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    Indigo Paints IPO kicks off: Can this issue deliver solid returns?

    Synopsis

    Indigo Paints' public offer includes a fresh issue stocks aggregating to Rs 300 crore.

    Indigo Paints IPO kicks off: Issue subscribed 1.9 times on day 1, HNIs portion fully booked
    NEW DELHI: Indigo Paints' initial public offer (IPO) opened for subscription on Wednesday. The IPO has come at a time when the offering of IRFC is already under way, and the one of Home First Finance is all set to hit the market on Thursday.

    The Indigo Paints IPO is being priced at Rs 1,488-1,490 and comprises fresh issuance of stocks aggregating to Rs 300 crore and an offer-for-sale of up to 58,40,000 equity shares. Ahead of its IPO, the Sequoia Capital-backed paints maker raised Rs 348 crore from 25 anchor investors at Rs 1,490 per share.

    Analysts said while the asking valuations look demanding, one can subscribe to the issue, in view of the paints' maker improving performance and scope for the market share expansion. The company was least impacted by Covid-19 compared with its peers due to its presence in small towns, they said, and suggested that ad spends as a percentage of revenues may fall for the paints maker going ahead, further driving profitability.

    YES Securities said the company has a good execution record in a difficult industry, but one needs to be wary of frenzied valuations at listing. The company is aiming for a market-cap of Rs 7,100 crore at the issue price which, YES Securities said, implies a P/E multiple of 66 times FY22 and 44 times FY23 earnings, assuming an earnings growth CAGR of 50 per cent over FY20-23E.

    Those earnings assumptions look good, given the low base and improving distribution for the company, the brokerage said.

    "With Asian Paints and Berger trading at 62 times and 73 times FY23 earnings, respectively, Indigo can also command a multiple of 60 times, translating into a fair value of Rs 2,050 against the IPO price of Rs 1,490, implying a 37 per cent upside. As current GMPs are implying an even higher upside on the listing day, we would suggest booking profit on the listing day, if the stock opens significantly above our fair value as we are capturing three times earnings growth in three years, and ascribing a multiple similar to the sectoral leader," it said.

    GMP stands for grey market premium.

    Antique Stock Broking said Indigo Paints may continue to gain market share and outperform its larger peers in the short to medium term. This, it said, would be through scaling up of operations in the recently entered markets and increasing presence in larger cities of its existing mainstay geographies.

    The paints maker had a distribution network in 27 states at the end of September quarter.

    "We believe Indigo Paints' demand for a valuation in line with the industry is justified given its Ebitda margin (18.5 per cent in H1FY21 against peers' 17 per cent) in line with the sector and ROE of 24-27 per cent for FY20, in an industry with significant market entry barriers. Aggressive dealer network, tinting machine expansion to existing and new markets on niche products offer a significant scope to increase market share," it said.

    Elara Capital said the specialised products portfolio that contributed 28.6 per cent to the company's FY20 is profitable and attractive for dealers, which usually gives Indigo a “foot in the door”. That portfolio gives Indigo Paints a higher trade margin of 17-20 per cent against 15 per cent for Asian Paints, but has built a strong reputation, which gives it pricing power.

    The brokerage said the business model gives the company industry-leading gross margin (adjusted for outward freight cost) of 37.9 per cent in FY20, which is higher than Berger Paints by 280 bps in FY20, Kansai Nerolac by 520 bps and was at par with Asian Paints 37.7 per cent for FY20.

    Due to its smaller business size, Indigo is the fastest growing among the top five paints companies in India. Overall, it is the fifth largest company in the decorative paint industry in revenue terms.

    IIFL Securities expects Indigo's earnings per share to grow at a compounded annual growth rate of 48 per over FY20-23 compared with 14-15 per cent for Asian Paints and Berger. On those FY23 expectations, IIFL values the stock 46 times FY23 EPS, implying a valuation discount of 28-41 per cent over peers.

    Anand Rathi and Elara Capital have 'subscribe' ratings on the issue. Astha Jain of Hem Securities even sees a listing pop on the issue.

    "Indigo Paints enjoys early mover advantage in floor painting, with growing sale of differentiated products which
    yields higher margin .We like the fact that company remain least affected during Covid period (growth in sales and on Ebidta margin terms) compared with peers due to extensive presence in small towns, which might be one of the reason that led company outperform its peers during Covid times," she said.
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