30 Dec , 2021 By : Kanchan Joshi
Early this year, the stock of Indigo Paints Ltd saw a stellar listing, closing at Rs3,117 per share on its listing day on 2 February on the NSE. This meant the stock had appreciated by 109% from its issue price of Rs1,490 apiece.
However, the stock has declined as much as 37% since listing, significantly underperforming the Nifty 500 index.
Cost inflation is one reason for weak sentiments. However, higher costs are a raging concern for all paint makers and not only Indigo Paints.
Moreover, in general, paint makers continue to hike prices gradually to combat inflation.
Channel checks of dealers by various brokerages show that paint companies have passed on the burden of increased costs by hiking prices by 15-20% in the past few months.
“The steep underperformance of Indigo Paints’ shares compared to its peers can be attributed to a combination of factors. One of this is the underlying weakness of the company’s business. Our channel checks suggest that the company is facing a bit of a headwind in terms of paint sales," said Varun Singh, an analyst at IDBI Capital Markets and Securities Ltd.
Some part of the correction in the stock can also be attributed to the overall decline in the stock market in recent months, Singh said.
“Indigo Paints is a mid-cap. When the market corrects, mid-caps tend to fall a bit steeper than larger companies," he said.
Meanwhile, in the September quarter (Q2FY22), Indigo Paints’ gross margin contracted about 850 basis points year-on-year. One basis point is one-hundredth of a percentage point.
Price hikes taken are expected to protect further margin erosion. In its Q2FY22 earnings conference call, the company indicated that if the input price inflation halts in Q3FY22, then gross margin would start to improve in Q4FY22.
Even so, it is not as if valuations offer comfort. Taking into account FY23 earnings per share estimates of domestic brokerage house Dolat Capital Market Pvt. Ltd, shares of Berger Paints and Indigo Paints are trading at price-to-earnings (PE) multiple of 66 times each. In comparison, the same measure for Asian Paints and Kansai Nerolac stands at 73 times and 43 times, respectively.
As such, Indigo Paints’ small market share and fifth position in the paint sector makes it challenging to justify its expensive valuations.
Unsurprisingly, some analysts reckon that if investors have to bet on discretionary companies, then they are better off taking exposure in market leaders such as Asian Paints or Berger Paints, which have a huge advantage of scale and reach over Indigo Paints.
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