Indigo Paint's IPO may fetch 3.5x returns for Sequoia in partial exit

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Indigo Paints' proposed IPO next year is expected to give 3-3.5-fold returns to private equity investor Sequoia. The company's proposed Rs 1,000 crore plan would partially support capex spending of Rs 100 crore every year. 

The company has hired an investment bank for the proposed IPO and aims to achieve Rs 3,000 crore in revenue in the next five years. It did not reveal the name of the investment bank.

Started by 60-year-old IITian Hemant Jalan, Indigo Paints has reported a revenue of Rs 600 crore in 2019, as against Rs 12 crore in FY 2009. This, in an industry that has been dominated by major brands such as Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel among others.

"We will be going to the market some time in October or November next year," said Jalan, adding that primary component would be around Rs 300 crore, while the rest would be a partial exit by Sequoia. Of the total 39 per cent stake, Sequoia is expected to dilute around 20 per cent worth about Rs 500-600 crore.

Sequoia has invested around Rs 170 crore in the company in two tranches in 2014 and 2016, after which it bought Employee stock ownership plan (ESOP) from the company's staff.

The fund-raising comes at a time when the company plans to penetrate cities and scale up investments to catch up with major players in the paint industry. It also planning to increase its investment and branding.

Unlike its peers, Indigo's strategy has always been to build the brand from smaller towns of India, which Jalan found easier to penetrate as they helped the company meet the competition in those markets. Having built the brand, the company is now entering bigger cites like Mumbai and Delhi. Jalan said India's small towns, which have a lot of money, still can contribute to a big chunk of his firm's business.

The company focus continues to operate largely in the decorative segment, which accounts for nearly 75 per cent of the Rs 55,000 crore paint industry. 

 
"The slowdown in construction and real estate has impacted the industry marginally. The market in which we have a large presence -- tier-II and III cities -- has not impacted much," he said.

These markets account nearly 95 per cent of paint consumption.

The industry is growing at around 10-12 per cent and in the decorative paints business, he says nearly Rs 5,000 crore in market value is getting added every year. During the past few years, the company's CAGR has been more in the range of 37-38 per cent and he said it is expecting to maintain that level over the next five years without much difficulty.

Jalan asserted that there is enough room for everyone in decorative paints and that the company can add Rs 200-250 crore to the top line every year.

The company likely to close the current financial year with Rs 800-825 crore in revenue and with Rs 1,150 crore the next year. The company further looks to increase the revenue to Rs 3,000 crore in the next three or four years.

It plans to invest some Rs 100 crore every year to build capacity, in order to deliver output worth Rs 400 crore with each infusion.

Indigo has three manufacturing facilities in the country. Two are located in South India — one each at Tiruchirappalli and Kochi. The third is in Jodhpur.