Indigo Paints prices IPO at a discount to peers; only 99 times earnings

Consumer discretionary spends were among the most impacted by the pandemic. But for some reason, the already high valuations of paint stocks have become far more expensive in the past year. That is working in favour of Indigo Paints, which has priced its initial public offering (IPO) at ₹1,488-1,490 apiece.

An analysis by Anand Rathi Securities Ltd showed that at the upper end of the IPO price band, Indigo Paints is valued at 98.5 times its trailing 12-month (TTM) earnings. Its much larger competitors, Asian Paints Ltd and Berger Paints India Ltd, trade at price-to-earnings (PE) multiples of around 114 times and 128 times respectively, the broker said in a report on 16 January.

Analysts said considering the vibrancy in the primary market and the discount relative to peers, Indigo Paints’ issue could find favour with investors despite being aggressively priced. Besides, the issue may also attract demand from investors for its niche products and rural approach.

Indigo derives 85% of its revenue from tier 2-4 cities and largely deals in economy products such as putty, primers and low-cost paints. Differentiated products contribute around 28% to its revenues. Analysts said it enjoys an early mover advantage in some of these products, such as floor paints. Also, growing sales of differentiated products could yield higher margins.

Further, the company claims to remain the least affected during covid than rivals, aided by its huge presence in small towns.

To be sure, its revenues in the first half of the current fiscal year fell only 5% to ₹260 crore, while its profit before tax and exceptional jumped nearly three times thanks to cost-saving measures.

In contrast, revenues of Asian Paints were down 18.5% to ₹8,273 crore, and its profits fell 22.7% as well.

That said, the Indian paint sector is very competitive with high entry barriers. Even though the long-term growth prospects of the company may seem promising, sustaining the competitive pressures, especially in larger cities, could be challenging.

“The Indian paint industry is oligopolistic; it is commendable that Indigo has been able to survive as the fifth largest player in such a market. However, capturing share may be a tall order. Its revenue per distributor is low; the discount it offers distributors to push its products is low compared to peers. In this sector, dealer discounts play a key role in achieving sales targets, so it’s a downside risk in terms of how willing the dealer is to push their products,” said an analyst with a domestic broking house requesting anonymity. According to the IPO prospectus, in 2019-20, it offered an 11.4% discount to dealers, lower than the 15.8% discount offered by Asian Paints.

With a mere 2% market share, Indigo’s presence may not be a threat to large paint manufacturers, and gaining further market share could be difficult.