Indigo Paints Rs 1,170.16-crore IPO (initial public offer) is all set to open for subscription on January 20. Indigo Paints — the fifth-largest company in the decorative paint industry — has set the price band for the public issue at Rs 1,488-1,490 per share of the face value of Rs 10 each. Even as Indian share markets were seen trading over one per cent down today, Indigo Paints shares were commanding a premium of Rs 850-860, up 57 per cent from IPO price in the grey market. Earlier this week, Indigo Paints shares were trading with Rs 820-830 premium in the grey market. AR Ramachandran, Co-founder & Trainer, Tips2Trade, told Financial Express Online that due to a strong positive sentiment in the IPO and secondary market, Sequoia Capital-backed Indigo Paints shares were quoting a grey market premium of over 55 per cent.
Indigo Paints IPO overvalued
Even though Indigo Paints’ financials are good, Ramachandran believes that the IPO is overvalued as compared to the strong peer group of Asian Paints and Berger Paints India. “Investors, if allotted, should book profit for listing gains and wait for a strong dip to add more in the coming weeks,” he added. 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. Half of the issue 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.
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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. 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.
Indigo Paints is targeting a market cap of Rs 7100 crore at the issue price which implies a P/E multiple of 66x FY22 and 44x FY23 earnings assuming an earnings CAGR of 50% over FY20-23E, which analysts at YES Securities believe is possible given the low base and improving distribution for the company. They also said that margins have already inched ahead of Berger Paints India and Kansai Nerolac Paints, as the company has better gross margins given 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.