Indigo Paints share price surges 12% as Motilal Oswal gives a 'buy' rating

Indigo Paints share price spiked over 12 percent in the morning session on December 31 after Motilal Oswal initiated coverage on the stock with a buy rating.

The stock was trading at Rs 2,187.70, up Rs 245.30, or 12.63 percent at 09:37 hours. It has touched an intraday high of Rs 2,187.70 and an intraday low of Rs 1,980.05.

The scrip was trading with volumes of 2,951 shares compared to its five-day average of 1,032 shares, an increase of 185.89 percent.

According to the domestic research and broking firm, the Indian paints industry is an oligopolistic industry dominated so far by four large players. The industry has high entry barriers for newcomers as the incumbents have strong moats such as robust distribution networks, strong brand equity, and significant penetration of tinting machines.

Indigo Paints is the only new entrant in the last two decades to have successfully overcome these high barriers with its patient and multi-pronged strategy, which comprises of introducing differentiated products to distinguish itself in the market.

It focuses on niche and differentiated products (~30% of sales in FY21, with the first-mover advantage in many cases), which helps it to distinguish itself in a competitive market and get access to dealer shelf space. These products are also margin accretive, it said.

Robust industry growth prospects

The Rs 545 billion (USD7.2 billion) paints industry in India is expected to post a 12.2% CAGR over FY19–24E, led by a ~10% volume CAGR. With the recent sharp price hikes, industry sales are expected to grow further in the coming years.

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Decorative paints (74% of the Indian Paints market) is expected to grow at a faster pace (~13% CAGR), from Rs 403 billion (USD 5.4 billion) in FY19. India has one of the lowest per capita consumption numbers, even compared with emerging markets offering long growth runways, the brokerage firm said.

Industry growth drivers comprise urbanization, the shortening of the repainting cycle, growth in branded players, and the robust pricing power of the branded players. Additionally, the oligopolistic nature of the industry means that the incumbents would see considerable growth opportunity, Motilal Oswal added.

Company slated to deliver strong growth

Over FY18–21, Indigo Paints delivered a sales/EBITDA/PAT CAGR of ~22%/68%/70%, driven by its efforts on distribution expansion, the proliferation of tinting machines, brand investments, and an improving product mix through differentiated products. We expect these initiatives to continue in the coming years as well. In addition, the company has taken 18–20% price hikes in recent months (in line with that of the industry) amid sharp commodity inflation.

Accordingly, the brokerage firm expects it to deliver a sales/EBITDA/PAT CAGR of ~28%/ 35%/41% over FY21–24E.It further expects it to continue to do so in the coming years as well.

Valuation and view

"While we expect Indigo Paints to continue to outperform larger peers in the industry, aggression by larger players in the rural markets could put the brakes on the company's growth aspirations. At the same time, greater acceptability in the urban markets would be crucial to Indigo's ambitions of achieving scale. Therefore, it would be necessary to watch out for the company's performance in both these markets," the research firm said in its report.

"On account of its strong topline and earnings growth outlook, we believe Indigo Paints deserves higher multiples in line with large peers trading at 55–60x. We initiate coverage with a buy rating, and targetr of Rs 2,270 (55x FY24E EPS)," it added.