Indigo Paints coming with an IPO to raise Rs 1176 crore

Indigo Paints

• Indigo Paints is coming out with a 100% book building; initial public offering (IPO) of Rs 10 each in a price band Rs 1488-1490 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on January 20, 2021 and will close on January 22, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 148.80 times of its face value on the lower side and 149.00 times on the higher side.
• Book running lead managers to the issue are Kotak Mahindra Capital Company, Edelweiss Financial Services and ICICI Securities.
• Compliance Officer for the issue is Sujoy Bose.

Profile of the company

Indigo Paints is the fastest growing amongst the top five paint companies in India. It is the fifth largest company in the Indian decorative paint industry in terms of its revenue from operations for Fiscal 2020. It has achieved this position in a highly competitive Indian decorative paint industry on the back of its multi-pronged approach. This includes introducing differentiated products to create a distinct market in the paint industry, building brand equity for its primary consumer brand of ‘Indigo’, creating an extensive distribution network across 27 states and seven union territories as of September 30, 2020, and installing tinting machines across its network of dealers. To create demand for its differentiated products, it initially tapped into Tier 3, Tier 4 Cities, and Rural Areas, where brand penetration is easier and dealers have greater ability to influence customer purchase decisions.

The company subsequently leveraged this network to engage with dealers in Tier 1 and Tier 2 Cities and Metros as well. It engaged Mr. Mahendra Singh Dhoni, a sportsperson with pan-India appeal, as its brand ambassador, to enhance its brand image amongst end customers. The company concentrated these branding efforts on its differentiated products and then leveraged these efforts to increase distribution and sale of its complete range of decorative paint products. It subsequently introduced tinting machines in its target markets to increase sales of emulsion paints, which require in-shop tinting.

The company manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints. It also identify potential product needs from customers and introduce differentiated products to meet these requirements, and create a distinct market for its products. For instance, it is the first company to manufacture and introduce certain differentiated products in the decorative paint market in India, which includes its 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). These products are differentiated based on the end-use they cater to, as well as added properties that they possess.

Proceed is being used for:

• Funding capital expenditure for expansion of the existing manufacturing facility at Pudukkottai, Tamil Nadu (the Proposed Expansion) by setting-up an additional unit (the Additional Unit) adjacent to the existing facility;
• Purchase of tinting machines and gyroshakers;
• Repayment/prepayment of all or certain of its borrowings; and
• General corporate purposes.

Industry overview

The Indian paint industry has a three-stage setup comprising raw material suppliers, manufacturers and sellers. Most of the raw materials in the paint industry are petroleum based, supplied by petrochemical companies. A few companies adopt contract manufacturing, while bigger companies have their own manufacturing facilities. The larger chemical companies are vertically integrated in both the raw materials and paint production stages while others are pure-play producers of paint and coatings. For example, Asian Paints and Berger Paints produce their own emulsions that are used in the production of paints. Most sales are driven through dealer and distributor networks, which sell onwards to local buyers. Hardware stores are usually the retailers in the paint and coating industry, while the other major retailers may have paint and coating segments within their broad range of offerings.

The Indian paint industry comprises a sizeable portion of India’s GDP. The industry has registered a CAGR of approximately 11% during Fiscal 2014 to Fiscal 2019, almost double the growth rate of India’s GDP. The high growth trajectory and shift of preference toward odor free, and dust and water resistant paints can be attributed to the rise in urbanization, growth in the popularity of branded paints, shortening of the re-painting cycle and robust pricing power prevalent in paint industry. An increase in demand is expected for both the decorative and industrial paints during the forecast period with the massive infrastructure initiatives by the Government of India. The decorative paint segment constitutes around 74% of the total paint sales, resulting in the paint sector growing at a robust rate even at the time of an industrial slowdown. The Indian paint industry is valued at approximately Rs 545 billion and is expected to grow to amount to Rs 971 billion by 2024. There is a strong co-relation between the Indian paint industry and the GDP growth of India. It has historically almost doubled India's GDP growth rate. Going forward, the decorative paint market is expected to grow at a CAGR of 13% while the industrial paint market is expected to grow at a CAGR of 9.9% by 2024.

Within the paint industry, the organized sector has a 67% market share and the remaining 33% is held by the unorganized sector. Until 2015 the unorganized sector had a market share of approximately 35%, which has been penetrated by the organized sector due to challenges faced by smaller players in the form of demonetization and implementation of GST. The organized players are expected to dominate the market share in the forecast period (through 2024) with companies like Indigo Paints tapping into the market of unorganized players in Rural Areas and smaller cities. With higher penetration and a larger dealer network in these areas, Indigo Paints will be able to effectively influence the purchase decisions of the consumers and capture a share of the market of smaller players. The unorganized players have been mainly focusing on the decorative paints segment with a highly scattered market, comprising about 2,500 units of small and medium sized paint manufacturing plants.

Pros and strengths

Track record of consistent growth: The company is the fastest growing amongst the top five paint companies in India. It is the fifth largest company in the Indian decorative paint industry in terms of its revenue from operations for Fiscal 2020. The Indian decorative paint industry presents significant entry barriers. These market entry barriers include the development of an extensive distribution network through relationships with dealers, the ability to set up tinting machines with dealers, as well as significant marketing costs and the establishment of a distinct brand to gain product acceptance. Its differentiated, strategic approach in addressing these issues has resulted in its continued success.

Differentiated products: The company consistently seek to launch first-to-market products by identifying niche product opportunities and introducing products that address these requirements. It was the first company to introduce certain category-creator products, including its Metallic Emulsions, Tile Coat Emulsions, Bright Ceiling Coat Emulsions and Floor Coat Emulsions in the decorative paint market in India. Other products that it introduced include its Dirtproof & Waterproof Exterior Laminate, Exterior and Interior Acrylic Laminate and PU Super Gloss Enamel that comprise its value-added product portfolio. These category-creator and value-added products comprise its portfolio of Indigo Differentiated Products and are differentiated from other products based on their end-use specifications and in terms of certain added properties.

Extensive distribution network: Paint companies are required to spend significant resources to develop their distribution network to increase the visibility and reach of their products through direct distribution to dealers. The dealers are typically multi-brand and are located across Metros, large cities, towns as well as Rural Areas. For a paint company, the market knowledge, financial resources and time required to develop such a network is significant. The company has established its distribution network gradually and strategically through the bottom-up approach with prudent use of time, cost and resources. As a relatively new entrant in the market, it first focused on dealers in Tier 3, Tier 4 Cities, and Rural Areas, where brand penetration is easier and dealers have greater ability to influence customer purchase decisions. This helped it engage with a larger base of dealers across Tier 3, Tier 4 Cities, and Rural Areas, which it subsequently leveraged to expand into larger cities and metros such as Kanpur (Uttar Pradesh), Kochi (Kerala), Thiruvananthapuram (Kerala), Patna (Bihar) and Ranchi (Jharkhand). The company first approached dealers in these markets with its Indigo Differentiated Products, being products with greater marketability, to improve penetration of its brand and strengthen its relationship with these dealers.

Strategically located manufacturing facilities: As of September 30, 2020, the company operated three manufacturing facilities in India, located in the states of Rajasthan, Kerala and Tamil Nadu. It plan its capital expenditure in advance and have periodically carried out capacity expansions at its facilities to cater to the increased demand for its products. The company’s aggregate estimated installed production capacity has increased progressively over the years from 46,608 KLPA and 48,944 MTPA as of March 31, 2018 to 101,903 KLPA and 93,118 MTPA as of March 31, 2020. Its manufacturing facilities are strategically located in proximity to its raw material sources, which reduces inward freight costs and results in lower cost of raw materials.

Risks and concerns

Significant portion of sales derived from Kerala: The company has historically derived a significant portion of its revenue from sales in the state of Kerala. In Fiscal 2020 revenue generated from sales in the state of Kerala represented 34.56% of its revenue from operations and revenue generated from Southern region (comprising states of Karnataka, Kerala, Tamil Nadu, Telangana, Andhra Pradesh, Pondicherry) represented 46.33% of its revenues from operations in Fiscal 2020. Accordingly, any materially adverse social, political or economic development, natural calamities, civil disruptions, regulatory developments or changes in the policies of the state or local government in this region could adversely affect its manufacturing and distribution activities, result in modification of its business strategy, or require it to incur significant capital expenditure, which will in turn have a material adverse effect on its business, financial condition, results of operations, and cash flows.

No long-term arrangements with dealers: The company sells all its products through its dealer network. It presently do not have any long-term or exclusive arrangements with any of its dealers and it cannot assure that it will be able to sell the quantities it has historically supplied to such dealers. Its dealers are typically multi-brand and also distribute products of its competitors. In the event its competitors’ products offer better margins to such dealers or otherwise incentivizes them, there can be no assurance that its dealers will continue to promote its products or place orders with it. Most of its transactions with its dealers are typically on a purchase order basis without any commitment for a fixed volume of business. There can also be no assurance that its dealers will renew their arrangements with it on current or similar terms, or at all. In addition, its dealers may also cancel purchase orders at short notice or without notice, which could have an impact on its inventory management. Termination of any of the above mentioned arrangements or frequent cancellation of purchase orders could have a material adverse effect on its business, financial condition, results of operations, and cash flows.

Dependent on third-party transportation: The company’s success depends on the supply and transport of the various raw materials required for its manufacturing facilities and of its finished products from its manufacturing facilities to its depots and further to its dealers, which are subject to various uncertainties and risks. The company uses third-party freight and transportation providers for the delivery of its products to dealers. Transportation strikes, if any, could have an adverse effect on supplies and deliveries to and from its dealers and suppliers. Further, on account of the COVID-19 pandemic, its manufacturing operations were shut down and its third-party transportation providers’ operations were also closed during the lockdown imposed by the Government in end of March 2020 through April 2020.

Stiff competition: The Indian decorative paint industry has historically been dominated by four major entities that had an aggregate market share of 65% in 2019, as the industry presents significant entry barriers. These market entry barriers include the development of an extensive distribution network through long-term relationships with dealers, the ability to set up tinting machines with dealers, as well as significant marketing costs and the establishment of a distinct brand to gain product acceptance. The company competes on the basis of the strength of its differentiated products, distribution network, brand recognition, and ability to populate tinting machines. As a result, to remain competitive in its markets, the ocmpany must continuously strive to manufacture differentiated products, expand its distribution network, enhance its brand and improve its operating efficiencies. An inability to effectively compete in terms of branding, providing competitive and differentiated products or services or expand into new markets, could have a material negative effect on its business, financial condition and growth prospects.

Outlook

Indigo Paints is one of the fastest-growing paint companies in India and in terms of revenue, it is the 5th largest company in the decorative paint industry. The company is engaged in manufacturing different types of decorative paints like enamels, emulsions, wood coatings, primers, distempers, putties, and cement paints. On the concern side, a significant portion of the company’s sales are derived from the state of Kerala and any adverse developments in this market could adversely affect its business. Moreover, its business is working capital intensive. If the company experiences insufficient cash flows from its operations or are unable to borrow to meet its working capital requirements, it may materially and adversely affect its business and results of operations.

The issue has been offered in a price band of Rs 1488-1490 per equity share. Minimum application is to be made for 10 shares and in multiples thereon, thereafter. On performance front, Revenue from operations decreased by 4.85% from Rs 2,726.36 million in the six months ended September 30, 2019 to Rs 2,594.20 million in the six months ended September 30, 2020, primarily due to a decrease in revenue from sale of goods. This was primarily attributable to the nationwide lockdown imposed in India during April 2020, and subsequent localized lockdowns imposed in many regions for varying durations. The company recorded a restated profit for the period of Rs 272.05 million in the six months ended September 30, 2020 compared to Rs 59.94 million in the six months ended September 30, 2019.

The company intends to continue to grow its portfolio of differentiated products going forward as these products have widened the end-user base that it cater to and typically have a higher margin profile than other decorative paint products. It also seeks to innovate and develop products with distinguished properties by undertaking research, attending industry trade fairs, and keeping abreast with industry trends and practices. By introducing more category-creator and value-added products, the company expects to continue to benefit from the early mover advantages that it has experienced in the past. It will continue to leverage the brand equity and dealer network created by these niche products to distribute its wide range of products in markets where it has been present for a considerable period, and to enter new markets, to further increase its market share.