Indigo Paints IPO review (May apply)

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Review By Dilip Davda on January 14, 2021

•    IPL is the fastest growing paint company and placed in the top five players in India.
•    The company has posted spectacular growth compared to listed peers.
•    Aggressive pricing mirrors future growth prospects, opined management.
•    IPL is largely banking on differentiated products that are being introduced for the first time.
•    Investors may consider investing in this IPO with a long term perspective.

ABOUT COMPANY:
Indigo Paints Ltd. (IPL) is the fastest growing amongst top five paint companies in India. The company initially targeted Tier 3 and Tier 4 cities and rural area for its market penetration and is now entering Tier 1 and Tier 2 cities and Metros.

IPL currently manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints. It also identifies potential product needs from customers and introduces differentiated products to meet these requirements, and create a distinct market for products. It is the first company to manufacture and introduce certain differentiated products in the decorative paint market in India, which includes Metallic Emulsions, Tile Coat Emulsions, Bright Ceiling Coat Emulsions, Floor Coat Emulsions, Dirtproof & Waterproof Exterior Laminate, Exterior and Interior Acrylic Laminate, and PU Super Gloss Enamel (together, 'Indigo Differentiated Products') (Source: F&S Report). These products are differentiated based on the end-use they cater to, as well as added properties that they possess. The company is currently present in 27 states and 7 Union Territories with extensive penetration in small towns. IPL has installed 4600 tinting machines till September 30, 2020.

As of September 30, 2020, IPL own and operate three manufacturing facilities located in Jodhpur (Rajasthan), Kochi (Kerala) and Pudukkottai (Tamil Nadu) with an aggregate estimated installed production capacity of 101,903-kilo litres per annum ('KLPA') for liquid paints and 93,118 metric tonnes per annum ('MTPA') for putties and powder paints. IPL is expanding Tamil Nadu unit with installation of 50000 KLPA capacities which is expected to be on stream in FY23.  

About a dozen top players contribute 77% market share in decorative paint segment and the rest is shared between small, regional and local players. IPL has hired M S Dhoni as its brand ambassador and is doing an aggressive media campaign to increase its market share.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its capital expenditure for expansion of Tamil Nadu unit (Rs. 150.00 cr.), purchase of tinting machines and gyroshakers (Rs. 50.00 cr.), repayment/prepayment of all or certain borrowings (Rs. 25.00 cr.)  and general corpus fund needs, IPL is coming out with a maiden IPO to mobilize Rs. 1168.59 to Rs. 1170.16 cr. (based on lower and upper price bands). The company is issuing approx 2013430 fresh equity shares of Rs. 10 each for Rs. 300 cr. and offer for sale of 5840000 equity shares. Thus this combo offer will be for approx 7853430 shares as overall size. The company has fixed price band of Rs. 1488.00 to Rs. 1490.00 and minimum application is to be made for 10 shares and in multiples thereon, thereafter. The issue opens for subscription on January 20, 2021, and will close on January 22, 2021. IPL is offering employees a discount of Rs. 148 per share to eligible employees.

Post allotment, shares will be listed on BSE and NSE. Out of the total issue, 70000 shares reserved for allotment to eligible employees and from the rest, it has allocated 50% for QIBs, 15% for HNIs and 35% for retail investors. Issue constitutes 16.51% of the total post-issue paid-up capital of the company. The issue is jointly lead managed by Kotak Mahindra Capital Co. Ltd., Edelweiss Financial Services Ltd. and ICICI Securities Ltd. Link Intime India Pvt. Ltd. is the registrar to the issue.  

Having issued initial equity at par, IPL has issued/converted further equity in the price range of Rs. 66.15 and Rs. 106.15 between May 2018 and January 2021. It has also issued bonus shares in the ratio of 64 shares for every 1 share held in March 2017.

The average cost of acquisition of shares by the promoters and selling stakeholders is Rs. 0.15, Rs. 74.49 and Rs. 113.77 per share.

Post issue, IPL's current paid-up equity capital of Rs. 45.56 cr. will stand enhanced to Rs. 47.57 cr. With this IPO price, the company is looking for a market cap of Rs. 7087.78 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, IPL has posted turnover/net profit of Rs.403.11 cr. / Rs. 12.86 cr. (FY18), Rs. 537.26 cr. / Rs. 26.87 cr. (FY19) and Rs. 626.44 cr. / Rs. 47.82 cr. (FY20). For the first half ended on September 30, 2020, it has earned a net profit of Rs. 27.21 cr. on a turnover of Rs. 260.24 cr.

For the last three fiscals, the company has posted an average EPS of Rs. 7.68 and an average RoNW of 19.89%. The issue is (based on upper price band) priced at a P/BV of 30.28 based on its NAV of Rs. 49.20 as on September 30, 2020, and at a P/BV of 13.53 based on post issue NAV of Rs. 110.12. On the said date, its debt-equity ratio was 0.13: 1. It has just a 2% market share against double-digit share enjoyed by four top leaders.IPL has posted growth in revenue at a CAGR of 41.9% between Fiscal 2010 and Fiscal 2019 and trying to encase on this track record.

If we annualize latest earnings and attribute on fully diluted equity post issue, then asking price is at a P/E of around 130 against the industry average of 81.

COMPARISION WITH LISTED PEERS:
As per the offer documents, IPL has shown Asian Paints, Berger Paints, Kansai Nerolec and Akzo Noble as its listed peers. They are currently trading at a P/Es of around 113.78, 128.23, 84.09 and 59.56 (as on January 14, 2021). Although they are not fully comparable on an apple to apple basis, the paint industry is trading at an average P/E of 81 and based on this IPL issue is priced aggressively. However, according to management, this pricing mirrors future growth prospects that are based on past track records of performance which is above the industry average. During the lockdown period too it has posted revenue growth of 16% with differentiated products launch in the market against sub 5% by four major players.

BRLM'S TRACK RECORDS:
Three merchant bankers associated with this issue have handled 30 public offers in the past three years, out of which 11 issues closed below the offer price on listing date.

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