Indigo Paints IPO: IIFL Securities recommends investors to subscribe to the issue, believes its a Multi-year high growth story

Indigo Paints has rapidly scaled up to become the fifth largest player in a competitive, oligopolistic decorative-paints industry in India, delivering organic revenue CAGR of 29% in the past five years. Indigo Paints Growth has been driven by differentiated products backed by heavy advertising, an incentivised workforce and a focus on smaller towns. IIFL Securities forecast FY20-23ii EPS CAGR of 48% for Indigo Paints vs. 14-15% for Asian Paints and Berger Paints, whereas company valuation at 46x FY23 EPS implies a 28-41% discount to both these peers. 

Indigo Paints is the fifth-largest decorative-paints company in India:

Incorporated in Mar-2000, Indigo Paints has rapidly scaled up, logging a turnover of Rs6.2bn in FY20 and delivering an organic revenue CAGR of 29% (48%, including acquisitions) in the past five years. It has 2% market share and is at the 5th spot in a highly competitive and oligopolistic decorative paints industry. Indigo Paints derives 46% of its sales from southern India and commands the 3 positions in the state of Kerala. It has built a network of 11000 dealers and 4600 tinting machines.

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Indigo Paints has a solid growth model:

Indigo Paints has been able to stand out in an industry with a cluttered tail, via development of differentiated products (29% of sales) catering to specific consumer needs, supported by ad spends similar to major players’ (except Asian Paints), on an absolute basis, despite its smaller size. A focus on smaller towns and cities helps it to grow faster and make inroads in the trade, which is a highly daunting task for any new company to achieve in big cities. The tinting machine-to dealer ratio for Indigo is 0.38 vs 0.65 for the top-three players; Indigo plans to focus on ramping up this ratio, as the addition of a tinting machine more than doubles the sales from a dealer.

Despite our negative stance on the paints sector, IIFL Securities recommends subscribing to the Indigo Paints IPO, given the favourable growth valuation equation. IIFL Securities forecasts FY20-23ii sales/Ebitda/PAT CAGR of 20%/36%/48% vs. 9%/13%/14% for the top four, on aggregate. As per IIFL Securities estimates, Indigo Paints would yield a valuation of 46x FY23 EPS, based on the upper price band vs. 63x for Asian Paints and 77x for Berger Paints. A combination of higher growth and lower valuations makes for an exciting investment opportunity.