Shares of Indigo Paints, the country's fifth-largest paint company, have been on a steady decline over the past year, plummeting from ₹1,623 apiece to ₹1,015, marking a sharp drop of nearly 37.46%. In 2023 so far, the company's shares have lost almost 22% of their value.
The stock has experienced losses in ten out of the last twelve months. The biggest monthly fall of 15.19% occurred in February following the company's Q3FY23 earnings, which missed the analyst estimates.
While the stock has continued to be an underperformer in the market, domestic brokerage firm Sharekhan remains bullish on it, citing reasonable valuations.
In Q3FY23, paint companies witnessed a demand slowdown impacted by consumer inflation, extended monsoons, a shorter festival season, and the normalization of pent-up demand, which led to lower volume growth during the quarter, said the brokerage.
Indigo Paints' performance in Q3 FY23 was largely in line with other paint companies. The company reported a muted revenue growth of 6% YoY, amounting to ₹281.3 crore. The revenue growth was driven by a mix of volume and value, with price-led growth staying ahead of volume growth.
Price hikes and correction in input prices aided gross margins by 94 bps YoY to 43.8% and by 210 bps on a QoQ basis. The operating profit margin during the quarter came in flat at 14.4%, while operating profit grew by 5% YoY to ₹40.6 crore and PAT grew by 8.1% YoY to ₹26.8 crore in Q3FY23. During the quarter, the company added 262 tinted machines.
The brokerage pointed out that there was a rebound in sales growth in November and December 2022. Historically, Q4 FY23 has been the company's strongest quarter, and the company expects momentum to continue in the quarters ahead.
The company experienced significant sales growth in 750 specified cities, with the growth rate in focus areas being almost twice that of upcountry areas. Furthermore, some of the key input prices have stabilized from their previous highs, and the company has refrained from implementing any recent price hikes, it added.
The upcoming plant in Tamil Nadu is in the final stage of completion and is expected to be commissioned in the upcoming quarter. This will take care of rising demand in the southern market.
In addition to that, the company is also planning to set up an additional line of solvent-based paints in Jodhpur. This facility would help provide better efficiencies, according to the brokerage.
IPL is focusing on gaining market share in tier-1 and tier-2 cities where it has a better dealer presence. The company's revamped strategy is showing good results and will help the company achieve growth ahead of the industry over the next two to three years, Sharekhan underscored.
Further, the company is planning to enter the construction chemical and waterproofing segment, which has seen good demand in the recent past. Focused strategies will help the company achieve consistent revenue growth of 24% over FY2022-FY2025. This along with OPM expansion will enable PAT to post a 38% CAGR over FY2022-FY2025, it said.
The recent correction in the stock price placed it at a reasonable valuation of 31.8x and 24x of its FY2024E and FY2025E earnings, respectively. The brokerage has kept its "buy" rating on the stock with a revised target price of ₹1,400 apiece.
7 analysts polled by MintGenie on average have a 'hold' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
