Should You Invest in Indigo Paints IPO?

20 January 2021
9 min read
Should You Invest in Indigo Paints IPO?

Indigo Paints Limited IPO that is being launched on January 20, 2021 (now live on Groww!). In this blog, we will deep dive into the fundamentals of the company, to help you decide whether you should invest in Indigo paints IPO or not. Read on!

Growth Story of Indigo Paints Limited

Indigo Paints Limited was founded in the year 2000 as the manufacturer of low-end cement paints. Right from the start, the company had a clear focus on establishing a vast distribution network to extend its reach across India.

Over time, it expanded its range to include water-based paints like emulsions (interior and exterior), primers, distempers, etc. Today, Indigo Paints is one of the strongest contenders in the Indian decorative paints landscape.

Indigo offers a range of products including (but not limited to) cement-based paints, putty, enamels, wood coatings, distempers, primers, and emulsions. The company boasts of offering the first metallic paint in India for walls, the first floor paint in India that can withstand vehicular traffic, specifically developed ceiling paint for brighter ceilings, and a unique tile paint for roofs.

Financials of Indigo Paints Limited

Here is a quick look at the financial performance of Indigo Paints Limited over the last four years:

2020 2019 2018 2017
Total Assets 421.96 373.18 297.39 246.17
Total Income 626.44 537.26 403.11 290.31
Total Expenses 559.01 503.25 389.24 307.89
Profit After Tax 47.82 26.87 12.86 -17.58
Long-Term Debt 24.71 26.91 8.91 8.24

All amounts in INR Crore

A quick glance at the financial performance of Indigo Paints over the last four years highlights significant growth. During this period, the total income of the company showed growth at a CAGR of 21.20%.

In 2017, the company did not fare well and reported a loss of Rs.17.58 crore. However, between 2018 and 2020, the profit after tax grew at a CAGR of 54.93%. Also, the company’s total assets grew at a CAGR of 14.42%. The long-term debt of Indigo Paints is under control making it a financially strong company. 

SWOT Analysis

In the last few years, there has been a steady growth in the paints and coatings industry. In fact, the Indian Paint Industry grew at a rate of around 10.4% between 2008 when the market was valued at around Rs.159 billion, and 2020 when the market reached Rs.520 billion.

Interesting fact: In 2019, the Indian Paint Industry was the second-largest in the world.

In India, this industry is broadly divided into two segments – industrial and decorative. Of these, the decorative segment accounted for nearly 75% market share while the industrial segment had just over 25% share. Also, the decorative paints segment has grown at a CAGR of 11.4% since 2008 while the industrial paints segment has grown at a CAGR of 7.9%.

Around the world, the per capita consumption of paints is around 13-15 kgs. However, in India, the per capita consumption of paints in 2019 was only 4.1 kgs. While this was a huge improvement from the per capita average of 2.6 kgs in 2012, there is a long way to go before the global average is met. 

The Indian decorative paints segment has been dominated by a handful of players like Asian Paints, Berger Paints, Kansai Nerolac, and Akzo Nobel. These four companies have been dominating the market with around 65-70% share of the market. Indigo Paints Limited has a 2% market share and ranks fifth.

The paint industry in India has high barriers to entry. This is because the manufacturing and distribution processes require a lot of investment of money and time. Therefore, not many new companies are established in this industry, reducing the potential competition for Indigo Paints.

Strengths of Indigo Paints Limited

  • Indigo Paints Limited boasts of a track record of consistent growth in a highly competitive decorative paints industry with significant barriers to entry.
  • Being the first company to offer differentiated products, Indigo Paints has managed to establish greater brand recognition and has expanded into the complete range of decorative paints.
  • The company has undertaken focused brand-building initiatives to gain visibility and build brand equity.
  • Catering to a country as vast and diverse as India, Indigo Paints has established an extensive distribution network strategically using the bottom-up approach for better brand penetration.
  • The company has managed to leverage its brand equity to install tinting machines across its distribution network.
  • Its manufacturing facilities are strategically located with proximity to raw materials
  • The management team consists of senior professionals from the paint industry with considerable experience.

Weaknesses of Indigo Paints Limited

  • Although there are fewer competitors, the competition is very stiff since the competing companies are bigger and have larger operational budgets. Hence, a small error can be exploited by its peers.
  • Indigo Paints spends a large portion of its revenue on marketing. In 2020, the company spent around 12.7% of its revenue on marketing alone. This can put a strain on its finances in the long-run.

Peer Comparison

Here is a quick look at the performance of Indigo Paints in 2020 in comparison to its peers on some key aspects:

Rate of Growth of Revenue Return on Assets Return on Equity Operating Margin
Asian Paints -10.20% 13.65% 21.84% 22.12%
Berger Paints -10.62% 10.36% 19.29% 17.36%
Nerolac -19.63% 7.79% 10.03% 15.89%
Akzo Nobel -23.53% 8.25% 14.42% 15.17%
Indigo Paints 16.59% 11.33% 24.27% 10.73%

As you can see, Indigo Paints has surpassed its peers in revenue growth. However, most large companies suffered revenue losses last year due to the pandemic and associated lockdowns. Also, Indigo being a smaller company, its growth rate would be higher than larger corporations. In all other aspects, Indigo Paints is on par with its peers.

Opportunity to Investors – Valuation of the IPO

Let’s look at the valuation factors of Indigo Paints in 2020 in comparison with its peers:

Market Cap in Rs. Crore Earnings Per Share P/E Ratio P/B Ratio
Asian Paints 273,294.63 23.72 119.90 24.73
Berger Paints 78,765.92 5.38 150.63 27.44
Nerolac 32,661.23 7.16 86.46 8.80
Akzo Nobel 10,929.68 38.89 61.79 9.00
Indigo Paints 10.61

If you look at only the decorative paints section of the business, then the average P/E Ratio is around 94.10. If we look at the price band of Indigo Paints IPO and calculate the P/E Ratio, we get a value of 140.43. This is way higher than the industry average. 

Let’s take a look at the intrinsic value of Indigo Paints.

Intrinsic Value = Earning per share x (8.5 + [2 x expected annual growth rate])

In FY 2020, the EPS of Indigo Paints was 10.61. Also, the estimated annual growth rate is 8%. Therefore,

Intrinsic Value = 10.61 x (8.5 + [2 x 8]) = Rs. 259.945 per share. 

Risk Factors

  • If Indigo Paints fails to protect, strengthen, and enhance its existing brand, then it could face adverse effects on its business prospects and financial performance.
  • The continuing impact of the COVID-19 pandemic on the company’s business and operations is uncertain and it may be significant and continue to have an adverse effect on its business, operations, and future financial performance.
  • The company may not be able to identify or effectively respond to evolving preferences, expectations, or trends in a timely manner, and a failure to derive the desired benefits from its product development efforts may impact its competitiveness and profitability.
  • The company’s ability to grow its business depends on its relationships with dealers and the community of painters. Any adverse changes in these relationships, or the company’s inability to enter into new relationships, could negatively affect its business and results of operations.
  • Indigo Paints does not enter into any long-term agreements with its dealers and relies on renewing the agreement at regular intervals. Any failure in doing so can negatively affect its business and results of operations.
  • The company is required to obtain, renew, or maintain certain statutory and regulatory permits and approvals necessary to operate its business. If it fails to do so in a timely manner or at all, then its business, financial conditions, results of operations, and cash flows may be adversely affected.
  • Indigo Paints derives a significant portion of its sales from the state of Kerala. Hence, any adverse developments in that market could adversely impact the company’s business and profitability.
  • The company relies on third-party transportation providers to ferry the raw materials to the manufacturing facilities and finished products to dealers. Any disruption can impact the business and results of operations.
  • The decorative paints business is capital-intensive. Hence, if the company experiences insufficient cash flows from its operations or is unable to borrow funds to meet its capital requirements, then it may materially and adversely affect its business and results of operations.
  • The decorative paints business is subject to seasonal variations and cyclicality that could result in fluctuations in its results of operations.
  • Restrictions on the import of certain raw materials may adversely impact the company’s business and results of operations.
  • Uncertainty regarding the manufacturing industry, the housing market, economic conditions, and other factors beyond the company’s control could adversely affect the demand for its products and services, its costs of doing business, and its financial performance.

Promoters of Indigo Paints Limited IPO

  1. Hemant Jalan;
  2. Anita Jalan;
  3. Parag Jalan;
  4. Kamala Prasad Jalan;
  5. Tara Devi Jalan; and
  6. Halogen Chemicals Private Limited.

Things to Keep in Mind Before Investing in the Indigo Paints IPO

Here are some things that you need to keep in mind before investing in the Indigo Paints IPO:

  1. Indigo Paints is a fast-growing decorative paints company and has outperformed its peers in recent years and also during the COVID-hit period.
  2. It is the first paint company to offer differentiated products and has an extensive distribution network to maximize its reach and boost sales
  3. The company faces stiff competition from some established and trusted paint brands in India like Asian Paints, Berger Paints, Nerolac, and Akzo Nobel.
  4. Indigo Paints derives a significant portion of its sales from the state of Kerala. This puts too much emphasis on its business in the state and exposes it to risks.

Happy Investing!


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