Indigo Paints Share Price Analysis May 2023 | Why is Indigo Paints Share Falling?

Introduction

Today I will talk about a company that is the fastest-growing company in its industry today. Perhaps some of you may have also invested in this company when its IPO came in February 2021. I am talking about Indigo Paints which was started by Hemant Jalan in 2001 from a rented factory.

10 years later, Indigo Paints did not unceremoniously rob its investors and shareholders when it entered the public market, giving a 75% listing gain. That is, the company’s stock was listed at a price of around ₹ 2,600 per share, while its IPO issue price was ₹ 1,490.

The stock of Indigo Paints did not stop there, the company touched its all-time high of ₹3,348 per share in intraday trading the very next day. That is, about a 125% return from the IPO price. And guess what! On the grand debut of Indigo Paints, Hemant ji threw a grand party for his well-wishers, stakeholders, and friends, and there Uday Kotak ji called Hemant Jalan on stage and said “Hemant made a triple century!“

They are pointing to the fact that Indigo Paints’ IPO was over-subscribed 100 times, listed at a premium of over 100%, and a P/E of over 100. So, it was a triple century, The month of February 2021 was nothing less than a fairy tale for Indigo Paints.

February 2023: After 2 Years

But come exactly after 2 years, in February 2023. Indigo Paints stock touched its all-time low on 27 February 2023 and closed at ₹994.85 per share. 30th April When I am writing this post, Indigo Paints stock is at around ₹1,070 level and is down almost 60%. Since the beginning of the year, the company’s stock has gained nearly 20%. Isn’t it quite a roller coaster ride?

That’s why in today’s post we will tell you whether the shine of Indigo Paints paint has reduced, it is only the result of broad macro-factors. Will know such details related to the business and financials of the company, which you will not have to hear, be with me till the end

Why is Indigo Paints’ Share Price Falling?

Why is Indigo Paints’ share price falling? Well, friends, the growth story of Indigo Paints has been powerful. Indigo Paints was bootstrapped from its inception till 2015. In the same year the company raised funds from Sequoia Capital and in 2018 MS Dhoni was also made the company’s brand ambassador. Indigo Paints became India’s 5th most extensive and zero-date paint manufacturer in the coming years.

In the last 10 years, the company’s sales have grown at 37% CAGR and profits at 62% CAGR. Even in the last 5 and 3 years, the sales growth is at a CAGR 20s, and the same profit growth is at a CAGR 40s. Friends, it is not common to maintain such a number one for a long time.

Generally, the market assigns a premium valuation to such high-growth stocks. and you will know, before the IPO, Indigo’s revenue grew at 2 times the speed of the rest of the industry players. Check out this table, Indigo Paints’ revenue has grown faster than all major paint players over the last 3, 5, and 10-year periods.

Hence, after listing in 2021, for a longer part of the year, the company’s stock was trading at 100-150 times P/E, which was higher than the industry average, and even top paint players such as Asian Paints and Berger Paints.

Usually, high-growth stocks trading at a premium valuation to the market against their competition have high market expectations. If the revenue and profit growth numbers of such companies come in below analysts’ estimates, their stock prices can correct sharply.

There are many examples of such cases such as Bajaj Finance or DMart when a company declared very good results, but because it failed to meet analysts’ estimates, its stock price went down, and Indigo Paints was also expected by the market to continue its pre-IPO growth.

Impact of COVID Lockdown

By the time their IPO came, Covid was not over yet. That’s why a direct impact of the pandemic was seen on the company’s numbers as well. Due to supply chain disruption, lockdown, etc., companies related to paints were greatly affected. Hence, Indigo Paints was not able to maintain the 2x industry growth rate as before.

Raw Material Price Increased

Second, the second major reason is that the raw material prices of the paints industry increased by 80 to 100%. For the last 3-4 quarters, paint companies have had to contend with inflationary pressures. Crude oil is obtained from the major raw material in the paint industry. And the volatility of crude oil prices was bound to impact the cost of the paint company.

In February 2022, crude oil prices skyrocketed after the Russia-Ukraine war. In June 2022, oil prices crossed $ 120 / barrel. And this had a direct impact on the margins of the paint companies. Paint companies also do a series of price hikes to protect the thin margin, but their sales volumes are also affected to some extent.

Increased Competition

Then the growing competition in the paints industry is also challenging the market share and valuations of the existing players. A few months ago, Aditya Birla Group’s flagship company Grasim Industries announced an aggressive capex plan. The company had earlier in 2023-24 made a capex plan of Rs. 5,000 crores, which is expected to double by 2024-25 to Rs. 10,000 crores

Grasim is targeting to build a capacity of 1.33 billion liters, which is very close to current industry leader Asian Paints. Their plant is expected to start operating by the last quarter of FY24, and these industry challenges have not only affected Indigo Paints but also other players like Kansai Nerolac Paints, Berger Paints, and Asian Paints.

Both Berger Paints and Nerolac Paints are down around 20% during the last year. However, Asian Paints is down only 5%. But among all the players, if anyone has been right the most, then it is Indigo Paints. The reasons I already told you – are industry challenges, Indigo Paints’ high P/E, and failure to meet market expectations.

Market Expectations

Well, let’s see their financial performance as well.

Looking at Indigo Paints’ FY22 results, its income from operations grew by 25.26% YoY to a record Rs 906 crore per annum, while profit after tax (PAT) grew by 18.62 percent to Rs 84.1 crore per annum.

While these growth figures are good, they are much lower than the FY21 and FY20 numbers, as I told you. Whereas, when we look at the company’s FY23 H1 numbers, its PAT YoY grew by 126.6% and operating income by 32.5%. Also looking at the latest quarter results, Indigo Paints sales grew by 15.64% QoQ and 6.04% on a YoY basis.

Even the company’s margin has come down from 19% in March 2022 to 14% in December 2022. These numbers reflect only one thing, and that is that Indigo Paints is not performing badly financially. It is still showing good growth despite the ongoing headwinds in the industry, but the market is not happy with this growth.

So, its share price correction is more a result of industry and macroeconomic headwinds, and higher valuations, than its business performance.

Advertising and Sales Promotion Spending

Another watchable aspect of Indigo Paints is its advertising and sales promotion spending. However, these expenses have come down a bit now. In FY21, their revenue was Rs. 723 crores, and advertisement expenditure of Rs. 77 crores, i.e., 10.65% of the revenue.

Whereas in FY22, Rs 88 crore was spent on his advertisement against 906 crore revenues, i.e., 9.71%.

Working Capital Management

Let’s look at “working capital days,” an important industry parameter, which measures the amount of time it takes a company to convert its working capital into sales. So, till March 2022, the number is 69 days for market leader Asian Paints, 64 days for Berger Paints, and 102 days for Nerolac Paints.

Surprisingly, Indigo Paints has the best working capital days, just 24 days. However, it has to be acknowledged here that Indigo is much smaller than the rest of the players. Even though Indigo is the 5th largest player, Asian Paints is 30 times its size, and Nerolac is 6 times its size in terms of revenue.

Given the size of these large players and their distribution, especially in the case of Asian Paints, experts believe that the impact of increased competition will be less and more on smaller players like Indigo Paints. Remember, even the big players have seen relatively less fall in share price performance.

Share Holding Pattern

Lastly, looking at the shareholding pattern, the promoters’ stake remains almost constant at 54%. DIIs have also not trimmed their stake much, but in March 2023, FIIs’ stake has come down from 10.19% to 8.8%.

Conclusion

So, this was a detailed analysis of Indigo Paints. Mr. Jalan, the company’s promoter, says that he is not much bothered about the company’s share price, and focuses only on the things that are under his control. With this, we end the post.

Are you buying Indigo Paints stock in this dip? Let us remind you that these posts are for Educational purposes only, and do not constitute any kind of buy or sell recommendation.