Is Indigo Paints Really Different?

THE PAINT INDUSTRY

The paint industry is expected to grow with 5 years CAGR of 12% to Rs 97,100 crores by FY24E from Rs 54,500 crores can be mainly attributed to the rise in urbanization, growth in the popularity of branded paints, shortening of the re-painting cycle, and robust pricing power prevalent in the paint industry and introduction of many innovative products such as odor-free, and dust and water-resistant paints.   

The decorative paint segment constitutes around 74% of the total paint sales, resulting in the paint sector growing at a robust rate even at the time of an industrial slowdown.

Industry Classification - By Technology: 

Indian paint makers are increasingly shifting from solvent-based to water-based paints. The volatile input costs, especially crude oil prices, exerting pressure on the prices of paints. Around 55% of the raw materials used by the paint companies are crude oil derivatives and comprise approximately 30% to 35% of the sector's overall raw material costs. 

So, considering the cost pinch, there’s a growing tendency to use water-based paints, simply because water-based paint is less sensitive to movement in crude oil prices. As the name suggests, for water-based paints the binding agent is water-based. For solvent-based paints, crude oil is required. There is another benefit of these water-based paints that it is easier to clean walls painted with water-based paints and also it is more environmentally friendly.

In fact, the slew of recent capacity expansions announced by key paint companies is focused more on water-based units.

For instance, in FY19, the market leader in decorative paints Asian Paints Ltd.’s plant in Mysuru has 600,000 kiloliters per annum water-based capacity.

“We are in the midst of our largest capacity expansion. In the first phase, two mega plants with initial capacities of 3,00,000 KL per annum each of water-based paints would be commissioned at Mysuru and Visakhapatnam in FY19,” Asian Paints managing director & chief executive KBS Anand said in the annual report.

Similarly, the leader in the industrial paints segment Kansai Nerolac Paints Ltd also has been consistently increasing the share of water-based paints in its portfolio.

Industry Classification - By Organization Type

The Indian decorative paint industry is mainly an oligopoly market and has historically been dominated by four major entities. While the organized market share is 67% mainly comprises of top 10-12 players while unorganized comprises many small, mainly regional or local players.

The unorganized players have been mainly focusing on the decorative paints segment with a highly scattered market, comprising about 2,500 units of small and medium-sized paint manufacturing plants.

 

Industry Classification - By Geography

The western and southern regions of India together account for ~60% of the total demand for paints (industrial and decorative paints). While the Metros and Tier-1 share (in terms of value) companies of only one-third of the paints demand as compared to smaller towns and Rural Areas.

For the past few years, the demand from smaller cities and towns has been growing at a faster pace than metro and Tier 1 Cities and also the smaller cities were better able to recover from COVID-19 and start operations as well.

The paint companies have been proactively expanding their dealer base in newer geographies, especially Tier 2 – 4 Cities and Rural Areas, to ensure adequate presence.

Decorative Paints:

The Decorative Paints segment includes wall finishes for interior and exterior use, enamels, wood finishes and ancillary products such as primers and putties. Over the past five years (FY14-19), the share of decorative paints has increased from 67% to 74%.  

The Decorative Paint segment is expected to grow 13% by FY24E to Rs 74,300 crore mainly driven by increase in the disposable income of individuals and families and various housing schemes. The Government schemes and policies like ‘Housing for All’ will also be a major driver for growth of fresh painting.  

 

Within the decorative paint market, enamels, and emulsion paints are the fastest-growing segments as the industry has been witnessing a gradual the shift in preferences from the traditional whitewash to high-quality paints like emulsions and enamel paints. Emulsions are the largest segment with increasing popularity among the masses as they are less toxic than most oil-based paints, release a smaller number of VOCs and are devoid of any strong odor. 

There has been a higher growth of emulsion paints for interiors as compared to distempers mainly due to its economy prices and more shine in comparison to lower-priced distempers. Even in the exterior category, emulsion-based coatings are being preferred against the conventional cement-based coatings due to better quality of emulsions and it overcome the disadvantages of the latter. Seeking better products, consumers are also switching to marginally higher-priced emulsions with more durability and better-looking finishes in a wider range of colors.   

 Some Trends: 

Reduction in GST Rates: The reduction in the goods and services tax (GST) on paints, varnishes and putty, from 28% to 18% in July 2018, has driven growth in these segments. Also, the rural consumers are becoming aware of the benefits of applying putty over walls prior to painting which leads to big players increasing their focus on this bottom of the pyramid space.  

Fresh Painting Vs Re-Painting: The decorative paint industry is largely driven by re-painting, i.e., c.78% of revenue comes from re-painting and the remaining from fresh painting. In the last decade the time cycle of re-painting has been declined from 7-8 years in 2010 to 4-5 years in 2019 mainly shift in the consumer behavior giving more importance to aesthetics, change in looks and appearance of their premises at regular intervals even while the condition of the existing paint is good. Earlier the major factor for re-painting the house was the life of paint coat i.e., repainting was done only when paint withered. 

Also, in the case of fresh painting, most builders prefer low-quality paints and distempers (mostly purchased from unorganized players) with the assumption that buyers will either get interiors done or repaint their houses as per their choice. Accordingly, opting for local paints allows builders to reduce the cost of construction. This leads to incremental demand for repainting using better-quality paints (mostly emulsions).           

Rising Trends of Environment-Friendly Products: The paint companies have introduced products that provide health-centric services, such as anti-bacterial and anti-pollution/ air-purifying, and anti-fungal and stain-resistant products.

The market perceptions of the adverse effects of VOCs (volatile organic compounds) combined with stringent environmental legislation have increased the demand for low/ zero VOC paints and coatings. In India, the regulatory changes are driving the increase in the adoption of water-solvent and high-solid coatings that have lower VOC content.

So, just what exactly is VOCs, and why are they dangerous? VOCs are chemicals inside paint that are released into the air as you paint a wall.  In fact, paint can release VOCs into the air for years following the initial painting, putting your family at risk of developing cancer, asthma, or allergies and can cause acute symptoms like headache and dizziness after painting.

COMPETITIVE LANDSCAPE

The organized market of decorative paint segment accounts for the top 10 to 12 players who represent 77% of the decorative market share. The top 5 players are Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel and Indigo Paints dominating 68% of the decorative market.  

 

The other paint companies with some presence include Nippon India, Kamdhenu Paints, Jenson & Nicholson Paints Private Limited (JNPL), JSW Paints, and Jotun Paints.

Tinting Machines: Tinting machines, which are color dispensing machines, come with added benefits of consistency, advanced technology, precision, high dosing speed and ease of operation. In order to match colors that suit the evolving needs of consumers, paint companies must have a range of colors that suit the consumer requirements and needs and installation of tinting machines is the only solution to maintain large numbers of SKUs and products ranges. However, the dealers faced the problem of space constraints. As a result, most dealers tend to install tinting machines of only recognized players.

These tinting machines are a pre-requisite for all dealers who sell emulsion paints.

Before 2000, machines used to cost approximately ₹ 1 million, due to being imported. With local manufacturing, the cost has decreased to ₹ 0.15 million, typically borne by the paint companies at least for Asian Paints and Berger Paints.

 

Distribution Network: While its dealer network is far away from the market leader, Indigo Paints has recorded a higher CAGR for its dealer network in the newly entered regions in the North, the growth in the southern regions is comparatively lower as they have matured in the South.

 

While most major entities purely concentrate on dealer margins, cash or scheme discounts to dealers, Indigo offers a wide range of incentives to its dealers such as cash discounts, annual turnover rebate, long-term dealer loyalty program, among others. 

Financial Overview: Indigo Paints being small in size and a late entrant is the fastest growing in the industry.

PORTERS' ANALYSIS

The threat of A New Entrant - Medium

The market entry barriers include the development of an extensive distribution network through long-term relationships with dealers, the ability to set up tinting machines with dealers, as well as significant marketing costs and the establishment of a distinct brand to gain product acceptance.

Bargaining Power of Supplier - Medium

The Indian Paint industry is raw material intensive industry with more than 300 products going into the manufacturing of the final products. Major raw materials include acrylic binders, packaging tins, pigments, alkyd resins, and additives that are manufactured using derivatives of crude oil and thus having fluctuating prices.

Around 55% of the raw materials used by the paint companies are crude oil derivatives and comprise approximately 30% to 35% of the sector's overall raw material costs.

Other raw materials include white cement, minerals including lime, dolomite, calcite, china clay and talcum, and turpentine oil.

The numbers show that the bargaining power of the supplier companies is declining.

Bargaining Power of Buyer – Medium

Households and Industrial Users are the main customers of this industry. For housing requirements, the buyers are building contractors who buy in bulk and end people who paint their house.

Customers are more price sensitive because for them number of options are available and decisions are made based on quality, price and differentiating factors like weather protection, environment friendly paints.

Asian Paints have the lowest receivable days proving its dominant power.

Competitive Rivalry – High

About 67% of the market is organized and dominated by few major players of the Indian Paint Industry. But the current market growth rate can provide ample room of opportunity for all the players of the industry to flourish in the smaller cities and increasing their reach to the customers. However, the competition will keep on increasing as the players keep on launching new innovative products (like eco-friendly, odor-free, and dust & water-resistant paints) trying to meet different customer needs.

The threat of Substitute Products – Low

The availability of substitutes is very minimal. In rural areas, lime wash is a conventionally used substitute for paints. The industry has recently witnessed a gradual shift in consumer preference from traditional whitewash to better, value for quality and value for money (VFM)' /'pyramid bottom (BOP)' paint, especially in Tier 2 – 4 Cities. One alternative option for decorative walls available today is Wallpaper. Buyer propensity to substitute is low.

INDIGO PAINTS - COMPANY BACKGROUND

Indigo Paints commenced operations in 2000 and spread its footprints across the country. It started with the manufacture of lower-end cement paints, and gradually expanded its range to cover most segments of water-based paints like Exterior Emulsions, Interior Emulsions, Distempers, and Primers. Today, it has emerged as the fastest-growing player and got recognized in the Indian paint industry. The company touted as being among the most innovative paint manufacturers in India.

Ø  Indigo Paints Limited (Indigo Paints) is the fastest growing amongst the top 5 paint companies in India. They are the 5th largest company in the Indian decorative paint industry in terms of their revenue from operations for Fiscal 2020.

Ø  Indigo Paints has achieved this position in a highly competitive Indian decorative paint industry on the back of their multi-pronged approach.  This includes introducing differentiated products to create a distinct market in the paint industry, building brand equity for their primary consumer brand of “Indigo”, creating an extensive distribution network across 27 states and 7 union territories as of September 30, 2020, and installing tinting machines across their network of dealers.

Ø  The company manufactures a complete range of decorative paints including emulsions, enamels, wood  coatings, distempers, primers, putties, and cement paints. They also identify potential product needs from customers and introduce differentiated products to meet these requirements and create a distinct market for their products.

Ø  To create demand for their differentiated products, Indigo Paints 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. They subsequently leveraged this network to engage with dealers in Tier 1 and Tier 2 Cities and Metros as well.

Ø  The company engaged Mahindra Singh Dhoni, a sportsperson with the pan-India appeal, as their brand ambassador, to enhance their brand image amongst end-customers.

Ø  The company subsequently introduced tinting machines in their target markets to increase sales of emulsion paints, which require in-shop tinting.

MANUFACTURING FACILITIES

As of September 2020, the company owned 3 manufacturing facilities in Rajasthan, Kerala, and Tamil Nadu with the installed production capacity of 101,903 KLPA for liquid paints and 93,118 MTPA for putties and powder paints.

Construction of Unit II at the Jodhpur Facility for manufacturing putties and cement paints was completed and commissioned in December 2019.

As per the management, capacity utilization is a misleading parameter to track, as the paint manufacturing business is seasonal. While the months of June, July, and August witness a significant dip in utilization for the industry, the demand for paints doubles just before Diwali (especially in the northern regions) and in the months of March & April (pan-India). Hence, on an annual basis, the average capacity utilization for any paint company will generally be low.

The manufacturing plants are located near the raw material supplier locations and the Management finds it logistically feasible for manufacturing activities to remain in their current locations for the next 5-6 years. This enables Indigo to procure high-quality raw materials with minimal freight charges. As a result of this, it incurs significant outward freight cost (~10%) to deliver finished products to dealers, way higher compares to the average (5-6.5%) of its peers (top 4 Paint Companies).

COVID-19 IMPACT

Despite FY20 being impacted by COVID-19, the revenue from operations have grown by 16.65% between FY2019-20, against the range of -9% to 5% recorded by the top four paint companies in India.

Revenue from operations declined by only 5% from 272cr in H1FY20 to 258cr in H1FY21. The pandemic-led demand destruction is likely to have the least impact (within peer set) on Indigo Paints as its exposure to big cities is negligible (Predominantly operates in Tier 2-4 cities).

KEY FINANCIALS

A CONTRARIAN STRATEGY

The company apply a slightly different strategy to expand its distribution network starting from the dealers in Tier 3 & 4 cities and rural areas and subsequently leverage its network to engage with dealers in Tier 1 & 2 Cities and Metros as well. Similar model was followed by Asian Paints many years ago. There is significant untapped opportunity in Metros and larger cities that can be capitalized.

In states where the company have been present for a significant period, it leveraged the presence in Tier 3-4 Cities and Rural Areas, to expand into larger cities and Metros such as Thiruvananthapuram (Kerala), Kochi (Kerala), Kanpur (Uttar Pradesh), Patna (Bihar)and Ranchi (Jharkhand). In states it has recently entered, it intends to first focus on expanding the reach in Tier 3, Tier 4 Cities and Rural Areas, and then leverage this to expand into larger cities.

The company is also in the process of increasing its presence in North India, particularly in the states of Punjab and Uttarakhand, and the union territory of Jammu & Kashmir, where it has recently commenced distributing the products.

The cons of this strategy (from rural to urban) are that it may be more time consuming to gain acceptance in the larger cities, and may take longer to reach expected sales and profit levels than anticipated.

With a growing demand from small towns in the western and southern regions of India, most of the major entities are evaluating Tier 2 – 4 Cities as well. Asian Paints and Berger Paints are expanding their market in the western region.

 As per HDFC Securities IPO Note, the 5 Metros (Mumbai, Delhi, Bangalore, Chennai, Kolkata), account for a mere 1-2% of sales for Indigo Paints. 

       ARE INDIGO PAINTS REALLY UNIQUE & INNOVATIVE PRODUCTS?

As per the Prospectus, Indigo Paints has effectively managed to establish itself as a differentiator in the existing product categories in addition to evolving as a category creator by bringing new product innovations to the market.

The company first introduced Metallic Emulsions in 2005 and has since entered new markets by introducing other differentiated products with regularity. Some of the examples of unique products in the existing categories are the most recently launched of Exterior and Interior Acrylic Laminate and Enamels such as the PU Super Gloss Enamel in 2016, Dirtproof & Waterproof Exterior Laminate in 2017, resulting in a portfolio of seven such differentiated products as of September 30, 2020.

Dirt-proof & Water-proof Exterior Laminate – Indigo Paints launched India's first and only paint that gives equally effective protection from dirt as well as water; it offers superior resistance from dirt, while the silicone polymer repels water, and offers the walls an extremely smooth finish.

Nope.!! the above statement is not true that Indigo Paints is the first company to launch dirt and waterproof paint as Berger Paints and Asian Paints in 2014 had launched products named Berger - Weather Coat All Guard, and Asian Paints- Apex Ultima Protek which are effective against the damage due to rainwater and take care of the walls against dirt too.

Acrylic Laminate – Indigo Acrylic Laminate is a premium quality emulsion that gives the walls (both exterior and interior walls) a rich sheen finish offering a high-quality finish to the walls; A similar product to this is Asian Paints’ Apcolite Premium Emulsion. 

PU Super Gloss Enamels – Indigo Paints’ PU Super Gloss Enamel is an all-surface enamel paint that delivers superior gloss and protects wood and metal with its anti-fungal and non-yellowing properties. This particular paint contains a resin system that prevents the paint from turning yellow after application, as compared to other synthetic-based enamel paints.

A similar product is available is Berger Paints Luxol 7 In 1 is a quick-drying anti-corrosive PU enamel for interior and exterior surfaces, it has Anti Yellowing properties with superior gloss shine.

But there are also some products which are actually unique and innovative that created a new category in this highly competitive paint segment. Some of them are

Metallic Emulsion (Walls) – Indigo Paints pioneered the Metallic Emulsion segment, which gives a designer finish with a glossy metallic texture effect. This has been used to glam up spaces suitable for interior and exterior walls of homes and offices, and is available in shades of Gold, Silver, and Copper.

While the products, like Tile Coat Emulsion (Roof Tiles), Bright Ceiling Coat (Interior Ceilings), and Floor Coat Emulsion (Driveways) which the company claims to be disruptive and unique in RHP already have existing competitive products in the market.

So, overall, we can conclude that Indigo Paints products are not actually innovative and different from its competitors but there are few unique products in its portfolio.

Then what is that makes Indigo Paints more different?

It is its single branding and marketing approach.  A few years ago, it clubbed all its multiple brands for different product categories into a single umbrella brand “INDIGO” as against the 12-15 sub-brands of large players. This strategy has helped the customers connect to the brand immediately without having to remember multiple brands name.

Also, Indigo Paints has managed to keep its packaging uniform across all its brands to enhance brand recognition. Another characteristic that differentiates Indigo Paints’ advertising strategy is that it only advertises its differentiated products.

Indigo Paints is continuously investing more in brand the building, compensating its late entry (~12% of revenue) while the big players are spending 4-6% of their revenues towards advertising expense.

 

Indigo Paints is estimated to make only marginal increases in their future media advertising expenses, and leverage their current cost structure to achieve growth and drive profitability by strengthening their brand.

MANAGEMENT

Hemant Jalan, MD & Chairman (Age 63 years)

He holds a bachelor’s of technology degree in chemical engineering from the IIT, Kanpur, a master’s degree in science from Stanford University and has done MBA from the University of Chicago. He has over 20 years of experience in the paint industry. Previously, he was associated with AF Ferguson & Co. as a consultant. Presently, he is associated with Halogen Chemicals Private Limited as a director. He is a Director on our Board since March 28, 2000.

Anita Jalan, Executive Director (Age 60 years)

She has not received a formal educational degree. She has over 20 years of experience as a director in our Company. She is a Director on our Board since March 28, 2000.

Praveen Kumar Tripathi, Independent Director (Age 63 years)

He holds a bachelor of technology degree in electrical engineering from the IIT, Kanpur and a post-graduate diploma in management from IIM, Ahmedabad. He has several years of experience in sectors such as media planning and advertising, media and market research, brand consulting, communication planning, data analytics, and financial services. Previously, he was associated with Motilal Oswal Financial Services Limited as an independent director, Zenith Optimedia Asia as president – South Asia & regional strategic planning director Asia, Chaitra Leo Burnett Private Limited as an associate regional director – media and strategic planning, Starcom, India division of TLG India Private Limited, as an associate director – media and strategic planning, Pidilite Industries Limited as president - marketing and sales services, Lowe Lintas, a division of Lintas India Private Limited as an account supervisor and Hansa Consulting, a division of Hansavision Private Limited. Presently, he is associated with Magic9 Media & Consumer Knowledge Private Limited and Indevia Accounting Private Limited as a director. He is a Director on our Board since November 13, 2014.

Sunil Goyal, Independent Director (Age 53 years)

He has completed a 3-year degree course in commerce from Seth Motilal College, University of Rajasthan and is a qualified chartered accountant. He has several years of experience as a director in the finance and manufacturing sectors. He is the founder and managing partner of Kreston SGCO Advisors LLP, the managing director of Ladderup Finance Limited and is a director on the board of Kreston International Limited. Further, he was the chairman of the Western India Regional Council of the Institute of Chartered Accountants of India for the year 2006 - 2007. He is a Director on our Board since November 13, 2014.

Narayanan Kutty Kottiedath Venugopal, Executive Director (Age 72 years)

He holds a bachelor’s of science degree in mechanical engineering from the University of Kerala and a post-graduate diploma in management from the IIM, Calcutta. He has several years of experience in the paint industry. Previously, he was associated with Hi-Build Coatings Private Limited as the managing director. He is a Director on our Board since February 24, 2016.

Sakshi Chopra, Nominee Director (Age 42 years)

She holds a bachelor’s degree in commerce from the University of Mumbai and has done MBA from the Asian Institute of Management, Republic of the Philippines. She has been awarded the Shri Anil Basu memorial award in post-graduate diploma course in advertising and public relations from the Indian Institute of Mass Communication. She has over 10 years of experience in private equity funds. Previously, she was associated with Sequoia Capital India Advisors Private Limited as a principal. Presently, she is associated with Sequoia Capital India LLP as a principal. She is a Director on our Board since October 10, 2018.

Ravi Nigam, Independent Director (Age 61 years)

He holds a post-graduate diploma in rural management from the Institute of Rural Management Anand (IRMA) and has completed the owner president management (OPM) program from Harvard Business School (HBS). He has several years of experience in the manufacturing industry. His previous engagement was as a managing director of Tasty Bites Eatables Limited. Presently, he is associated with Visage Lines Personal Care Private Limited as a nominee director, Extraaedge Technology Solutions Private Limited, Sunshot Technologies Private Limited as a non-executive director and Ronin Wines Private Limited as an additional director. He is a Director on our Board since March 28, 2019.

Ravi Shankar Ganapathy Agraharam Venkataraman, Alternate Director (Age 42 years)

He holds a bachelor’s degree in computer science and engineering from Bharathidasan University and a post-graduate diploma in management from the IIM, Ahmedabad. He has over 16 years of experience in private equity funds. Previously, he was associated with McKinsey & Company, Inc. Presently, he is associated with various companies as a director including Sequoia Capital India Advisors Private Limited where he acts as the managing director. He was appointed on the Board of our Company with effect from October 10, 2018, as a nominee director. He ceased to be a Director on the Board of our Company on March 2, 2020. He was re-appointed on the Board of our Company as an Alternate Director with effect from March 11, 2020.

Nupur Garg, Independent Director (Age 46 years)

She holds a bachelor’s degree in commerce (honours course) from the University of Delhi and a master’s degree in business administration from the Massachusetts Institute of Technology. She is a qualified chartered accountant and has attended a program on private equity and venture capital from Harvard Business School. She has several years of experience in the finance and private equity sectors. She is the founder and director of Winpe Development Forum and an independent director on the boards of Small Industries Development Bank of India and Kerala Infrastructure Fund Management Limited. She is an external member of the investment committees for the Fund of Funds-1 managed by National Investment and Infrastructure Fund, the Dutch Good Growth Fund's investment fund mandate and an expert member of SIDBI’s Venture Capital Investment Committee. Previously, she was associated with Price Waterhouse, Discovery Communications India and International Finance Corporation. She is a Director on our Board since June 1, 2020.

Key Risks and Concerns

Ø  A significant portion (in FY20 its 35%) of its revenue comes from Kerala state and half of its revenue from the Southern region.

Ø  The decorative paints business is sensitive to seasonality, with revenues recorded during the months of June to August being relatively lower compared to other periods due to the monsoon season impacted by curtailed housing and construction activities. In addition, unusually cold and rainy weather could have an adverse effect on sales of exterior paint products.

Ø  There are several raw materials that are directly driven by crude oil. Approximately 50% of the input costs can be accounted for by crude derivations. The remaining portion of the input costs arises from non-crude (TiO2) forms. Therefore, any sharp increase in input costs could adversely impact the business.

Ø  There is no mention of Research and Development expenses in the RHP of the company.