Indigo Paints IPO To Open On January 20: Should You Subscribe?

Indigo Paints shall be the second IPO of this year after IRFC opens on January 18, 2021. Here are the fine points of the issue which you must note, when considering the issue for subscription:

Issue details:

Issue size: Rs. 1170 crore IPO
Price band- Rs. 1488- Rs. 1490 per share of the face value of Rs 10 each

Grey market premium on January 15, 2020, when the market fell by over 1%: Commanded a premium of 57 percent i.e. in the range of Rs. 850-860.

Indigo Paints public issue will consist of a Rs 300 crore fresh issue of equity shares and an offer-for-sale (OFS) of 58.4 lakh equity shares worth Rs 870.16 crore. 50% f of the issue size is reserved for qualified institutional buyers (QIBs), 35 per cent for retail investors, 15 per cent for non-institutional bidders and there is a reservation of up to 70,000 equity shares for subscription for employees, who will get a discount of Rs 148 per equity share to the offer price.

Company profile:

The paints company started in the year initially forayed into manufacturing low-end cement paints and now ranks at the 5th spot among its peers. The company manufactures a complete range of decorative paints including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints.

Issue objectives:

From the net proceeds, the company proposes to use Rs.150 crore towards funding capital expenditure, expansion of its existing manufacturing facility at Pudukkottai, Tamil Nadu by setting-up an additional unit adjacent to the existing facility; Rs. 50 crore for purchase of tinting machines and gyroshakers; Rs. 25 crore for repayment/prepayment of all or certain borrowings; and the balance towards general corporate purposes.

Financials:

In FY20, Indigo Paints reported ROE of 24.3 per cent which is slightly lower than Asian Paints and Berger Paints India but better than Kansai Nerolac Paints and Akzonobel. The firm has doubled its PAT margins from 3.2% in FY2018 to 7.7% in FY20 while peers like Asian Paints and Berger Paints India were able to increase margins by 2.5% and 3.4%, respectively.

Valuations:

Yash Gupta Equity Research Associate, Angel Broking Ltd said that currently Asian Paints and Berger Paints India are trading at PE of 111 and 148, respectively and Indigo Paints reported EPS of 10.49 valuing IPO at 149 at higher price band. "We expect the grey market premium of Indigo Paints to consolidate in a couple of days. We have a positive outlook towards the IPO," Gupta said.

Positives of the company:

Margins for the company have already inched ahead of Berger Paints India and Kansai Nerolac Paints, as the company has better gross margins on the back of lower trade discounts on the differentiated portfolio and lower overhead costs. The gross margins are at highest in industry given it has only 3 plants near RM sources. "Margins can improve in the future with rising scale which will mainly reduce advertising and promotional (A&P) and freight costs. The return ratios are already comparable to top peers given best in class working capital," analysts added.

Should you subscribe to Indigo Paints IPO?

An expert from the industry suggests that in comparison to its listed peers such as Asian Paints and Berger Paints, the counter is overvalued and one may take position in the scrip and if allotted should book gains at the time of listing and may later add the counter at dips in lots.

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