Industry

The Indian paint industry has a three-stage setup comprising raw material suppliers, manufacturers and sellers. Most of the raw materials in the paint industry are petroleum based, supplied by petrochemical companies. A few companies adopt contract manufacturing, while bigger companies have their own manufacturing facilities. The larger chemical companies are vertically integrated in both the raw materials and paint production stages while others are pure-play producers of paint and coatings. Most sales are driven through dealer and distributor networks, which sell onwards to local buyers. Hardware stores are usually the retailers in the paint and coating industry, while the other major retailers may have paint and coating segments within their broad range of offerings. Direct sales are a minor component of overall sales.

India’s per capita consumption of paints and coatings stands at 4.1 kgs. in 2019 compared to 4.7 kgs. in Asia Pacific and 9.7 kgs. in developed countries of Asia Pacific. India's consumption has increased by a CAGR of 6.8% in the last seven years from 2.6 kgs. in FY 2012 to 4.1 kgs. in FY 2019, compared to the global average consumption of approximately 14 - 15 kgs., the per capita consumption of paints and coatings in India is low, signalling a significant opportunity for market penetration in India.

Source: RHP, StockAxis Research

The decorative paint segment constitutes ~74% of the total paint sales, resulting in the paint sector growing at a robust rate even at the time of an industrial slowdown. The industry (Decorative and Industrial Paints) has growing at a CAGR of 11% from 2014 – 2019 and is expected to reach Rs. 971 billion in 2024, registering a growth of ~12% CAGR from 2020 – 2024. In Volume terms, the industry has grown from 4.1 MMT in 2014 to 6.3 MMT in 2019, a growth of 9% CAGR. Further, the industry volumes are expected to reach at 9.4 MMT in 2024, thereby growing a CAGR of 8.3% for the period of 2020 – 2024.

Geographically, the western and southern regions of India account for over 60% of the total demand for paints. For the industry, metros and Tier 1 areas contribute a much lower share in terms of value as compared to the smaller towns and rural areas. For the past few years, the demand from smaller cities and towns has been growing at a faster pace than metro and Tier 1 Cities. The paint companies have been proactively expanding their dealer base in newer geographies, especially Tier 2 – 4 Cities and rural areas, to ensure adequate presence. Most of the bigger players are expanding their capacities and setting-up their plants in the southern regions which is also expected to see a major growth in demand during the forecast period.

Source: RHP, StockAxis Research

In value terms, Indian decorative paints segment of the industry is expected to growth at a CAGR of ~13% and in volume terms it is expected to grow 10.2% from 2020-2024, driven by a number of factors such as increase in disposable income and numerous housing schemes. The GoI schemes and policies like ‘Housing for All’ will also be a major driver for growth of fresh painting. With more such initiatives targeted for the regional population, the demand from smaller cities and towns is estimated to grow faster.

Within decorative segment, enamels and emulsion paints are the fastest growing sub-segments. Emulsions are the largest sub-segment with increasing popularity among the masses as they are less toxic than most oil-based paints, release a smaller number of VOCs and are devoid of any strong odour. Increasing penetration of emulsions is driven by the varying degrees of shine that manufacturers offer in these paints. The data in the table below is the CAGR growth recorded by the Indian decorative paints industry, segmented based on sub-product type, in terms of value (Rs. billion):

Source: RHP, StockAxis Research

The Indian decorative paint industry has been witnessing a gradual shift in preferences from the traditional whitewash to high-quality paints like emulsions and enamel paints, providing stable base for growth of Indian paint industry. In addition, it is creating a strong competitive market, where players are adopting different strategies to tap the growing demand in the market for a larger share. Further, increased focus on education, urbanization, development of the rural market, and introduction of many innovative products such as odour free, and dust and water-resistant paints, are major drivers that are propelling the growth of the paint market in India.

The demand for roofing and flooring paints is also gaining momentum mainly from residential buildings. Roofing coats offer benefits such as thermal insulation and water proofing. Paint companies are now promoting products and the benefits associated with them which has led to increased consumer awareness, and corresponding increase in sales of roofing and flooring paints.

Source: RHP, StockAxis Research

Fresh painting accounts for ~22% of the decorative paint demand. Of this, the share of unorganized players tends to remain high as not all builders provide high quality paints in newly constructed houses. Some builders opt for low-quality distempers with the assumption that buyers will either get interiors done or repaint their houses as per their choice. Accordingly, opting for local paints allows builders to reduce cost of construction. This leads to incremental demand of repainting using better-quality paints. Re-painting represents ~78% of the demand in the decorative segment in India.

In the last decade, the average re-painting cycle has gradually reduced from an interval of 7-8 years in 2010 to 4-5 years in 2019. Earlier the major factor for re-painting the house was the life of paint coat i.e., repainting was done only when paint withered. However, this trend has been changing gradually with some consumers giving more importance to aesthetics, change in looks and appearance of their premises at regular intervals even while the condition of the existing paint is good. These consumer behavioural changes have led to reduction in repainting cycle.

Peer comparison

Risks

• The company operates in a highly competitive business environment, in which other players have larger business operations, greater financial resources, wider network, access to cheaper cost of capital, etc. The inability of the company to compete and sell at competitive prices may have a material adverse effect on the company’s operations and profitability.
• The company’s ability to grow its business depends on its relationships with its dealers and the community of painters, and any adverse changes in these relationships, or inability of the company to enter into new relationships, could adversely affect its business.
• The business of the company is subject to seasonal variations and cyclicality that could result in fluctuations in its results of operations.
• The company remains susceptible to the risks arising out of raw material price fluctuations and in particular fluctuation of crude oil prices which could result in declining operating margins.

Company Description

Indigo Paints Limited (Indigo Paints) manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints. It claims to be the 1^st company to manufacture and introduce certain differentiated products in the decorative paint market in India because of which, it has an early mover advantage in the current markets, which has allowed it to realize relatively higher margins for these products compared to the rest of its product portfolio.

As of September 2020, the company has three manufacturing facilities located in Rajasthan, Kerala and Tamil Nadu with an aggregate estimated installed production capacity of 101,903 KLPA for liquid paints and 93,118 MTPA for putties and powder paints. The manufacturing facilities are strategically located in close proximity to raw material sources that reduces inward freight costs. It also intends to expand manufacturing capacities at its Tamil Nadu facility, by adding capacities to manufacture water-based paints. The proposed installed production capacity of the expansion unit is 50,000 KLPA and it is expected to be operational during FY 2023.

In revenue terms, Indigo Paints has achieved the position of 5^th largest company in the Indian decorative paint industry on the back of its multi-pronged approach, which includes introducing differentiated products to create a distinct market in the paint industry, building brand equity for its primary consumer brand – Indigo, creating a wide distribution network across 27 states and 7 union territories and installing tinting machines across their network of dealers.

To strategy which the company implements to create demand for its differentiated products is to tap into Tier-3, Tier-4 cities, and rural areas, where brand penetration is easier and dealers have greater ability to influence customer purchase decisions. The company is gradually leveraging this network to engage with dealers in Tier-1, Tier-2 and metros cities. The company engaged Mahendra Singh Dhoni as its brand ambassador to enhance its brand image amongst end-customers. Indigo Paints focuses these branding efforts on its differentiated products and then leverages these efforts to increase distribution and sale of its complete range of decorative paint products.

Valuation

Indigo Paints is the fastest growing amongst the top five players in India and has a consistent track record of sales. The company has posted a strong revenue CAGR of ~42% from FY10-19 compared to 12-13% growth posted by the top four players in the same period. Even in the period of covid-19 pandemic, the company has performed better than its peers in the industry. Further, the company’s focus on differentiated products has given it early-mover advantage resulting into higher margins plus these differentiated products have aided the company to build a strong brand equity which also allows it to push its other decorative paint products. The company’s strategy to increase its presence by tapping its distribution network by adding more dealers (~2,000 – 2,500/year) and tinting machines (1,000 – 1,500/year) will aid its growth further. At higher price band of Rs. 1,490 the issue is value at 140.43x of its FY2020 EPS. We recommend to Subscribe to the issue for listing gains.

Key Information

Use of Proceeds:

The net proceeds are proposed to be utilised towards:

• Funding capital expenditure for expansion of the existing manufacturing facility at Pudukkottai, Tamil Nadu by setting-up an additional unit adjacent to the existing facility.
• Purchase of tinting machines and gyroshakers.
• Repayment/prepayment of all or certain of their borrowings.
• General Corporate Purposes.

Book running lead managers:
Kotak Mahindra Capital Company Limited, Kotak Mahindra Capital Company Limited and ICICI Securities Limited.

Management:
Hemant Jalan (Managing Director and Chairman), Chetan Bhalchandra Humane (CFO), Thundiyil Surendra Suresh Babu (COO).