-zero to 2.5% over FY15-20.

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The COVID-19 blues:

Indigo Paints clocked rev growth of 16.6% in FY20 (Rs 6.25 bn). Management highlighted it lost Rs 500 mn in sales in the second half of March-20. Hence, it may have potentially ended FY20 with 24-25% growth. Demand destruction was severe in Q1 FY21, courtesy the COVID-induced lockdown. Apr-20, the dominant sales month of the quarter was a washout. Business recovery commenced May-20 onwards and was swiffer for Indigo Paints vs. its bigger rivals, given its predominant Tier 2-4 presence and nearly 100% decorative business. The 5 Metros (Mumbai, Delhi, Bangalore, Chennai, Kolkata), account for a mere 1-2% of sales for Indigo Paints. Revenue recovery run-rates have been impressive at 0/38/12/25% in May/Jun/Jul/Aug-20 resp. All depots have been operational since the end of May-20 with utilization levels of 80%.

Labour shortage not a concern, while the jury is still out on how the consumer will behave:

Indigo Paints has plants in Tiruchirappalli, Kochi, and Jodhpur. Labour force in Southern plants/Jodhpur is as high as 100/70% resp. Hence, the company, fortunately, has not had to contend with labour shortage concerns. The jury is still out though on how swiftly will the consumer get over the fear of bringing painters/contractors home for a paint job during the pandemic.

FY21-22 outlook:

Management intends to resume its historical run-rate by FY22; however, demand prediction in FY21 remains hazy. It intends to improve upon margins. Capex is likely to be toned down in FY21.