Siddhika Coatings coming with an IPO to raise around Rs 5 crore

Siddhika Coatings

• Siddhika Coatings is coming out with an initial public offering (IPO) of 8,24,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 57 per equity share.
• The issue will open on March 24, 2021 and will close on March 26, 2021.
• The shares will be listed on NSE Emerge Platform.
• The share is priced 5.70 times higher to its face value of Rs 10.
• Book running lead manager to the issue is Unistone Capital.
• Compliance Officer for the issue is Ashish Kumar Sonwani.

Profile of the company

Siddhika Coatings is a strategic channel partner in India for SK Kaken Ltd. (‘SKK’) and an authorised importer of its products through SKK Singapore Pte. Ltd. SKK is a renowned coatings and pigments manufacturer based in Japan. Having been associated with SKK for over 15 years, the company has gained the reputation of being one of the well-known suppliers of their products in India. It provides application services which include preparing and coating interior as well as exterior surfaces of civil structures using organic and inorganic architectural textured pigments and technical-grade functional coatings. In addition to apply and supply to majority of its clients, it also provides technical support service along-with supply of products wherein its experienced team provides technical know-how, guidance and equipments for paint/coatings application. Currently, the company is placed as one of the older marketers for SKK products and its specialist paint and application service providers in India.

The company’s greatest strength as a company is based in the inherent professional ‘team-based’ work ethos that it derives from its Japanese partners. This has enables it to provide end-to-end integrated solutions to its clients from supplying of materials to their successful application, it provides flawless and timely delivery of services.

With its head office based in New Delhi, over the years, it has set up various branch offices across the country to expand its reach to customers and have built a commendable service record with clients from various regions. Its prestigious and frequent clients include various eminent architects, real estate developers as well as government and private entities in India. Its PAN India network of application specialists, enabled it to execute projects for big names across various industries over the past decade.

Proceed is being used for:

• Part financing the working capital requirements
• General corporate purposes
• Meeting issue expenses

Industry Overview

The Indian paint industry has been involved in the manufacture of paints and coatings for over a decade. The industry has seen a gradual shift of customer preferences from the traditional white wash to higher quality paints like emulsions and enamel paints. Factors like, growing popularity of new variants providing improved finishing and textures, increasing per capita income of people and manufacture of a wide variety of paints such as eco-friendly, odor free, dust and water resistant paints, have propelled the growth of the paint market in India. India has emerged as the fastest growing major economy in the world and is expected to be one of the top three economic powers of the world over the next 10-15 years, backed by its strong democracy and partnerships. The production of Paints (all types), Printing Ink and Varnish (all types) (2018-19) was 809200.27 tonnes, 196923.18 tonnes and 35833.52 tonnes respectively. During the financial year 2019-20, the production of these products has been 500779.57 tonnes, 134512.19 tonnes and 20541.50 tonnes respectively.

The market size of the Indian paints sector has been pegged at Rs 134 bn in value terms and is very fragmented. While in value terms, the industry grew by 18% in 2008, in volume terms, the growth stood at 15% per annum. The current demand is estimated to be around 650,000 tonnes per annum and is seasonal in nature. The per capita consumption of paints in India stands at 0.7 kg per annum as compared to 1.6 kgs in China and 22 kgs in the developed economies. India's share in the world paint market is just 0.6%. The Indian decorative business has a share of approximately 77% in total sales. In foreign countries 50- 70% of the business is from the industrial segment. The unorganised sector controls around 35% of the paint market, v/ith the organised sector accounting for the balance. In the unorganised segment, there are about 2,000 units having small and medium sized paints manufacturing plants. Top organised players include Asian Paints (30% market share), Kansai Nerolac (20% market share), Berger Paints (19% market share) and iCI (12% market share).

India is the second-largest consumer of paint in Asia. The Indian paint industry has seen a gradual shift in the preferences of people from the traditional white wash to higher quality paints like emulsions and enamel paints. Increase in sales outside metros, as rural India's incremental consumption expenditure is witnessing a handsome growth. The rural sector has a major share of the decorative paints segment. Thus, any benefit to the rural sector for improving the dispensable income is directly co-related to the growth of the paint industry. Besides, decorative paints are marketing savvy products backed by large advertisement campaigns and dealership networks. 

Pros and strengths

Geographical Presence & efficient network management: The company is gradually expanding its presence to various cities in India. Currently it has branch offices across 11 states, including Delhi, Haryana, Uttar Pradesh, Rajasthan, Himachal Pradesh, Karnataka, Tamil Nadu, Telangana, West Bengal, Gujarat and Maharashtra. It has been able to efficiently manage the operations from its various locations in its network. Efficient coordination and standardized quality and practice across all locations have been achievable because its directors covered major segments of the country, while being stationed in major commercial centers like Bangalore, Mumbai, New Delhi and one director is constantly on business tours covering minor regions, there are senior employees, designated as General Managers who supervise each major branch office.

Good track record and customer retention: The company has been able to achieve a good track record by completing over 160 projects across 11 states in India over the last three calendar years, without compromising on quality or efficiency. The paint application industry in India is quite unorganized. In such a scenario, large institutions/ corporate clients generally prefer to deal with an organized entity. Thus, the company becomes a preferred choice for such clients by being placed well as an organised entity providing specialized services with SKK’s products. Once the company delivered its service to clients sourced through leads by SKK, the onus of retaining those clients is on the company. The senior management is directly responsible for interacting with clients so as to ensure maximum client satisfaction, smooth execution and eventually, customer retention. It has seen repeat business from some clients over the years which is due to its consistent good track record and service quality.

Unique brand positioning: The company’s association with ‘SK Kaken Ltd.’, a brand known for its high-quality paints and coatings, has positioned it well in this competitive market. The company has been able to enhance its brand recognition and improve brand recall through a variety of means such as its strong contract performance, PAN India network, quality workmanship, comprehensive solutions, modern techniques, integrated systems and processes, and targeted marketing. The company’s brand recognition has been instrumental in increasing its client count through a high referral rate and high client retention rate.

Risks and concerns 

Significantly dependent on a single supplier: The company is SK Kaken Ltd.’s (SKK) Indian strategic channel partner and as its authorised importer. Thus, it procures the majority of its paints and coatings material from a single supplier, SKK (S) PTE. LTD., a subsidiary of SKK. Any conflict, changes in policy or dispute may extremely severely impact its ability to procure material for its work contracts and may affect the survivability of its business. There can be no assurance that the company can maintain favourable terms in the future.

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 imported products of SKK, distribution network, brand recognition, and ability to complete projects with trained supervision. As a result, to remain competitive in its markets, the company must continuously strive to offer differentiated products/services, expand its distribution network, enhance its brand and improve its operating efficiencies.

Business is subject to seasonal fluctuations: The company’s business operations may be affected by seasonal factors which may restrict its ability to carry on activities related to its projects and fully utilize its resources. Heavy or sustained rainfalls or other extreme weather conditions such as cyclones could result in delays or disruptions to its operations during the critical periods of its projects. In particular, the monsoon season may restrict its ability to carry on activities related to execution of its projects and fully utilize its resources, which may affect its revenues and consequently, profit recognition to subsequent quarters. Adverse seasonal developments may also require the evacuation of personnel, suspension or curtailment of operations, resulting in damage to sites or delays in the delivery of materials. Such fluctuations may adversely affect its revenues, cash flows, results of operations and financial conditions.

Outlook

Siddhika Coatings is a key supplier of SK Kaken Ltd (SKK) products and its specialist paint in India. SKK is a Japan-based coatings and pigments manufacturer, and being a strategic channel partner of SKK, Siddhika Coatings Ltd is engaged in the business of supplying Architectural Coatings Supplies & Applications in India. It supplies products to real estate developers, government and private entities i.e. IT companies, hospitality leaders, business park developers, and various eminent architects in India. It has successfully completed 160+ projects across 11 states in India over the last 3 calendar years. On the concern side, the majority of the company’s products are imported in nature. It is exposed to possibilities of loss of products in transportation, change in import-export policies, foreign currency exchange rate fluctuations and exchange control risks, which may adversely affect its results of operations. 

The company is coming out with a maiden IPO of 8,24,000 equity shares of Rs 10 each at a fixed price of Rs 57 per share to mobilize around Rs 4.70 crore. On performance front, the revenue from operations of the company for the FY 2020 was Rs 3012.53 lakh as compared to Rs 3194.24 lakh during the FY 2019 showing a minor decrease of 5.68%. The company has earned a profit of Rs 295.86 lakh in the FY 2020 as against Rs 351.14 lakh in the FY 2019. There was a decrease of 15.74% in PAT of FY 2020 in comparison to PAT of FY 2019. The company intends to work towards expanding its product and specialised service awareness, thus benefitting from the untapped potential in this sector. Moreover, the company has started using products in addition to SKK like sealants, skim coats, etc to cater requirements of TMS business. However, as a business strategy it is still focused on single brand usage and specialization.