Indigo Paints Ltd, fifth largest paint company focused solely on decorative paints is coming out with its IPO on 20th January 2021. In the blog ‘ Indigo Paints Ltd- IPO Review ‘ I will talk about: 1) IPO Details 2) Indian Paint Industry 3) Market share 4)Entry barriers 5) About the company 6) Key pointers of Indigo Paints 7) How Indigo dealt with the entry barriers 8) My take
Indigo Paints Ltd- IPO Review
Indigo Paints Ltd- IPO Details
Price band= ₹1488-1490 per share
Lot Size= 10 shares & multiple of 10s
Issue size: Rs. 1170 crore. Of which ₹300cr is primary issue that will go directly to the company i.e. Indigo Paints Ltd. Of the ₹300cr, 150 cr will go towards expansion of its Pudukkotai facility in Tamil Nadu, ₹50 cr will go towards the purchase of tinting machine & gyro-shakers(I will talk about these 2 later in the blog) and the last ₹25 cr will go towards debt clearance.
The remaining ₹870cr is offer for sale that is the money will go to the selling shareholders.
So, who are selling shareholders?
Sequoia Capital, a venture capital fund had invested ₹140cr in Indigo paints between 2015-16, holds more than 39% stake in the company. They along with the Managing Director ‘Hemant Jalan’ will be the selling shareholders. Promoters held 60% share before the IPO which will reduce to 54% post-IPO.
Company valuation at the time of IPO= ₹7,100cr which would mean a TTM P/E ratio of 149 at the price of ₹1490 which is quite high. Although the industry overall has a very high PE ratio, lets see how the market reacts.
Indigo Paints Ltd- IPO Review
Indian Paint Industry - Key Pointers
Now, let us look at who the big boys of the industry are- Obviously it is Asian Paints & Berger Paints. While the market share of Indigo stands at just 2%.
While decorative paints find application in various parts of a house, industrial paints are used in application such as automotive coatings, refrigerator coating etc
One positive for the industry is the reduction in repainting cycle time and which is expected to reduce little more in the future.
Average repainting cycle is on a decline from 7-8 year period in 2010 to 4-5 year period in 2019.
Coming to the sub-segment of the industry, Emulsion is the largest with a share of 41% of Indian decorative paint industry and the most trickier.(I will explain later in the blog why?)
Indigo Paints Ltd- IPO Review
Indian Paint Industry- Entry Barriers
Indian Paint Industry has three main entry barriers which makes the entry and scaling up of new entrants very difficult. I will explain the entry barriers one by one below.
Entry Barrier #1 : Placing Tinting machine in Shops
Let me first get started by : What is a Tinting machine?
It is basically a mid-sized machine which using a few color combination can create a huge number of shades of emulsion paints(2000+). Given, the huge number of variants and different sizes of product, it is very difficult to maintain inventories of these products, & hence the tinting machines becomes very important. Also, it is the largest segment in the Indian decorative paint market & fastest growing as shown in the image above.
Now comes the problem: Tinting machines are unique to each paint company due to different colorants used, slide cards, custom software application, etc as well as different emulsion shades of different companies.
Tinting machines are installed at the dealer’s place by these paint companies at their own cost.
Now given the size of the machine & space constraints with these shops, there is a stiff resistance by dealers to go for more than one tinting machine.
But Every company wants the dealers to use their own tinting machine. The solution is possibly to get on with new dealers.
Other than Tinting machine, a gyro shaker is required to shake the emulsion mixture formed by the combination of different colors to bring in uniformity. Gyro shakers are brand agnostic.
Typical pricing of tinting machine is ₹1.15 lac & that of gyroshakers are ₹30000-35,000 per machine.
Asian Paints with its reach is way beyond and presence in over 70,000+ dealers have already setup its own tinting machines creating big hindrance for other brands to get in.
Entry Barrier #2 : Setting up the 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 wider the presence of the brand network, the greater are the result outcome(revenue generation) because of advertisement.
Dealers/Distributors are mostly hardware shops or multi brand outlets who would start storing inventories if there is demand/awareness from customers/ painters.
Entry Barrier #3 : Build brand awareness
Paint companies need to spend significant amount to promote their brand through advertisements to bring in awareness, top of mind recall etc. making distributors stock their products.
Indigo Paints Ltd- IPO Review
Indigo Paints Ltd- About the company
Setup in the year 2000, Indigo Paints Ltd is a pureplay decorative paints company. The company manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints.
The company claims to be the first 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. Revenue generated from such differentiated product is about 29% of revenue which fetches better margins.
The company has grown by focusing more on tier 3 & 4 cities in southern India. Now they are strengthening presence in North India.
It has 3 manufacturing facilities situated in Jodhpur (Rajasthan), Kochi (Kerala), and Pudukkottai (Tamil Nadu). It is further looking to expand its manufacturing capacities at Pudukkottai to manufacture water-based paints. Capacity utilization is about 55%. Indigo is currently present in 27 states (it is yet to enter Himachal Pradesh) and 7 union territories as of date.
Trying to grow by populating more dealers with their tinting machines which will enhance the sales of emulsion paints.
Indigo Paints Ltd- IPO Review
How Indigo Paints scaled in a sector with such high entry barriers?
Getting entry into a market dominated by such household brands (Asian Paints, Berger Paints etc) always will be difficult. So, to bring in the initial scale for the company to be able to do anything meaningful, the company focused on differentiated products and more importantly spread its distribution in smaller towns & rural areas and that too in Southern India, where the larger peers did not had meaningful presence. They approached dealers in these markets with Indigo’s Differentiated Products. These products brought greater marketability for them as well as acceptance among the dealers.
Even in FY20, the company derives 35% sales from Kerala.
Post gaining the scale, the company started populating its own tinting machines with distributors & then have been spending heavily on marketing to build brand salience.
With things in a much better place, the company is now focusing on increasing its presence in newer geographies which is likely to aid the growth which is a common strategy of first gaining some scale and using that to grow further.
How Indigo Paints Ltd is dealing with the entry barriers:
Entry Barrier #1: (Tinting Machines) Indigo Paints started installing its own tinting machines since 2014 only post achieving its initial scale. Co. has installed an average of 1,223 tinting machines every year since FY18. Number of tinting machine as of Sept 30,2020 is 4600+.
Entry Barrier #2: (Distribution Network) Co. has setup its distribution network across 27 states and seven union territories as of September 30, 2020.
Also, Painters are incentivized through a token system in which containers of a select range of products carry tokens. Also, doing lot of painter meets, dealer boards and in-shop branding, and also intensified dealer loyalty programs since FY19.
Entry Barriers #3 : Indigo Paints has been aggressively advertising to build its brand. As a part of the advertisement and marketing campaigns, the company roped in M S Dhoni in May 2018.
In addition, the company is using a single brand to promote its different product again to build brand.
Also, IPOs or Public listing brings in additional brand awareness.
Indigo paints ltd started advertising only since last 4-5 years and now have been able to price its products on parity with larger brands.
In terms of total advertising spend, the company competes with its top 3 in the amount.
Primary Research- Indigo Paints Ltd
Asian Paints Regional Salesperson:(Bihar)
The brand is so strong that they have the bargaining power with everyone/everything. Regarding companies moving towards other brands in lure of higher margins, his point was the volume of sales for Asian paints will compensate for the lower margins that Asian paints give its dealers. Quality wise products by all brands are more or less same.
Asian paints have the largest product portfolio associated with wide distribution network.
Indigo Paints regional salesperson:(Bihar)
Copying Asian paints’ “No distributor approach” almost all paints company have now switched to (Factory–> Depo–> Retailer) supply chain except Akzo Nobel.
NO Need for distributor/stockist. This increase the margin for the company.
Indigo paints is trying to differentiate by providing differentiated product and targeting rural areas and towns.
His point was market is quite underpenetrated which provides room for all the brands to grow. As the awareness of any brand increases, retailers start stocking those brands.
Kansai Nerolac + Indigo Paints dealer(Bihar)-
People/Painters comes asking for Asian/Berger paints but according to him, he was the influencer suggesting what should the painter buy. The margins are better compared to other companies, so they used to sell Indigo more as well as offer slightly lower price than competitors. To reward the decision maker i.e. the painter, Indigo paints offered ₹100 token per bucket(20 lit) compared to ₹50 per bucket by Nerolac and much lesser by others. Indigo had the entire product portfolio. Supply chain is similar to Asian Paints & Berger paints, they get the product within a day from the company’s depo. Indigo is continuously increasing the number of depos, so now the supply is within hours.
He made the point that the brand was trying hard to gain further market share.
Because of the lot of marketing initiatives taken by Indigo Paint, their margins are lower than that of the competitors. And that is helping the growth. In interviews, the management has maintained that they would continue the current amount of marketing and Ad spend but as the sales grow, this spend as a percentage will start appearing lower.
Indigo Paints Ltd- Financial Analysis (2012-21)
As you can observe that the sales of the company has grown at a CAGR of almost 39% between 2012 and 2021, much faster than the industry growth rate of around 12%. Thus multiplying the revenue by almost 20 times.
Whenever any company grows faster than the industry there is always market share capture.
The Operating profit margin(Line item #6) and Profit margin growth(Line item #11) is much more impressive.
The company also has consistently generated higher Cash flow from operation(Line item #12) than profits.
With branding comes the negotiating power, as is visible in the cash conversion cycle(Line item #20) since FY15 which turned negative.
Also, the company has been consistently adding assets(Line item #13) to keep its growth momentum going.
Factors helping Indigo Paints grow:
As I had mentioned in my previous blog that there are strong entry barriers in the Indian Paint industry. So, any company to grow has to come up strategies different that the market leaders:
- Management of the company brands all their products under one brand name that is ‘Indigo Paints’. Larger brands have 10-12 different brand name for different product categories.
- The primary reason for maintaining one brand name was to reduce the advertisement cost.
- In all their advertisement, they include the Brand name with the product/category name to create better brand recall such as ‘Indigo PU Paint’, ‘Indigo Bright Ceiling Paint’, ‘Indigo Acrylic Paints’ etc
- In terms of choosing the brand ambassador, they chose ‘M S Dhoni’ over bollywood stars as cricket have much more wider acceptance than bollywood star.
- Company is getting into products where the competition is less. For eg. Pouch Distemper which is sold in 1 kg pouches sells a lot in rural areas. Most of the larger players have exited that market as they don’t find it lucrative. Indigo paints is focusing on that area.
- Other strategies of differentiation is that they are focusing on product categories where the market size is ₹50-60cr where larger players will not invest additional bucks.
- Focusing on very differentiated product categories. Almost 30% of sales comes from differentiated products where the company is able to increase prices pertaining to any cost increase. That also enables them to have the Highest Gross margin in the industry.
- Post achieving the initial scale and the investment by Sequoia capital, the company started advertising aggressively since 2014. While larger companies invest 2-3% of sales towards advertisement, Indigo spent 10%.
Indigo Paints Ltd- IPO Review
While reading about the Indian paint industry, I was in awe of the industry leader Asian paints having a market share of 42%, the second one Berger Paints had the market share of just 12%, a huge gap of 30%. While that of Indigo Paints stands at just 2%.
Indigo Paints management has grown the company by focusing on the areas where these giants have little or no presence. As of now, they have been growing by snatching up low hanging fruits of underpenetrated markets or taking up market share from smaller /unorganized players.
The growth is likely to continue given the smaller size of the company and various initiatives taken by the management.
Indigo Paint with a revenue of ₹625 cr in FY20 still very small compared to the ₹20,000+cr revenue of Asian Paints, ₹6400cr revenue of Berger Paints & ₹5300cr of Kansai Nerolac. Even the closest peer Akzo Nobel had a turnover of ₹2700cr in FY20.
Problem is likely to come once the company become sizeable to directly competing with the larger ones. Given the low penetration of paints in India, there is enough opportunity of growth for everyone.
Coming to profitability, with revenue growth, the ad spend as a percentage of sales is expected to go down, aiding margins. Also, as of now it has limited geographical presence, as it expands even slightly, it will reflect in the sales growth .
One day before the IPO opening, Indigo Paints shares were trading with a 54.36 per cent premium over the IPO price in the grey market today. The shares of the fifth-largest company in the decorative paint industry were trading at Rs 2,300, up Rs 810 from the issue price. Date: 19.01.21
In terms of valuation, it is quite high and post listing gains the share prices are likely to correct. If we get at the right price, it is definitely a long term holding bet.