Indigo Paints CMD says no margin pressure compared to peers but Street is not impressed

Indigo Paints’ revenue for June 2022 ended quarter increased over 43 percent on a year-on-year basis to Rs 224 crore, compared to Rs Rs 156 crore in the year-ago period.

“The company continues to witness higher volume growth in the Emulsions segment (by far the largest contributor to overall value sales), and the Premium Emulsion category in particular,” the firm said in a presentation for investors. It added that the periodic and incremental price hikes affected a few selected products that were in line with the industry.

Jalan explained that all other companies have a reasonable exposure to industrial sales, but his firm is not in that segment as of now and is 100 percent in the decorative paint business.

“As far as industrial paints are concerned, last year, in the first quarter and second, the base was extremely low because of the chip shortage that plagued the automobile industry. So, coming off a low base, all those companies have probably registered much higher growth in the industrial segment. And that has led to an overall top-line growth which is marginally higher than ours,” he said in the boardroom meeting.

Stressing the difference between top-line growth and the margin behaviour of other companies versus Indigo Paints, Jalan said industrial sales come at a cost, they deliver lower gross margins compared to decorative, and therefore their gross margins have shrunk marginally compared to Indigo Paints, which has risen significantly.

The paintmaker’s earnings before interest, taxes, depreciation and amortisation (EBIDTA) for the three months came in at Rs 35.27 crore, which was 75 higher than Rs 20.16 crore in the same quarter a year ago.

The EBIDTA margin — the amount by which a business's operating revenue exceeds its costs — expanded to 15.75 percent against 12.92 percent in the last quarter.

“With stabilising raw material prices, gross margin improved sequentially from 43.61 percent (in the fourth quarter of FY22) to an industry-leading 45.19 percent. The gross margin is largely on par with the figures of the first quarter of FY22,” the firm said in its presentation.

It said the company had passed on incremental price increases to the consumers in a staggered manner. The company said raw material prices have largely stabilised and have started softening.

Indigo Paints believes that its growth in profitability would have been significantly higher had it not indulged in high advertising and promotional spending during the Indian Premier League (IPL) season.

“In FY22, IPL schedule was split between April and September, whereas in this fiscal year, IPL was conducted in a single phase in April and May. As we are a significant advertiser in IPL, this has resulted in a higher advertising and promotional spending in June quarter of FY23 than in FY22 (by Rs 5 crore),” it explained.

The firm expects a much sharper increase in profitability parameters in the future quarters with comfortable margins and stabilising input costs. The company added that the strategy of increasing the presence in the Tier-1 and Tier-2 cities are showing early indications of traction and is expected to yield rich results in the next 2-3 quarters.

However, despite the jump in revenue, profit, and margin, Indigo Paints' shares failed to cheer Dalal Street investors as the stock declined more than 3 percent intraday and was trading 1.9 percent lower at Rs 1531.20 on BSE at 1:50 pm. But, in the five days, the stock has risen close to 10 percent.