Home / Markets / Mark To Market /  What the Indigo Paints IPO has in common with GameStop frenzy

Who says India can’t have its own GameStop mania? As Exhibit A, consider Indigo Paints Ltd, the latest company to list on the stock exchanges. At the time of its IPO, this column had said, tongue-firmly-in-cheek, that the issue was priced at only 99 times trailing earnings.

Dalal Street has a strange fascination for paint stocks, with market leader Asian Paints Ltd trading at over 110 times trailing earnings. But since the time Indigo Paints hit the primary markets, paint stocks have corrected a bit, thanks to the threat of competition, after the Aditya Birla group announced a huge investment in the sector.

Also Read: Paint makers get a taste of their own medicine as Grasim enters their turf

But none of that has dulled the enthusiasm for shares of Indigo Paints. Its shares have risen 110% on the day of listing, which means its trailing price-earnings ratio has risen to over 200 times, making it the most expensive paints stock in town.

“This is insane. Indigo Paints is trading at well over 100 times two-year forward earnings estimates. Investors are overlooking the rising competition in the sector," says a consumer goods analyst at a domestic institutional brokerage. Even if earnings grow 40% in the next two years and the stock stays where it is, Indigo Paints will be valued at 100 times earnings two years from now.

Much like GameStop, Indigo Paints has ceased to be a mere paints stock. Its shares are rising only because it got the necessary support from the markets ecosystem, which pushed it as a great IPO, to be bought at any cost. Valuations don’t really matter, as the attempt is to ride the rally and get out before the shares start correcting. Looking at the PE of 200 times, the stock attracted some short sellers as well, many of who are now trapped. 5.9 million shares of the firm were marked for delivery on Tuesday, even though floating stock is just 5.5 million. This can result in a further spike in the shares, as was the case with the Burger King IPO, which was valued higher than Mcdonald’s on listing, despite much lower revenues.

Also Read: Short squeeze takes Burger King valuations way past McDonald's in India

Retail demand for Indian IPOs follows a fairly predictable pattern. In an unofficial market for unlisted shares, traders seek signals for how an IPO is likely to list, by looking at the so-called grey market premium. Companies where the premium is high, tend to do very well, both in terms of demand for its shares as well as listing premium. Some such stocks also tend to get recommended by experts on business channels and some television anchors, who go so far as to advise investors to apply for the IPO in the names of all family members, so as to increase the chance of getting an allotment. Once these elements are in place, fundamentals take a backseat, like they have with shares of Indigo Paints.

Indigo Paints’ market cap is now nearly 15,000 crore, or about 24 times FY20 revenues. Akzo Nobel India Ltd, a much larger paints company whose revenues are more than four times higher, has a much lower market cap of around 10,400 crore.

Note also, that in sharp contrast, shares of Indian Railway Finance Corp. Ltd, listed last week at a discount to its IPO price, simply because it did not have the support of the market ecosystem.

While fundamentals don’t matter much in market frenzies such as the current one in Indigo Paints, for what it’s worth, here what the consumer analyst says, “It is difficult to explain this enthusiasm towards the paints sector especially now that margins have peaked and the risks are on the downside. The much-promoted theme of shift from the unorganised to the organised sector has largely played out in the past two years, so sustaining past growth rates can be challenging."

"Bumper IPO listings have more to do with market mood than anything else. In the case of Indigo Paints as well, fundamentals do not support this kind of valuation growth. Besides, there is a threat to market share of existing firms, with competition fast emerging from newcomers such as Grasim and JSW. But investors seem to have conveniently ignored that," says another analyst at a domestic brokerage.

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