Indigo Paints: Upcoming Star

Stock Opportunities Untested - but worth a good look
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On my estimates at Rs1500 IPO is at 56x FY22E P/E
• Asian Paints at 72.9x
• Berger Paints at 87.4x
• Kansai Nerolac at 52.6x
• Akzo Noble at 43.38x

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Does anyone know - how much percentage of total ownership sequoia is selling out in IPO ?

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Broadly they are selling about a quarter of their holding.

They hold approx 39% and are selling 4170000 shares,post the IPO they will hold about 29-30%.

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Similar interview to CNBC. Mr jalan was asked about the high IPO price and whether this leaves anything on table for new investors. His understanding of valuations is quite interesting. He understands that Indigo lacks the track record of the market leaders, at the same point he points out the 2x-3x faster topline growth done by indigo as one of the justifications for the high Valuations.

In the BQ interview he has mentioned making distributor network 3x in 5 years. In my original post I have talked about how he wants to make topline 5x in 5 years. The growth story is there but the Valuations are steep meaning that any downward surprise could lead to steep derating (and hence possible loss of capital). For that reason I intend to start off with a small position and build it incrementally over years, buying the dips.

Disc: this is not a buy or sell recommendation. Only for educational purposes. All investors must do their own due diligence before any investment decision.

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Paint Industry ratio analysis

S.No. Name CMP Rs. Mar Cap Rs.Cr. ROE % OPM % NPM Ann % Debt / Eq Sales Var 5Yrs % Med Sales Gwth 5Yrs % Profit Var 5Yrs % CFO to PAT % Div Yld % P/E Pledged % Contingent liabilities to Net worth
1 Asian Paints 2590.9 248556 28.2 20.65 13.67 0.1 8.22 5.54 14.2 101.11 0.46 107 11.86 3.7
2 Berger Paints 777.5 75642 25.25 16.07 10.12 0.3 8.83 7.79 19.82 116.19 0.28 145 0 5.9
3 Kansai Nerolac 633.95 34217 14.19 15.27 9.64 0.06 8.54 7.58 13.38 75.45 0.5 90 0 2.0
4 Akzo Nobel 2312.75 10538 20.01 13.57 8.92 0.05 1.74 5.71 10.19 90.78 0.61 58 0 14.8
5 Indigo Paints 1500 7099 27.8 14.6 7.7 0.2 47.3 38 34 297 0 124 0 16.0
6 Shalimar Paints 100.4 544 -15.5 -13.95 -13.03 0.51 -3.72 -7.67 -2.83 0 0 30.1
7 Hardcast.& Waud 182 12 2.5 44.41 25.57 0 2.31 21.8 -10.42 23.56 0 19 0 0.9
8 Yug Decor 26.3 11 9.55 9.14 3.4 0.37 1.67 1.85 63.26 434.29 5.32 19 0 1.0
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IndigoPresentation - Analyst and Broker Meet-14Jan2021.pdf (4.1 MB)

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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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image
image3201×1217 1000 KB

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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).

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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?

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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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