What Indigo Paints management told analysts ahead of IPO
The meeting was represented by MD & CEO Hemant Jalan, Chief Financial Officer Chetan Humane and Chief Operating Officer Suresh Babu.
By ETMarkets.com |
iStock
NEW DELHI: Indigo Paints arranged a virtual analyst meet on Thursday ahead of its IPO on January 20. The meeting was represented by MD & CEO Hemant Jalan, Chief Financial Officer Chetan Humane and Chief Operating Officer Suresh Babu. Domestic brokerage Nirmal Bang Institutional Equities, which attended the virtual meet, has jot down the following takeaways from the meet:
Financials
Operations-specific commentary
Industry-specific
Region-specific commentary
Financials
- Indigo’s revenue has grown at a CAGR of 42 per cent over FY10-FY19. Even during FY20, when all companies were affected by the outbreak of Covid-19, Indigo managed to post a healthy revenue growth of 16 per cent.
- During H1FY21, while there were no conscious cost reduction measures taken and the company even implemented salary increments in June, Ebitda margin expanded on account of lower ad spends during the period, as April and May, which is generally an ad-heavy period, witnessed lockdown.
- The company has incurred high ad spends in the last 4-5 years and is now leveraging its brand equity to strengthen the presence of tinting machines across retailers.
- Indigo’s average working capital cycle of 23 days is the lowest in the business.
- Over the last 2-3 years, the company has been aggressively expanding its geographical footprint and increasing its brand salience.
- Post the IPO, Indigo would be a debt free company.
- Sequoia Capital intends to remain invested for another 5-6 years.
Operations-specific commentary
- As consumers in large cities are highly brand conscious, the company took up a bottom-up approach while entering new markets. Similar model was followed by Asian Paints many years ago.
- While large paint players have 12-15 sub-brands, Indigo has followed the one-brand strategy (similar to Amul).
- The company has no intention of manufacturing raw material for captive consumption (3 out of 4 top players do so) since it believes that the value-add component in doing so is fairly low and there are enough underutilised capacities with many raw material suppliers in India.
- The management finds it logistically feasible for manufacturing activities to remain in its current locations for the next 5-6 years.
- The company sees the decorative business opportunity in India to be huge and thus has no plans to expand into home décor and industrial paints businesses.
- It does not have any plans to enter other countries for a long period of time. The company also does not have any component of institutional sales.
Industry-specific
- Demand for decorative paints in India has been very resilient on the back of repainting (which is 78 per cent of demand vs fresh painting) and reduction in repainting cycle.
- Emulsions comprise nearly 50 per cent of the market whereas enamels comprise nearly 20 per cent of the market. Paint industry has adopted a direct distribution model and cannot employ a two-tier distribution model, which is done by most FMCG companies in India on account of the large number of SKUs handled (3,000-4,000).
- As per the management, the capacity utilisation is a misleading parameter to track, as the paint manufacturing business is seasonal.
- While the months of June, July and August witness significant dip in utilization for the industry, the demand for paints doubles just before Diwali (especially in the northern regions) and in the months of March and April (pan-India). Hence, on an annual basis, average capacity utilization for any paint company will generally be low.
- Dealers across India offer multi-brand products (not loyal to one brand. The management believes that paints in India cannot be sold by reducing prices since it is not an everyday-commodity (painting is done once in 5 years).
- Actual cost of paints is only 40 per cent of the overall painting cost.
- Competitive intensity in small towns is as high as in urban areas.
- Wood paints is quite a tough market since players have to deal with polishers (not painters), and thus creating the brand equity is not easy. However, Indigo is seeing traction in this category in a few states.
Indigo Paints is the fastest growing paint company among its top five peers in India. Having a market presence across 27 states and 7 union territories, it is the fifth largest company in the Indian decorative paint industry by revenue from operations for FY20.
The company manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints.
Region-specific commentary
- The company has entered different states at different points of time and each state is at a different stage of evolution in terms of distribution.
- Places such as Maharashtra, Telangana and Gujarat are still work-in-progress on the rural front compared with cities such as Kochi, Kanpur, Patna, Ranchi, Thiruvananthapuram, etc.
- The company has just recently entered North India. Kerala is the largest revenue generating state for the company where it ranks third
- Asian Paints is the leader, followed by Berger. Indigo is twice the size of the fourth largest player and is not far behind Berger.
- Around 7-8 states compete for the second and third spot for the company including states like West Bengal, Bihar, Maharashtra and Uttar Pradesh. The company is seeing good traction in Delhi and Mumbai.
- While the company has a depot in Mumbai, it does not have one in Delhi and supplies to this market from the Ghaziabad depot.
- The company believes that making paints is not a rocket science and, thus, research & development (R&D) spends are miniscule in nature and believes that understanding the consumer mindset is a bigger challenge in the business.
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