Indigo Paints Limited — Q2 FY25 earnings call

Call held 8 Nov 2024

Management summary

Indigo Paints delivered its sixth consecutive quarter of industry-leading growth in Q2 FY25, with consolidated revenue up 7.4% to INR299.5 crores despite a muted demand environment. While stand-alone gross margins remained strong at 44.1%, PAT saw a 7.7% decline due to increased depreciation from the newly commissioned Tamil Nadu plant. The company is progressing with strategic capex projects and expanding its distribution network, with management expressing optimism for a demand recovery in Q3 FY25.

Highlights

  • Consolidated Revenue grew by 7.4% to INR299.5 crores in Q2 FY25.

  • Stand-alone sales registered a value growth of 6.7% YoY.

  • Stand-alone Gross Margin stood at 44.1% for the quarter.

  • Stand-alone EBITDA increased by 1.9% to INR42.6 crores.

  • Stand-alone PAT decreased by 7.7% to INR24.1 crores, impacted by higher depreciation.

  • Subsidiary Apple Chemie reported robust revenue growth of 27.7% in Q2 FY25.

  • Active dealer count reached 18,718, with 10,555 tinting machines as of September 30, 2024.

  • A&P spends as a percentage of revenue decreased from 5.8% to 5.4% YoY.

Key financials

  1. Consolidated Revenue ₹299.5 Cr +7.4%YoY
  2. Consolidated EBITDA Margin 13.9%
  3. Consolidated PAT Margin 7.3%
  4. Stand-alone Gross Margin 44.1%
  5. Stand-alone EBITDA ₹42.6 Cr +1.9%YoY
  6. Stand-alone PAT ₹24.1 Cr -7.7%YoY

What they filed

Q1 FY27: revenue up 18.6%, net profit up 61.5% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue289 327 367 295 298 +3%339 +4%398 +8%350 +19%
EBITDA43 57 86 44 46 +7%66 +16%92 +7%62 +41%
Net profit24 36 57 26 26 +8%36 +0%57 +0%42 +62%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • Apple Chemie
    27.7% Revenue Growth (Q2 FY25)38% Revenue Growth (H1 FY25)

Guidance & targets

Profitability

  • A&P spends as percentage of revenue Profitability · Going forward · Medium confidence Decline
    Hence, the A&P spends as a percentage of revenue is expected to still decline going forward.

    — Hemant Jalan

Ad Spend

  • Digital media spend as percentage of total media spend Ad Spend · This year (FY25) · Medium confidence ~15%
    Now this year, it may comprise of maybe 15% of our total media spend, which is a subsection of the total A&P spend.

    — Hemant Jalan

  • Digital media spend as percentage of total media spend Ad Spend · Going forward · Medium confidence Ramp up
    And maybe the percentage will ramp up as we go forward if we get a good feedback.

    — Hemant Jalan

Capacity

  • Water-based paint plant commissioning Capacity · Q2 FY26 · High confidence Q2 next fiscal
    The water-based new plant is expected to be commissioned sometime in Q2 of the next fiscal

    — Hemant Jalan

  • Solvent-based plant commissioning Capacity · Q4 FY25 / Q1 FY26 · Medium confidence Q4 this fiscal / Q1 next fiscal
    while the solvent-based plant, we are trying to get it up and running by the Q4 of this fiscal, at most, it may spill over to Q1 of the next fiscal.

    — Hemant Jalan

  • Putty plant brownfield expansion completion Capacity · Q4 FY25 · High confidence Q4 this fiscal
    we are also undertaking a brownfield expansion of our putty plant at Jodhpur, which would certainly be completed in Q4 of this fiscal.

    — Hemant Jalan

Distribution

  • Active dealers with tinting machines Distribution · Medium term · Medium confidence Closer to 75%
    So we hope that in a few years, our percentage of our active dealers who have tinting machines will also grow closer to 75%. That is the objective in the medium term.

    — Hemant Jalan

Capex

  • Total capex outlay for water-based plant Capex · Overall project · High confidence INR250-275 crores
    The total capex outlay for the water-based plant that we are setting up is going to be somewhere around INR250 crores to INR275 crores.

    — Hemant Jalan

  • Total capex outlay for solvent-based plant Capex · Overall project · High confidence ~INR50 crores
    For the solvent-based plant, I believe, is about INR55 crores or something like that. Sorry, it's closer to INR50 crores.

    — Hemant Jalan

  • Total capex outlay for brownfield putty plant Capex · Overall project · High confidence <INR15 crores
    And for the brownfield expansion of the putty plant, it will be around below INR15 crores or so.

    — Hemant Jalan

  • Significant capex Capex · Next 3-4 years · High confidence No significant capex
    we don't envisage any significant capex for the next 3, 4 years, keeping healthy demand growth in mind.

    — Hemant Jalan

New Product

  • New differentiated product launch New Product · Next 3-4 months · High confidence Regulatory clearance
    I'm hopeful that we will get it in the next 3, 4 months or so.

    — Hemant Jalan

Risks & concerns

  • Muted underlying demand situation in the industry

    medium

    The last three quarters have been tough for the industry, with August and September continuing a low-demand scenario, though management hopes for a sharp reversal in Q3.

    Management acknowledged

  • Gross margin contraction due to price cuts and raw material costs

    medium

    Gross margins were impacted by industry-wide price cuts of 4.5-5% in previous quarters and slightly higher raw material prices YoY, leading to a 3-3.5% deficit in pricing.

    Management acknowledged

  • Competition and difficulty in penetrating metro markets

    medium

    Metro markets are 'winner takes all' where even larger players struggle, and Indigo's presence is weak, making it difficult to penetrate these markets with a full product range.

    Analyst acknowledged

  • Adverse product mix impacting subsidiary (Apple Chemie) margins

    low

    Apple Chemie's margins were significantly impacted in Q2 due to an adverse product mix, but management expects significant improvement in upcoming quarters, with October showing a return to normal.

    Management acknowledged

Areas of evasion (2)

  • Industry-wide negative putty margins (stated cannot answer for others)
  • Exact capex spent in H1 (provided total outlay instead)

Q&A highlights

2 direct
Putty Gross Margins & Industry Competition Direct
For us, Abneesh, putty has never been a negative gross margin. And the reason is that we are perhaps the only paint company that manufactures almost all of its putty in-house.

This question addresses a key competitive concern in the industry regarding negative putty margins and highlights Indigo's unique in-house manufacturing advantage and strategy of maintaining quality over price cuts.

Asked by Abneesh Roy

Impact of New Competitors (Birla Opus) & Industry Demand Slowdown Direct
Is that diminished growth that we are talking about? Certainly not. I mean the industry normally grows at about a healthy 8%, 9% every year. So the industry should have been growing by at least around INR1,400 crores to INR1,500 crores per quarter. And if some new entrant comes and takes a small portion of that, that is not what leads to demand slowdown.

The management directly confronts the prevailing market narrative about new entrants causing industry slowdown, asserting that the overall market size and growth rate are sufficient to absorb new players without significant impact on established companies like Indigo.

Asked by Tejash Shah

Share Price Performance & Potential Buyback Partial
That's a very good suggestion, and it is something that the Board will definitely consider in due course of time. At the moment, the capex that we are undergoing which was not part of the IPO proceeds... Maybe 1.5 years from now when all this capex is behind us, I'm sure when we have a lot more surplus funds, the Board will take a decision at the appropriate time for a capex and -- for a buyback, as you suggested.

This addresses investor frustration regarding the company's stock performance post-IPO despite strong operational growth, providing a clear, albeit deferred, timeline for when a buyback might be considered, linking it to the completion of current capex cycles.

Asked by Rajesh

2 min read 6 chapters

Detailed narrative

Q2 FY25 Performance and Industry Growth

Indigo Paints reported its sixth consecutive quarter of industry-leading growth in Q2 FY25, with consolidated revenue increasing by 7.4% to INR299.5 crores. Stand-alone sales value grew by 6.7% year-on-year, despite the industry experiencing a muted demand scenario, particularly in August and September. The company maintains its pole position in gross margin, which stood at 44.1% for the quarter.

Margin Pressures and Depreciation Impact

While stand-alone EBITDA grew by 1.9% to INR42.6 crores, PAT decreased by 7.7% to INR24.1 crores. This PAT decline was primarily attributed to higher depreciation costs associated with the new Tamil Nadu plant, commissioned in mid-September of the last fiscal year. Gross margins were slightly muted compared to the previous year due to industry-wide price cuts of 4.5-5% taken in Q3 and Q4 of the last fiscal, which were only partially offset by recent price hikes of 1.5%.

Strategic Capex and Capacity Expansion

Indigo Paints is actively pursuing significant capex projects, including a new water-based paint plant in Jodhpur (INR250-275 crores, expected Q2 FY26), a solvent-based plant (approximately INR50 crores, expected Q4 FY25/Q1 FY26), and a brownfield expansion of the putty plant (less than INR15 crores, expected Q4 FY25). These investments are funded entirely through internal cash accruals, and the management anticipates no significant capex requirements for the next 3-4 years.

Distribution Network and Digital Marketing Initiatives

The company's active dealer network expanded to 18,718, with 10,555 tinting machines as of September 30, 2024. Management aims to increase the percentage of active dealers with tinting machines to 75% in the medium term. In a strategic shift, digital media advertising now accounts for approximately 15% of the total media spend for FY25, supplementing TV advertising to reach a younger audience, with plans to intensify these efforts based on feedback.

Differentiated Products and Competitive Stance

Indigo Paints continues to benefit from its portfolio of differentiated products, which contribute to healthy mid-single-digit revenue and command higher price realizations, particularly in waterproofing. Management asserted that these products, established over 10-15 years with extensive advertising, are largely protected from imitation by larger competitors who find their market size insufficient for significant marketing investment. The company also downplayed the impact of new entrants on overall industry demand, stating the market is large enough to accommodate them.

Shareholder Value and Future Outlook

Addressing investor concerns about the share price performance post-IPO, management indicated that a buyback would be considered by the Board in approximately 1.5 years, once the current capex cycle, funded by internal accruals, is completed and the company has accumulated more surplus funds. The company expressed optimism that the current muted demand situation will reverse in Q3, leading to a return to normal growth rates.

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