Indigo Paints - Differentiation is the key; initiate at ADD - ICICI Securities

Indigo Paints (Indigo) has been able to carve out a niche in the 'high-entry-barrier' paints industry on the strengths of (1) product differentiation, (2) 'share of voice' higher than 'share of market', (3) focus on (differentiated) distribution and (4) industry-leading HR policies (in our view). We forecast 30%, 46% CAGR in revenues, EBIDTA, respectively, over FY21-23e. We initiate at ADD with a DCF-based target price of Rs2,750. Key business risk is potentially higher competitive ntensity in Kerala and key stock risk is potentially lower trading multiples due to entry of Aditya Birla Group in paints category.

- Focus on differentiation: Indigo has developed seven differentiated paints, which accounted for 28.6% of its revenues in FY20. We believe these products generate 400-500bps higher EBITDA margins than rest of the products and are relatively easier to establish in new retail outlets. Other products too are able to grow piggybacking the differentiated products. As these products operate in smaller and niche segments, competition is likely to remain low.

- Creation of competitive advantages: Indigo's competitive advantages are: 1) strong brand {Indigo}, 2) distribution network comprising 11,230 active outlets, and 3) fleet of 4,600 tinting machines. It is also able to manage competitive pressures by focusing on tier-2&3 cities and rural markets. Its manufacturing thrust is largely on business-critical activities thereby saving capital for brand building. Indigo's product realizations are similar to peer group (commendable achievement for a young brand).

- Growth strategies: Key revenue growth strategies: 1) expansion in new states and emphasis on market share gains (current market share: 2%), 2) introduction of new differentiated products and 3) actively adding dealers and tinting machines. We forecast India paint industry to grow at 12% in FY21-24e; Indigo will benefit from industry growth too. We forecast EBITDA margins to expand to 21.7% in FY23e from 17.2% in FY21e driven by: 1) reduction in adspend as a percentage of net sales, 2) improvement in revenue mix, 3) operating leverage.

- Initiate with ADD: We model revenue, EBITDA and PAT CAGR of 29.6%, 45.7%, 55.4% respectively over FY21-FY23E. We forecast RoE to expand to 23% in FY23e from 19.8% in FY21e. We initiate coverage on the stock with an ADD rating and DCF-based target price of Rs2,750. Key risks: delay in geographical expansion, and failure of some of the new products and potentially higher competitive intensity in Kerala.

Source : Equity Bulls

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