January 18, 2021 IPO Note - SUBSCRIBE INDIGO PAINTS LIMITED Company Background Issue Details Incorporated in 2000, Indigo Paints Ltd (‘Indigo’) has rapidly scaled up its operations to become Fresh Issue of Equity Shares aggregating upto ₹ 300 Crore the fifth largest company in the Indian decorative paint industry in terms of revenues as on and Offer For Sale of 5,840,000 Equity Shares FY20. Indigo has created an extensive distribution network across 27 states and seven union territories. The company manufactures its products across three manufacturing facilities located Issue Highlights in Jodhpur (Rajasthan), Kochi (Kerala) and Pudukkottai (Tamil Nadu) with an aggregate estimated Net Issue Size: ₹ 1,168 – 1,169 Cr No. of Shares ('000): 7,856 – 7,853 installed production capacity of 101,903 kilo litres per annum (“KLPA”) for liquid paints and Face Value (₹): 10 93,118 metric tonnes per annum (“MTPA”) for putties and powder paints. The company has Employee Reservation: Upto 70,000 Equity Shares expanded its manufacturing capabilities to manufacture a complete range of decorative paints Price Band : ₹ 1,488 – 1,490 including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints. Bid Lot: 10 Shares and in multiple thereof Indigo is the first company to manufacture and introduce certain differentiated products in Employee Discount: ₹ 148 /- per share the decorative paint market in India, which includes Metallic Emulsions, Tile Coat Emulsions, Issue Opens On: Wednesday, 20th Jan’2021 Bright Ceiling Coat Emulsions, Floor Coat Emulsions, Dirtproof & Waterproof Exterior Laminates, Issue Closes On: Friday, 22nd Jan’2021 Post Issue Implied Exterior and Interior Acrylic Laminates, and PU Super Gloss Enamel (together, “Indigo ₹ 7,079 – 7,088 Cr Market Cap Differentiated Products”). The company has been able to break into the oligopolistic market Listing : BSE & NSE which is dominated by four major players by creating a distinct market in the paint industry with the introduction of differentiated products and building brand equity for their primary consumer BRLMs: brand - “Indigo”. Kotak Mahindra Capital, Edelweiss, ICICI Securities Registrar: Objects of the Issue Rs. in Crs Link Intime India Pvt. Ltd. Funding capital expenditure for the Proposed Expansion 150 Purchase of tinting machines and gyroshakers 50 Indicative Timetable Activity On or about Repayment/prepayment of all or certain of our borrowings 25 Finalisation of Basis of Allotment 28-01-2021 General corporate purposes 75 Refunds/Unblocking ASBA Fund 29-01-2021 Total 300 Credit of Equity Shares to DP A/c 01-02-2021 Trading Commences 02-02-2021 Brief Financial Data Issue Break-up % of (₹ in Crores) 2018 2019 H1FY20 2020 H1FY21 No of Shares ₹ Cr Issue Revenue From Operations (Net) 401.48 535.63 272.64 642.79 259.42 QIB 3,893,064 – 3,891,710 579 – 580 50% EBIDTA 25.8 54.09 23.46 91 48.09 NIB 1,167,919 – 1,167,514 174 - 174 15% EBIDTA Margin % 6.4% 10.1% 8.6% 14.2% 18.5% Retail 2,725,145 – 2,724,198 405 – 406 35% Employees 70,000 – 70,000 9 - 9 Profit before Tax 12.55 33.71 11.81 67.43 35.23 Total 7,856,128 – 7,853,422 1,168-1,169 100% PBT Margin % 3.1% 6.3% 4.3% 10.5% 13.6% Profit/(Loss) for the period 12.86 26.87 5.99 47.82 27.21 Shareholding (No. of Shares) PAT Margin % 3.2% 5.0% 2.2% 7.4% 10.5% Pre Issue Post Issue^ Post Issue# Earnings Per Share - Basic (₹) 2.88 5.98 1.33 10.61 6.03 45,555,575 47,571,704 47,568,998 ^ Lower Price Band # Upper Price Band Earnings Per Share - Diluted (₹) 2.82 5.90 1.32 10.61 5.97 ROE (%) 10.09% 18.22% - 24.27% - Shareholding (%) ROCE (%) 9.86% 17.26% - 27.50% - Pre-Issue Post- Issue Source: Company RHP and LKP Research: Promoters & Promoter Gr 60.05% 54.00% Public 1.00% 8.70% Non Promoter Non Public 38.95% 37.30% Total 100.00% 100.00% Meet Jain | [email protected] +91 22 6635 1220 LKP Research INDIGO PAINTS LIMITED | IPO Note Fastest growing Paint Company in the last decade Indigo has grown its revenues at a CAGR of 41.9% between FY2010 to FY2019 as compared to 12.1% to 13.1% recorded by the top four paint companies in India. During Covid-19, the revenues of Indigo grew at much higher rate than its peers. Asian Paints Berger Paints Kansai Nerolac AkzoNobel Indigo Paints FY10-FY19 12.8% 13.1% 12.1% 12.5% 41.9% FY19-FY20 4.9% 3.2% -4.5% -8.8% 16.6% Source: Company websites, Frost & Sullivan Revenue from Operations (₹ bn) 8.7% 8.4% 2.1% -2.4% 24.2% Asian Paints Berger Paints Kansai Nerolac Akzo Nobel Indigo Paints FY18 145.6 48.4 47.4 27.9 4.0 FY19 163.9 55.2 51.7 29.2 5.3 FY20 171.9 56.9 49.4 26.6 6.2 Source: Company RHP and LKP Research Paint Industry derives nearly half its sales from Tier2 - Tier 4 and rural areas where impact of covid was on a much lower scale compared to the Metros and urban India. The pandemic-led decline in demand is therefore likely to have the least impact on Indigo as compared to the other players as the company’s predominant focus is on Tier 2 - Tier 4 Cities. First to launch Differentiated Products and Carving out a separate customer base Indigo is the first company to introduce certain category-creator products, including the Metallic Emulsions, Tile Coat Emulsions, Bright Ceiling Coat Emulsions and Floor Coat Emulsions in the decorative paint market in India (Source: F&S Report). Other products that the company introduced include the Dirtproof & Waterproof Exterior Laminate, Exterior and Interior Acrylic Laminate and PU Super Gloss Enamel that comprise its value-added product portfolio. These category-creator and value- added products comprise of a portfolio of seven Differentiated Products and are differentiated from other products based on their end-use specifications and in terms of certain added properties. Being the first company in India to introduce this, Indigo had an early mover advantage in the markets they are present in, which allowed them to set pricing terms for these products resulting in higher margins for these products compared to the rest of their product portfolio. Differentiated Products as a % of Product Mix 26.68% 27.58% 28.62% 2018 2019 2020 Source: Company RHP and LKP Research LKP Research 2 INDIGO PAINTS LIMITED | IPO Note Aggressive Brand Building initiatives to build brand equity Indigo has been spending aggressively on building its brand equity across India consistent with the growth of their business. The company’s advertisement & sales promotion expense is c.12.65% in FY20 which is highest in the Industry. The advertising and branding strategy of Indigo has been the differentiating factor. This strategy has helped the customers connect to the brand immediately without having to remember multiple brand names. Indigo differentiates its products on the basis of the price point as Platinum, Gold, Silver and Bronze series. Indigo has managed to keep its packaging uniform across all its brands to enhance brand recognition. Another characteristic that differentiates Indigo advertising strategy is that it only advertises its differentiated products. Indigo was the first among its competitors to introduce coatings for the ceiling, tile and floor, with the competitors entering this space only now. Indigo engaged Mr. Mahendra Singh Dhoni, a sportsperson with a pan India appeal across demographics, as their brand ambassador. The company has also created a mascot for their brand, a Zebra with colourful stripes that regularly features in their marketing materials, to increase brand recall. To build brand visibility and recall, and engagement with dealers, the company liaised with dealers to display boards and carry out in-shop branding at their outlets. Company-wise advertising expenses for Fiscal 2020 (₹ in Crs) Asian Paints Berger Paints Kansai Nerolac AkzoNobel Indigo Paints Nippon TV 264.6 70.2 63.1 35.5 61.3 27.2 Print 22.0 3.1 0.0 0.0 2.6 1.3 Radio 1.7 0.8 0.0 0.0 0.0 0.2 Total 288.4 74.0 63.1 35.5 63.9 28.8 Source: BARC, Frost & Sullivan Company-wise advertising and promotion expenses, as a percentage of sales 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% FY18 FY19 FY20 Asian Paints 3.8% 4.2% 4.6% Berger Paints 4.6% 3.3% 4.2% Kansai Nerolac 5.8% 5.0% 5.0% Akzo Nobel 3.9% 3.1% 3.3% Indigo Paints 11.2% 12.6% 12.7% Source: Company websites, Frost & Sullivan LKP Research 3 INDIGO PAINTS LIMITED | IPO Note Rapid & Strategic Expansion of Distribution Network Distribution network is the key growth driver in the Paint industry. The paint companies are required to spend significant resources to develop their distribution network to increase the visibility and reach of their products through direct distribution to dealers. The dealers are typically multi-brand and are located across Metros, large cities, towns as well as Rural Areas. Indigo has established their distribution network gradually and strategically through the bottom-up approach with prudent use of time, cost and resources. As a relatively new entrant in the market, the company first focused on dealers in Tier 3, Tier 4 Cities, and Rural Areas, where brand penetration is easier and dealers have greater ability to influence customer purchase decisions. This helped the company to engage with a larger base of dealers across Tier 3, Tier 4 Cities, and Rural Areas, which they subsequently leveraged to expand into larger cities and metros such as Kanpur (Uttar Pradesh), Kochi (Kerala), Thiruvananthapuram (Kerala), Patna (Bihar) and Ranchi (Jharkhand).