Indigo Paints IPO oversubscribed on first day; HNI fully subscribed

Indigo Paints IPO oversubscribed on first day; HNI fully subscribed

The initial public offering of Indigo Paints, the fifth largest decorative paints company in India, has been subscribed 1.9 times on its first day of the bidding so far, January 20.

The public issue has received bids for 1.04 crore equity shares against offer size of 55.18 lakh shares (excluding anchor book), the subscription data available on the exchanges showed.

The anchor book witnessed good response from investors, including global investors and domestic asset management companies. The company aims to raise Rs 1,170 crore through its public issue, of which it has already garnered Rs 348 crore from anchor investors.

The retail investors' reserved portion has seen a subscription of 3.3 times and that of non-institutional investors 1.09 times, while employee portion received 72 percent subscription and that of qualified institutional buyers 10 percent.

The public issue consists a fresh issue of Rs 300 crore and an offer for sale of 58,40,000 equity shares by promoter Hemant Jalan, and investors (Sequoia Capital India Investments IV and SCI Investments V).

The offer will close on January 25. The price band for the issue has been fixed at Rs 1,488-1,490 per share.

Indigo was the first company to launch differentiated paint products and has enjoyed the first mover advantage. The revenue from premium products categories have registered CAGR of 30 percent in FY18-20, while the revenue contribution from the same has increased from 26.7 percent in FY18 to 28.6 percent by FY20.

The company has a significant presence in the semi urban and rural markets which contributes around 85 percent of total revenue. "The significant presence in the semi urban and rural markets has helped company to recover its lost sales quickly amid pandemic. The company now sees a significant untapped opportunity in Metros and tier 1 cities that can be capitalized by expanding distribution networks," said ICICI Direct.

Indigo Paints has been gaining market share. "We believe it will continue to gain market share in the upcoming years also due to the strong management team, strategies planned by the company and smaller base compared to top four players," Keshav Lahoti, Associate Equity Analyst at Angel Broking said.

Company's revenue from operations have grown at a CAGR of 41.9 percent between Fiscal 2010 and Fiscal 2019, compared to the range of 12.1 percent to 13.1 percent recorded by the top four paint companies (Asian Paints, Berger Paints, Kansai Nerolac and Akzo Nobel) in India.

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"There is further scope left for the company to improve EBIDTA margins due to operating leverage especially in the cost of advertisement expense. Issue is priced at 98.4x PE on a trailing basis in terms of fully diluted EPS, which we believe is quite reasonable by looking at the future growth prospects of the company," Lahoti said.

The key risk for this company would be an inability to protect, strengthen and enhance their existing brand, he feels. Angel Broking is positive on the long term prospects of the industry as well the company, hence it recommended a subscribe to the Indigo Paints IPO for long term as well as for listing gains, he said.

The company will use its fresh issue funds for expansion of the existing manufacturing facility at Pudukkottai, Tamil Nadu by setting up an additional unit adjacent to the existing facility (Rs 150 crore), purchase of tinting machines and gyroshakers (Rs 50 crore); repayment certain of borrowings (Rs 25 crore); and general corporate purposes.

As of September 2020, Indigo Paints owns and operates three manufacturing facilities located in Jodhpur (Rajasthan), Kochi (Kerala) and Pudukkottai (Tamil Nadu) with an aggregate estimated installed production capacity of 1,01,903 kilo litres per annum (KLPA) for liquid paints and 93,118 metric tonnes per annum (MTPA) for putties and powder paints.