Indigo Paints IPO opens next week: Key things to know before subscribing

Indigo Paints IPO will be open for subscription from January 20-22. Investors can make a minimum bid of 10 equity shares and in multiples of 10 thereafter. The company has fixed a price band of Rs 1,488-1,490 for the Rs 1,000 crore IPO.

As per dealers, the scrip was demanding a premium of Rs 830-850 a piece in the grey market earlier on Thursday. This translated into a 55-60 per cent premium over the upper limit of the price band.

The issue would comprise of a fresh issue, aggregating Rs 300 crore. In addition, there would be an offer-for-sale (OFS) of up to 58,40,000 equity shares by its existing shareholders.

On the path of expansion, Indigo Paints is looking towards building assets. According to JM Financial, the company is likely to spend the funds being raised for the following activities:

1) Indigo Paints is setting up an additional manufacturing facility next to its existing one at Pudukotttai, Tamil Nadu, with an estimated budget of Rs 150 crore.

2) The company is also looking to purchase tinting machines and gyroshakers worth Rs 50 crore.

3) The company is planning to repay all or certain borrowings worth Rs 250 crore

Indigo Paints used the rural path to carve their market share. To create demand for their differentiated products, the company initially tapped 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 subsequently leveraged this network to engage with dealers in tier-1, tier-2 cities and metros.

Indigo Paints was worth Rs 197 crore as on 31st March 2020. The company saw its net worth rise by approximately Rs 50 crore between 2019-20 and 2018-19, along with a similar increase in reserves during the period.

Indigo Paints' net profit increased by 77.94 per cent during FY19-20. Total borrowings also dropped from Rs 60.1 crore to Rs 50 crore during the period.

Indigo Paints lags behind Asian paints and Berger Paints in profitability with a RONW (Return on Net Worth) of 24.27 per cent, whereas the other two posted RONW of 27.39 per cent and 24.66 per cent, respectively as on 31st March 2020.

In terms of earnings per share (EPS), Indigo Paints is behind Akzo Nobel India and Asian Paints with an EPS of 10.61, as the latter two posted an EPS of 52.13 and 28.25, respectively, during the same period.

JM Financials lists out few potential risk factors to keep an eye on:

1) Majority of the company’s revenue is derived from its business in India and a slowdown in economic growth could cause the business to suffer and could adversely affect its operations.

2) Restrictions on import of raw materials may adversely impact the company’s business.

3) The company’s business is subject to seasonal variations and cyclicality that could result in fluctuations.

4) There are outstanding litigation proceedings filed by and against the company. Any adverse outcome in such proceedings may have an adverse impact on their reputation, business, financial condition and cash flows.

5) The company is dependent on third-party transportation providers for the supply of raw materials and delivery of finished products.