After losing around 40 percent of investor wealth in the last 1 year, Indigo Paints surged 10 percent just in August on the back of strong June quarter (Q1FY23) results. Domestic brokerage house Sharekhan expects the stock to jump over ₹2,200 in the next 1 year from around ₹1,500 currently.
The brokerage retained a 'buy' call on the stock post its Q1 results with a target price of ₹2,250, indicating an upside of 47 percent from the current market price of ₹1,528.
Sharekhan is bullish on the stock as it posted sturdy numbers in Q1 despite a tough environment of raw material inflation and a slowdown in consumer demand. The stock fell over 28 percent in 2022 so far.
The stock has underperformed most of its peers in the last 1 year. While Indigo Paints lost 40 percent in this time, Asian Paints added 15 percent. However, Kansai Nerolac fell 22 percent and Berger Paints declined 17 percent in this period.
The company's revenue grew 43.6 YoY to ₹224.0 crore on a low base of Q1FY22 driven by a mix of volume and value. Its 3-year revenue growth CAGR stood at 17 percent, said the brokerage. However, it added that price-led growth stood at 30 percent while volume growth stood in the mid-teens.
"The company witnessed good sales growth in both Kerala and the Rest of India. Better product mix, lower trade spends and price hikes in the portfolio helped in corrected sharp YoY fall in gross margins to 33 bps (improved by 158 bps on q-o-q)," noted Sharekhan. The company's operating margin improved by 283 bps YoY to 15.7 percent while net profit grew by 71.5 percent YoY to ₹20 crore.
The brokerage noted that this is the third consecutive quarter of sequential improvement in gross margins; improved by 158 bps QoQ to 45.2 percent highest as compared to peers.
The brokerage further said that Indigo Paints has shifted its strategy by focusing more on expanding its reach and output per dealer in tier-1 and tier-2 urban cities. It is focused on intensive engagement with influencers (painters’ community) in these towns to improve sales, it pointed out adding that the strategy is already showing some green shoots. The incremental revenues from the same would start flowing from Q3FY23, predicts the brokerage.
Indigo has launched a range of budget exterior emulsions and more economical variants of distempers and now the company is planning to enter the industrial paints segment by entering into a strategic tie-up with formidable international players in the coming years, which is also a key positive, noted the brokerage.
Further, Prices of some of the key inputs such as emulsion monomers, titanium dioxide and packaging material have corrected from their high in the last six months and if prices continued to decline or remain stable in the coming months, the company will see YoY substantial improvement in the margins from Q3FY23, believes Sharekhan.
The brokerage also maintains its earnings estimates for FY2023 and FY2024 and will keenly monitor the performance in the coming quarters.
"IPL is focusing on gaining share in tier 1 and tier 2 cities where it has relatively good dealer presence. The revamped strategy will help the company beat industry growth in the medium term (IPL targets growth at twice the industry’s growth). This will help the company to achieve consistent revenue growth of 30 percent over FY22-FY24. This along with OPM expansion will enable PAT to post a 60 percent CAGR over FY22-FY24," explained Sharekhan.
However, increased competitive pressures from large players or a sustained rise in key input prices are key risks to the company's upside potential, it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.