Indigo Paints IPO: Here’s All You Need To Know

Indigo Paints Ltd. will launch its three-day initial public offering on Wednesday as investors seek a partial exit and the company looks to expand production capacity, pare debt.

Business

Indigo Paints was India’s fifth-largest by revenue from operations in the decorative paints segment in 2019-20. The company has built a distribution network across 27 states and seven union territories as of September 2020, and has installed tinting machines across its network of dealers.

As of Sept. 30, the company had 10,988 dealers. “In the next five-six years, we would like to approach the dealer strength of the No. 2 and 3 players,” Jalan, chairman and managing director at Indigo Paints, told BloombergQuint in an interview before the IPO’s launch.

Berger Paints India Ltd., the nation’s second-largest paintmaker with a 12% market share in the decorative segment, has 30,000 active dealers, while Kansai Nerolac Paints Ltd. has a 7% share and 27,000 active dealers, Jalan said.

Besides, to create demand for its products, the company initially tapped into smaller towns and cities and rural areas, where brand penetration is easier and dealers have greater ability to influence customer purchase decisions. The paintmaker then leveraged this network to engage with dealers in tier-1 and 2 cities and metros.

As of September 2020, Indigo Paints owned and operated three manufacturing facilities in Jodhpur (Rajasthan), Kochi (Kerala) and Pudukkottai (Tamil Nadu), with an aggregate estimated installed production capacity of 101,903 kilolitres per annum for liquid paints and 93,118 metric tonnes per annum for putties and powder paints.

• Indigo Paints’ advertisement and sales promotion expenses in FY18, FY19 and FY20 have been relatively high and represented 11.22%, 12.63%, and 12.65%, respectively, of its revenue from operations in these years.
• The advertising and promotion spend as a percentage of revenue from operations for the top four paintmakers were in the range of 3.8-5.8% in FY18, 3.1-5.0% in FY19, and 3.3-5.0% in FY20, Indigo paints said in its red herring prospectus.

But while advertising expenses will grow in the future, Jalan said it will grow at a modest pace.

Financials

The company, according to Jalan, saw a relatively lesser fall in revenue than peers as smaller towns and rural areas had fewer Covid-19 cases. Business activity, he said, wasn’t impacted as much due to the pandemic.

Peer Comparison

The Rs 40,300-crore Indian decorative paints space is dominated by Asian Paints Ltd., Berger Paints India Ltd., Kansai Nerolac Paints Ltd. and Akzo Nobel India Ltd., which collectively own 66% of the market. Indigo Paints own 2% of the decorative paints segment.

While Indigo Paints completely focuses on the decorative paints segment, that for Asian Paints account for 95-97% of revenue.

Risks

• The continuing impact of the Covid-19 pandemic.
• Inability to identify or effectively respond to evolving preferences.
• Inability to enter into new relationships with dealers and painters.
• Not being able to enter into long-term arrangements with dealers.
• Under-utilisation of its manufacturing capacities.
• A significant portion of its sales are derived from Kerala, and any adverse development in this market could adversely affect business.