Indigo Paints’ ₹1,000 crore IPO is a hit even before it opened⁠ for subscription— here’s why

Indigo Paints’ ₹1,000 crore IPO is a hit even before it opened⁠ for subscription— here’s why
  • India’s fifth largest paint maker, backed by US-based venture capital firm Sequoia, will start its initial public offering (IPO) today, January 20.
  • The price band for the IPO has been set at ₹1480-1490 per share.
  • The bids can be made for a minimum of 10 equity shares, and in multiples of 10 thereafter.
  • The shares commanded a premium of ₹800-810 in the grey market, over above the set IPO price band.
The ₹1,000 crore IPO of Sequoia Capital-backed Indigo Paints will be open for public subscription from today (January 20).

The issue from India’s fifth largest paint maker has garnered a strong response in the grey market ahead of its IPO — the shares were commanding a premium of ₹800-810 over the set price band of ₹1480 - ₹1490 per share. However, the grey market is not an official measure of the market premium. But it is a fair indicator of demand for the shares in the market.

Analysts reports that have given a ‘subscribe’ rating for the IPO indicate that the demand, so far, is well justified because the Pune-based paint maker has given tight competition to much larger peers like Asian Paints and Berger Paints in recent years. Indigo Paints is a relatively small player with a 2% market share but its profit has grown significantly, nearly four times in the last three years.

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All you need to know about Indigo Paints IPO:
  • The issue will remain open for subscription until January 22, making it the second IPO of 2021, after IRFC.
  • The price band for the IPO has been set at ₹1480-1490 per share.
  • The bids can be made for a minimum of 10 equity shares and in multiples of 10, thereafter.
  • The proceeds of the issue will be used for expansion of the existing manufacturing facility at Pudukkottai in Tamil Nadu, purchase of tinting machines and gyro shakers, and repayment/prepayment of borrowings.
Attractive valuation, healthy financials, robust growth and much more — here’s what analysts have to say about the IPO

Discounted valuation

Analysts believe that the IPO is attractively priced and can offer a good investment opportunity for the investors. The team at the brokerage firm, Anand Rathi, has highlighted that the company is reasonably valued at current valuation compared to the larger peers. At the upper end of the IPO price band, Indigo Paints is offered at 98.5 times its earnings, as compared to its other listed peers like Asian Paints, Berger Paints and Kansai Nerolac.

CompanyP/E ratio
Asian Paints113.78x
Berger Paints128.23x
Kansai Nerolac84.09x
*Source: Anand Rathi report

The price to earnings ratio is the financial ratio that helps determine a stock's market value compared to the company’s earnings. The P/E ratio shows what the market is willing to pay for a stock based on its earnings.

“We believe that due to the lower valuations as compared to its peers, Indigo Paints is placed at an attractive valuation. Further with the planned expansion, lowering debt and other cost control measures, we are also confident that the company will maintain the growth levels which is mirroring the pricing of the IPO,” said the report.

Healthy financial position

Indigo Paints’ revenue and profitability have consistently improved over the last few years. HDFC Securities, in its IPO report, noted that the company has ‘smartly executed its revenue ramp-up’ and that reflects in the company’s improving fundamentals.

Indigo Paints’ ₹1,000 crore IPO is a hit even before it opened⁠ for subscription— here’s why
Business Insider

The company’s revenue from operations has grown at a compound annual growth rate (CAGR) of 41.9% between financial years 2010 and 2019, compared to the range of 12.1% to 13.1% recorded by the top four paint companies in India.

The sector is poised to grow, and its listed peers are proof of that

Indigo Paints is from the sector that is poised to grow over the coming years, despite all the challenges that may take over the world. According to the ICICI Securities report, the Indian paint industry is valued at ₹54500 crore, and it is expected to grow at 12% CAGR in the next five years.

Indigo Paints’ ₹1,000 crore IPO is a hit even before it opened⁠ for subscription— here’s why
Business Insider

The decorative paint segment, which constitutes 74% of total paint sales, is likely to grow at CAGR 13% backed by shortening repainting cycle, rising urbanisation and aspiration level of middle-class households in India. The report highlighted that government schemes like Pradhan Mantri Awas Yojana, smart city development, Real Estate development and others might play out in its growth in the near future.

The gains in other listed Indian paint stocks are proof of safety that investors have found in the sector.

CompanyStock price change since March 31, 2020
Asian Paints59%
Berger Paints59%
Akzo Nobel45%

Here are some of the risk factors you may want to consider before investing in Indigo paints.
  • Although the paint industry is deemed to grow, what remains challenging is the cut-throat competition in the industry.
  • Paint companies have been one of the biggest beneficiaries of benign raw material prices resulting in significant gross margin expansion. According to ICICI Direct report, any significant upward movement in crude prices from the current level possesses a substantial risk at gross margin.
  • A significant portion of sales for the company are derived from Kerala, and any adverse developments in this market could adversely affect the business.
  • According to HDFC Securities, the company does not have long-term agreements with its suppliers for raw materials, and an inability to procure the desired quality, quantity of its raw materials in a timely manner and at reasonable costs may have a material adverse effect on its business.
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