ValuePickr Forum

Indigo Paints: Upcoming Star

IPO looks significantly overvalued to me. Despite its higher growth rate (albeit off a lower base versus larger peers and hence not sure of sustainability) and improving margin trajectory (again off a very low base), the business needs to be priced atleast at a 25-30% discount to an Asian Paints. At the current price band it seems to be valued at a premium to larger peers to Berger and Asian which does not make sense to me.
This is no way means that shares wont rally post listing given the times we are in; but I am get worried about prospective 3-5 year returns for those who are investing at these elevated levels.

A price of around Rs1000 is what looked reasonable to me even after factoring all there is to like about this business.

CMP (INR) M Cap (US$ mn) FY20A EPS FY25E EPS FY25PE PAT CAGR
ASPN 2,586 27.6 28 52 50 13%
Berger 773 8.2 7 13 57 15%
Kansai 633 3.8 10 17 37 12%
Akzo 2,324 1.3 52 92 25 12%
Indigo 1,020 0.62 10 25 40 19%
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I fully agree. It made no sense to me why they have priced at such a high level. Surely it would be an interesting to watch !!

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Indigo can do a 20-25% Revenue CAGR since the base is way too low. On incremental growth, their marketing spends are gonna reduce from 12.5% of revenue to 5%-7% [Industry standard 3-5%]of the revenue types.This will result in PAT margin expansion to maybe 9.5-10%. This can give 30% CAGR on pat to some 180cr.

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Retailers should stop subscribing to this over valued ipo. The PE guys will make a fortune at this elevated price. There are better companies available for our money.

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Your growth assumptions are not realistic. When the industry itself is growing topline at 13% it is unreasonable to expect Indigo to only compound PAT at 19%. The business standard article linked is much better on the front of earnings estimation.

Unless you are a SEBI registered advisor, would suggest against posting direct advice on any such matters of buying or selling. Please see: SEBI Research Analyst Guidelines, Sep 1, 2014

Agreed. This would be my bear case for indigo PAT trajectory. As several others have noted (including me in the previous posts), the valuations are extreme. What I intend to do is to wait and watch. A lot of recent IPOs have gone down post the initial listing gains (becters, Burger King).

Couple of things people are not factoring - gross margin hit of 200bps in FY21 due to a resurgent crude. As Indigo grows larger into newer states and comes into tier 1 to compete with the larger paint companies; expect some higher promotion intensity. Asian Paints for example, under the CEO has publicly stated an aggressive stance to make market share gains in tier 2/3/4 towns.
Moreover, I am even worried if the street is banking on a 48% PAT CAGR to invest at such high valuations. Anything below that will lead to disappointment.

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This case might be different,

In bector case, it’s EBIT margin is 1/2 that of market leaders and despite low base even the growth trajectory is not very great compared to market leaders. So, it totally makes sense for now having demand post listing.

For burger king, all the metrics are in line but, profits is a overhang due to rapid expansion. They need to justify billion$ valuation despite not being profitable, no IP, heavy depreciation, unprofitable expansions etc.

Where as for Indigo, everything seems inline.

Margin profile same as that of market leader, growth double the market leader, opportunity is huge, crazy profitability, growth visibility etc (except the asset turnover in which no one is even close to market leader), don’t need too much money to expand etc.

I don’t see any reason why institutional money will not chase this stock except for the reason expensive.
With each passing quarter of 30% growths, people will keep on justifying valuations and push the stock up.

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Few sources are quoting TTM P/E ratio to be 98.5. I wonder how that is possible. Is economic times making a mistake or has there been any information shared for Q3FY21 which places P/E ratio to be 98.5?

I’d done some work on the paints industry a couple of months ago, putting out the industry landscape sheet here

Company Revenue Gross Margin Employee Cost Other Expenses EBITDA % PAT % Gross Asset Turns D/E 5 year Sales Growth % 5 Year PAT Growth % Industrial Paints % Capacity MMT Utilization% Sales MMT Realization per L Dealers Depots ASP % Freight %
Asian Paints 20,515 44.52% 6.78% 16.08% 21.95% 13.47% 2.38 0.10 8.22 14.20 3% 1.73 64% 1.11 185.29 70,000 138 4.47% 5.88%
Berger Paints 6,366 40.80% 7.00% 10.00% 17.36% 10.12% 2.60 0.30 8.83 19.82 20% 0.64 79% 0.51 125.91 30,000 164 4.20% 6.30%
Kansai Nerolac 5,280 38.10% 6.00% 15.00% 15.55% 9.64% 1.82 0.06 8.54 13.38 45% 0.52 63% 0.33 161.17 27,500 104 5.00%
Akzo Nobel 2,662 45.80% 10.00% 20.00% 15.46% 8.92% 3.11 0.05 1.74 10.19 40% 15,000 52 3.30%
Indigo Paints 620 48.56% 6.70% 27.26% 14.60% 7.70% 1.73 0.25 25+ 25+ 0% 0.195 55% 11,230 34 12.70%
Shalimar Paints 344 35.00% 14.00% 28.00% -9.33% -13.03% 1.04 0.51 -3.72 32% 0.1 55% 5,600 30 7.39%
Nippon Paints 1,000 45%
Kamdhenu Paints 250 0% 0.06 4,000 31
JSW Paints 200 0.125
37,236

While Asian Paints is a behemoth, there is an unorganized segment size of almost 10,000 Cr out there up for grabs, especially where the Top 3 aren’t very focused. These are the low priced segments below economy price, Tier 3 and below towns and niche segments which may not be very profitable for them.

If you put yourself in the shoes of the Asian Paints management, growth cannot come at lower margins or lower unit economics. That is the curse of being the market leader, the leader can gobble market up theoretically but in practice that rarely happens. When you run a high quality market leading business there will always be a segment of the market that you will end up saying no to. That is where the opportunity lies for players like Indigo Paints and JSW paints.

JSW Paints has done into some states aggressively and has gotten into conflicts with Asian Paints. This is out there in the public media. But interestingly both JSW Paints and Indigo Paints have proven that a focused management can make headway into the decorative paints market, a 50,000 Cr annual market has enough space to fit in 2-3 more focused players.

At a revenue of ~600 Cr for FY20, Indigo Paints has hardly tapped into the 10,000 Cr unorganized market segment. Multiple years of industry leading growth are possible from here, though it will have to start tapering at some point of time. Even a rank laggard like Shalimar Paints was able to deliver healthy growth in the 2-3 Q’s before COVID-19 hit. It is not that growth cannot be achieved by the newer/smaller players, just that they cannot compete in the segments where the incumbents are already there.

At what price does this become a good investment is where investing skill lies in stories like this. A cursory look at the numbers will lead most people to conclude that this is a decent if not a great business operating in an industry that has been a wealth creator for investors.

Disclaimer: I am a SEBI registered individual IA. Not participating in the IPO.

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Nice perspective into Indigo Paints again by @zygo23554.Indigo paints enjoys highest GM compared to Asian Paints or Berger Paints

  1. Reason for this mentioned in RHP “While Asian Paints, Berger Paints and Kansai Nerolac make their emulsions in-house by importing raw materials such as monomers, Indigo Paints procures it locally as purchasing emulsion instead of producing it has a cost benefit thereby providing higher margins”. Not sure as scale of operation grows for Indigo how long it will continue to procure emulsion/base from market.
    2.May be(don’t have supporting data yet), Indigo into decorative paint it has most exposure into water based paint technology where as its a mix of water based and solvent based for AP and Berger. Solvent base has some crude linkage . Feel free to provide more information.
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What is ASP percentage?

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Good thoughts, although I would not call it a curse but rather a choice. A choice which can be changed anytime. Can you share your thoughts on why is Asian paints looking at Pidilite related adjacencies for extra growth when there are such huge pockets where JSW and Indigo would operate for next many years? Thanks

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Advertising and sales promotion

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Potential strong competitor in the long run.

Disc: not invested in any paint companies at this time

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The most though provoking questions are more often than not qualitative, there is limited utility in slicing and dicing numbers beyond a point.

The overall trend I see is that category expansion is happening across the board in stories that operate in the building materials sector. Other examples being -

Cera Sanitary venturing into faucets, tiles in addition to growing the core business
Kajaria ceramics venturing into sanitaryware, bathware and now plywood
HSIL venturing into PVC Pipes

Each of the sub categories within building materials has a large unorganized market, smaller regional players who lack the scale and the brand recall will cede market share to larger players over the next 5-10 years. COVID-19 has accelerated this shift by starving the smaller players of access to capital and by improving the cash flows of the organized players.

In the same vein Asian Paints venturing into waterproofing is a logical move. They already have strong distribution network in hardware stores and this presents a catchment area that can be accessed by sweating existing relationships. Construction chemicals is a large market in India, waterproofing by cursory estimates appears to be a sub USD 1 Bn category as of date but it meets the criteria of Asian Paints - brand strength, distribution network and influencer relationships can lead to a dominant market share. The waterproofing segment also offers a replacement market with a 4-5 year refresh rate, this is right up Asian Paint’s template.

Over a period of time one can expect to see 4-5 strong players with presence across multiple categories in the building materials space. The market sent the valuation of Cera and Kajaria higher the moment the management displayed the willingness and the ability to scale across multiple categories while keeping risk under control. When manufacturing is relatively easy and business success depends more on brand and distribution, sweating existing market reach to tap into new categories is easy.

HSIL did 200 Cr revenue in PVC Pipes within 2 years of launching
JSW Paints crossed 200 Cr within 2 years of launch
Cera captured respectable market share in faucets where Jaquar was the undisputed leader
Kajaria now does 250 Cr per year in sanitaryware + faucets

The niches that we are used to seeing in this segment may disappear over time. As the market started getting more organized, Kajaria (best tiles player) has to now compete with Cera (most efficient sanitaryware player). Competing against Johnson Tiles was easier for Kajaria, similarly competing against HSIL was easier for Cera. Now they go head to head against one another.

The good players in each of these categories will get bigger and keep growing but as they challenge the leaders in other categories the moats may get challenged, testing a few theories that we have been taking for granted all these years. In the process, the pedestalization of some of the businesses by investors will get tested if not shaken. I would spend more time tracking emerging supply and industry structure than obsess over growth rates, ROCE and ROE which are the culmination of business dynamics, never the source of a competitive advantage.

Corporate India is getting hungry, it is not just investors who read case studies about how Amazon has disrupted so many categories in the US.

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Indeed. Last 10 months of COVID has changed the way corporates are looking at themselves and also at business. If a paints company can transform to a sanitizer company, an FMCG can become a BPO for coordinating with retailers etc, a skeptical competitor can become a pure enabler - many ecommerce companies/aggregators, privacy/security skepticism turn to a rush for Digital/Cloud, many factories turned to healthcare related manufacturing …and examples go on… if such companies can do what they have done in last 10 months - they have realized they can do anything and need not wait to do that but can do that now. I think we would see many more such large forays in times to come from leaders. They have understood how nimble they can be despite their size and now know exactly where to get that extra growth from and how.

Big would become Bigger, Large would get Larger. This is not exactly a bad news for the smart Small as probably they would be left alone in the battle of the Bigs and would silently keep growing at envious pace.

Idea is to stick to an ethical, smart management with proven execution capabilities and limited liabilities - Small, Big, Large - All now know where & how to get that extra growth.

Thoughts Welcome!

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This is big news. The Rs5000cr capex is sizable compared to the existing gross block of large incumbents. The catch here is that building a brand and distribution moats in the paints business always had more to it than just providing copious amounts of capital (initially). So its naive to assume that they will make much out of this foray in 5 years time.
What this does tell you as that outsiders view the paints industry as earning above normal profits and thus extremely attractive to attempt to enter. Perhaps, margins currently are so good, that are encouraging new entrants to come in. The question here is to ask if the long term margin trajectory for the large incumbents is sustainable. At some point, the large incumbents might have to let go off some margins to deter new entrants.

This ofcourse takes the sheen off smaller players like Indigo. Large groups which enter paints with such large capex plans might ultimately fail but not before they run amok with the pricing discipline to make initial market share gains. This will hurt the smaller players and brands much more than large incumbents.

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Agree. And would just add to the discussion here with a marketing viewpoint as well.

How is a decision on a new product launch taken?

  1. Market size : Asian paints would possibly anticipate a much larger market in Pidilite adjacencies, with a rare brand of similar strength

  2. Synergy in distribution : Products that can be sold into the the same dealer network/serviced by a similar task force. The Indigo paints product range is a better bet, but pidilite products could be across a vast distribution universe tapping a part of which could still be more viable? Or maybe not, that’s a business/data call.

  3. The advantages of a wider basket : Counters seasonality to a certain extent. Gives a different medium of initiating first purchase to the consumer and then to enable cross selling into other bouquet of products.

  4. Profitability : Obviously, potential profit pool from higher margin products is more lucrative

Overall, the opportunities are large and I think the Asian paints strategy is fantastic. And I would not be surprised at all to see them enter newer Indigo paints areas in the course of time as well.

Paint sector might become a commodity space in few years down the line as this space is getting crowded day by day. How the incumbents respond to the new entrants is a thing to watch.

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