Indigo Paints Ltd Management Discussions

Indian Economy review¹

Despite the world economy grappling with challenges such as subdued external demand, prolonged geopolitical tensions and fluctuations in global financial markets, the Indian economy demonstrated remarkable resilience during FY 2023-24².

The timely intervention from the Reserve Bank of India (RBI) and effective programmes initiated by the Government of India strengthened the Indian economy, cushioning the country from the global headwinds.

During the reported year, the Indian economy achieved a growth rate of 8.2%³ propelled by strong growth in fixed investment, which was bolstered by the Governments emphasis on capital expenditure.

Further, a steady uptick in urban demand and a rebound in rural spending, significantly contributed to the growth of the Indian economy. The robust urban demand is evidenced by a surge in passenger vehicle sales, heightened transactions through credit and debit cards, domestic air travel surpassing pre-pandemic levels and a notable uptick in housing purchases. On the other hand, an increase in demand for tractors and two-three-wheeler sales, along with a surge in the volume of fast-moving consumer goods (FMCG), signify a marked improvement in rural demand. This holistic momentum in both urban and rural sectors underscores Indias economic resilience and potential for sustained growth in FY24.

Additionally, the Indian rupee became the third most stable Asian currency in the year under review, with the manufacturing and service sector emerging as primary catalysts for growth.

Outlook

Looking forward, the Indian economy is expected to maintain momentum, supported by the Governments continued emphasis on capital spending and fiscal discipline. Additionally, factors such as strong corporate finances, increasing capacity utilisation, double-digit credit expansion, a robust financial sector and decline in inflation, are expected to propel growth.

According to the International Monetary Fund (IMF), India is expected to become the third-largest economy in the 2027 in USD at market exchange rate. It is also expected that Indias contribution to global growth to rise by 200 basis points in five years.⁴

industry has been serving as the primary catalyst increasing the demand for paints and coatings, particularly in architectural applications.

Additionally, with rising disposable incomes and changing lifestyle preferences, consumers are preferring aesthetically pleasing paints and durable coatings.⁷

India Paints and Coatings Market 2024-2033 (By Million)

Industry overview

Paints and coating⁶

Indias paints and coatings market, encompassing both decorative and industrial segments, was valued at USD 13,405.4 million in the fiscal year 2024, and is projected to reach USD 31,706.3 million by FY2033, with a forecasted Compound Annual Growth Rate (CAGR) of 8.75%. The countrys burgeoning population, coupled with rapid urbanisation, are driving the demand for paints and coatings in various sectors. Urban development initiatives such as the Smart Cities Mission and Housing for All, further stimulate construction activities, creating a significant opportunity for the pain and coating industry.

Further, the automotive sector also contributes to this growth. With the growing demand for automotive and increasing after-sale services for various car segments, it is expected to bolster the demand for specialised paints and coatings. On the other hand, the construction industry has witnessed robust growth due to urbanisation, infrastructure development and government initiatives. Thereby, the

Construction chemical⁸

Indias construction chemicals market holds the third position globally in profitability and leads in growth. The Indian construction chemicals market size is expected to reach 5.02 billion USD by 2030, growing at CAGR of 7.24% between 2024 and 2030.

While the commercial sector holds the highest market share for construction chemicals, it is closely followed by the residential sector. Commercial buildings necessitate a wider range of construction chemicals due to their higher densities and intricate designs. On the other hand, the residential sectors consistent demand for waterproofing plays a significant role in bolstering construction chemical market.

It is expected that through favourable government initiatives and surge in investments, the residential and commercial sector is poised for growth in the forthcoming years, further benefitting the construction chemical industry.

Value of Construction Chemicals Consumed by End Use Sector, USD, India, 2018 - 2030

Waterproofing chemicals⁹

Indias waterproofing chemicals industry has witnessed remarkable growth driven by rapid urbanisation and the escalating demand for resilient construction solutions. Given Indias climate and the necessity to shield buildings and infrastructure from monsoons, humidity and water damage, waterproofing chemicals play a pivotal role in the construction sector.

The India Waterproofing Solutions Market size is expected to reach 1.81 billion USD by 2030 from 1.18 billion USD in 2024, growing at a CAGR of 7.44% during the forecast period (2024-2030).¹⁰

The surge in infrastructural development and urbanisation, with the Government mandating the use of waterproofing products, are contributing to the growth of the industry.

Furthermore, advancements in research and development have introduced innovative waterproofing technologies in India. These include cutting-edge materials such as crystalline waterproofing and liquid-applied membranes. These innovations offer superior performance and improves application ease, enhancing the overall quality of available waterproofing solutions in the market.

Decorative coating¹¹

Indias decorative coating market is expected to expand to H 159,000 crore by 2032, rising from its current size of H 70,000 crore, with an average annual growth rate of 9.5% between 2024 and 2032. The market can be segregated into Organised and Unorganised sectors.

In 2023, the Organised sector represented approximately 77% of the total decorative coating market, equivalent to around H 54,000 crore. It is further anticipated that the sector will grow at a CAGR of 9.8% to surpass H 125,000 crore by 2032. Various factors such as newly announced capacity expansions, rapid urbanisation, increased preference for branded paints and shorter repainting cycles are expected to drive growth of the market in the upcoming years.

On the other hand, the Indian Unorganised decorative coating market comprises over 2200 small and medium-scale companies, collectively accounting for approximately 23% of the market share. These companies generate revenue ranging from H 1 crore to H 1000 crore for decorative coatings. Typically, Unorganised decorative coating manufacturers cater to the regional markets, however, some of the major players whose revenues exceed H 200 crore, have established their presence in more than two states and possess strong distributor networks.

Megatrends

Focus on sustainable living

Eco-conscious consumers are driving the demand for water-based, low-VOC paints that minimise environmental impact. Thereby, paint manufacturers are developing more eco-friendly solutions that cater to the growing population of environmentally-responsible consumers.

Premiumisation

A growing middle-economic class with rising disposable income is fuelling the demand for high-quality paints. High-quality paints synergise aesthetics with features such as anti-bacterial properties, superior durability and improved functionality. This trend has been specially gaining momentum as consumers are increasingly preferring the touch of luxury associated with premium brands.

Digital transformation

The advent of digital transformation has significantly bolstered innovation in the sector. Online paint shopping platforms, virtual reality (VR) tools for visualising colours in your own space and mobile apps for product information and after-sales service are rapidly gaining traction. This shift hassignificantlyenhancedcustomerexperiencebyoffering convenience and personalised recommendations. Paint companies are leveraging digital tools to create a more engaged customer base and improve brand retention.

Tier-2 and Tier-3 market expansion

Withrapidurbanisation,thedemandforqualitypaintsissteadily gaining momentum. As paint companies are expanding their reach, they are strategically targeting these areas with focused marketing campaigns, developing customised product offerings and establishing wider distribution networks. This expansion unlocks a vast potential customer base and positions paint companies for long-term growth.

Company overview

Established in 2000, Indigo Paints has emerged as a leading paint company in India. With its headquarters in Pune, Maharashtra, the Company initially manufactured economical cement paints. However, it has significantly expanded its portfolio and diversified its offerings to include a wide range of decorative paints. The Companys extensive distribution network ensures widespread In availability of products across India.

Operating three strategically located manufacturing facilities in Jodhpur (Rajasthan), Kochi (Kerala) and Pudukkottai (Tamil Nadu), Indigo Paints emphasises on research and development to introduce innovative products. The Companys resilient and multifaceted operational strategy has enabled it stay ahead of the curve and effectively navigate hurdles in its growth path.

Growth strategies

Product innovation

The Company focuses on developing a differentiated product portfolio to cater to specific consumer needs, increase their market share and outperform its peers. The Companys strategy to create innovative specialty paints allows the organisation to foray into new segments and strengthen its presence in existing markets. The Company relies on its innovative capacity to solidify its position as a leading player in the Indian paint industry.

Geographic expansion

In an unconventional approach, the Company has started operations by focusing on Tier-3 and Tier- 4 cities. Having established its presence in the bottom of the pyramid, the Company has started focusing on growth in Tier-1 and Tier-2 cities. The Company aims to tap into the vast potential of these developing regions with rising disposable incomes and increasing demand for quality paints. This strategy involves establishing wider distribution networks, targeted marketing campaigns and developing ‘value paints for people seeking budget options. The Company is also engaging with painters and contractors, providing them training on product application, offering exclusive benefits to recommend and use Indigos products and accelerating brand adoption in new markets. This dual strategy involves expanding its geographic footprint and building strong relationships with local stakeholders to drive Indigo Paints growth across India.

Capacity augmentation

Investing in a state-of-the-art plant with automated material handling will help to significantly increase production efficiency and capacity. This allows the Company to meet rising demand while potentially reducing production costs. Additionally, the company is leveraging its established presence and distribution networks to set up new manufacturing units. This will help reduce transportation costs and improve delivery timelines to meet the growing regional demand. The Company is prepared to handle future growth and maintain a competitive edge through potentially lower costs and solidify their presence in key markets.

Brand and marketing focus

The Company is strengthening its salesforce to reach more dealers and retailers, increasing product availability and brand visibility. Additionally, through tailored brand promotion and engagement with the influencer community, the Company plans to leverage social media to connect with potential customers. The Company also increase customer engagement through targeted online advertising, informative content creation and interactive tools such as virtual paint colour visualisation. This multi-pronged approach enables the Company to build brand awareness, generate interest and ultimately drive sales for Indigo Paints.

Expansion into adjacencies

The Company aims to drive growth by expanding into adjacencies, particularly in the high potential Indian infrastructure sector. With the acquisition of Apple Chemie India Private Ltd, the Company ventures beyond the decorative paint segment. Exploring segments such as construction chemicals and waterproofing, the Company, now, has new revenue streams and to capitalise on the synergies within its existing operations.

Strategic acquisitions

In FY24, the Company has acquired Apple Chemie India. With this acquisition, the Company aims to expand its product portfolio into the space of construction and waterproofing products. Apple Chemie has achieved impressive growth of 50% in the fourth quarter of fiscal year 2024, and is anticipated to sustain its robust growth in the forthcoming quarters.

IPO Fund utilisation

Sr. No. Item Head	Amount as proposed in offer Document	Utilised up to March 31, 2024	Un- Utilised up to March 31, 2024
1 Funding capital expenditure for the proposed expansion	15,000.00	15,000.00	Nil
2 Purchase of tinting machines and gyroshakers	5,000.00	5,000.00	Nil
3 Repayment/ prepayment of certain borrowings of our Company	2,500.00	2,500.00	Nil
4 General corporate purposes	6,211.21	6,211.21	Nil
Total	28,711.21	28,711.21	Nil

The proceeds have been utilised for the intended objects. The additional unit in Pudukkottai was commissioned in September 2023 and has started to contribute to the sales.

Operational overview

Sales and product mix

The sales growth in Tier-1 and Tier-2 regions continue to outpace the sale in Tier-3 and Tier-4 regions, including rural areas. This trend is expected to gain momentum in the future. The throughput per Tinting Machine is steadily growing and efforts are on to increase it further

Value growth

Product category	FY2021-2022	FY2022-2023	FY2023-24
Cement paints + putty	7.91%	33.19%	35.87%
Emulsions	39.80%	18.20%	15.01%
Enamels + wood coatings	16.03%	30.30%	13.63%
Primers + distempers + others	21.42%	18.93%	32.16%
Volume growth
Product category	FY2021-2022	FY2022-2023	FY2023-24
Cement paints + putty	3.86%	25.52%	35.50%
Emulsions	21.66%	5.88%	15.36%
Enamels + wood coatings	2.87%	18.52%	15.79%
Primers + distempers + others	5.37%	13.82%	33.01%

Distribution network

During the year under review, the Company increased its active dealer base, reaching a total of 18,105 dealers. Furthermore, the Company augmented its tinting machines to 9,842 in FY24. The expansion of the active dealer network aligns with the Companys long-term business strategy, which aims to attract a greater number of dealers and facilitate the expansion of its footprint.

Product category	FY2020-21	FY2021-22	FY2022-23	FY2023-24
No. of depots	44	47	47	53
Active dealers	13,214	15,787	16,496	18,105
Tinting machine	5,472	7,101	8,273	9,842

Financial Overview

The Company concluded the year with a net revenue of 1,30,609 Lakhs on a consolidated basis. The Company has managed to achieve industry leading gross margin at 47.63%. This accomplishment can be attributed to a favourable product mix and a prudent material purchase policy. The EBITDA margin has expanded to 18.23% from 16.91% in FY23, while the PAT margin has decreased to 11.27% from 12.18% in FY23. In accordance with the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations 2018, the Company is required to provide details of significant changes (i.e., change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefor.

The key financial ratios are given below:

On Standalone Basis

Product category	FY2020-21	FY2021-22	FY2022-23	FY2023-24
Revenue from operations (in Lakhs)	72,332.47	90,597.48	1,07,333.43	1,25,486.11
Gross margin (%)	47.95	43.32	44.54	47.90
EBITDA (H in Lakhs)	12,251.61	13,598.37	18,153.24	23,269.79
EBITDA margin (%)	16.94	15.01	16.91	18.54
Profit for the year (H in Lakhs)	7,085.01	8,404.80	13,193.94	14,865.26
PAT margin (%)	9.80	9.17	12.18	11.72
Capital employed (Hin Lakhs)	53,992,27	62,777.76	75,251.10	89,854.25
ROCE (%)	18.84	18.42	20.90	22.25%
RoNW	12.57	12.93	17.00	16.24
Debt-equity ratio (in times)	0	0	0	0
Debtors turnover ratio	6.38	6.16	5.75	6.21
Inventory turnover	4.39	4.84	5.06	4.61
Interest coverage ratio	26.68	86.91	114.29	125.70
Current ratio	2.37	2.34	1.96	2.16

1. Capital employed = Tangible net worth (i.e., paid up capital + reserves – goodwill) + total debt + deferred tax liability

2. Return on capital employed (ROCE) = Earnings before interest and taxes (i.e., profit before tax + finance cost) ? capital employed

3. Debtors turnover ratio = Net credit sales (gross credit sales – sales return) ? average trade receivable

4. Inventory turnover ratio = Cost of goods sold ? average inventory

5. Return on net worth (RONW) = Profit after tax ? shareholders equity (i.e. equity share capital + reserves)

Particulars	FY2020-21	FY2021-22	FY2022-23	FY2023-24
Discount as a % of revenue from operations	12.64	14.22	17.39	21.78
Employee costs as % of net revenue	6.68	6.22	6.81	7.36
Advertising and sales promotion as a % of revenue from operations	10.65	9.72	7.70	7.36
Material costs as a % of revenue from operations	52.05	56.68	55.46	52.10
Freight and handling as a % of revenue from operations	9.93	8.89	8.97	9.62
Overhead costs- other expenses (excluding Freight and handling, A&P)	3.74	3.48	4.15	5.02

On Consolidated Basis

Particulars	FY2020-21	FY2021-22	FY2022-23	FY2023-24
Revenue from operations (in Lakhs)	72,332.47	90,597.48	1,07,333.43	1,30,608.58
Gross margin (%)	47.95	43.32	44.54	47.63
EBITDA (Hin Lakhs)	12,251.61	13,598.37	18,153.24	23,806.86
EBITDA margin (%)	16.94	15.01	16.91	18.23
Profit for the year (H in Lakhs)	7,085.01	8,404.80	13,193.94	14,882.83
PAT margin (%)	9.8	9.17	12.18	11.27
Capital employed (Hin Lakhs)	53,992,27	62,777.76	75,251.10	88,539.03
ROCE (%)	18.84	18.42	20.9	22.67
RoNW	12.57	12.93	17.00	16.50
Debt-equity ratio (in times)	0	0	0	0.003
Debtors turnover ratio	6.38	6.16	5.75	6.17
Inventory turnover	4.39	4.84	5.06	4.75
Interest coverage ratio	26.68	86.91	114.29	94.63
Current ratio	2.37	2.34	1.96	2.18

Revenue

For FY24, on a consolidated basis Indigo Paints has achieved a revenue of H 1,30,608.58 Lakhs, a robust 21.68% which is far ahead of the industry growth. During the year under review, Indigo Paints had acquired 51% stake in Apple Chemie India Private Ltd which had contributed H 5,122.47 Lakhs to the consolidated revenue from operations. On a standalone basis Indigo Paints has clocked a revenue of H 1,25,486.11 Lakhs, registering a healthy growth of 16.91%.

Raw materials & gross margins

While the net revenue from operations increased by 21.68% on a consolidated basis, the cost of raw materials and components consumed increased by 14.90% from H 59,524.93 Lakhs in FY2023-24 to H 68,393.51 Lakhs in FY2023-24. On a standalone basis, the cost of raw materials and components consumed increased by 9.84% while the revenue from operations increased by 16.91%. A favourable product mix backed by double digit product growth in all categories and a prudent purchase policy helped to achieve better realisation thereby increasing the gross margins from 44.54% achieved in FY2022-23 to 47.90% in FY2023-24. Once again, Indigo Paints has achieved industry-leading gross margins of 47.90% in FY24 on a standalone basis.

EBITDA & PAT margins

On a consolidated basis, the EBITDA has grown by 31.14% from H 18153.24 Lakhs in FY23 to H 23806.86 Lakhs in FY24. The EBITDA margin improved from 16.91% in FY23 to 18.23% in FY24. The PAT grew by 28.73% (after adjusting for the reversal of excess provision of tax in FY 23) in FY24 to H 14882.83 Lakhs. On a standalone basis, the EBITDA increased to H 23,269.79.00 Lakhs from H 18,153.24 Lakhs registering a growth of 28.19%. The increase was driven by both growth in sales and expansion in the gross margins. The EBITDA margin expanded to 18.54% from 16.91% in the previous year. This margin expansion was despite the increase in the employee cost which increased by 26.30% from H 7310.08 Lakhs in FY 23 to H 9232.91 Lakhs in FY 24, primarily due to the significant increase in the salesforce as the Company is expanding its presence in Tier -1 and Tier -2 cities. The margins improved due to better realisation at the gross margin level as well as margin expansion due to economies of scale. The reduction in advertisement & promotion cost (as a percentage of revenue from operations reduced) by 34 bps from 7.70% in FY2022-23 to

7.36% in FY2023-24 also aided the margin expansion. The Profit for the year increased significantly from H 13,193.94 Lakhs in FY 2022-23 to 14865.26 Lakhs in FY2023-24.

Other income, cash and investments

The other income increased substantially from H 1,006.75 Lakhs in FY 2022-23 to H 1421.64 Lakhs in FY 2023-24, primarily due to the increase in the treasury income. During the year under review the Company had commissioned a state of the art plant at Pudukkottai in Tamil Nadu and has also completely utilised the proceeds of the IPO for the intended purpose. As on March 31, 2024, on a consolidated basis, the Company had H 19964.47 Lakhs and on standalone basis had H 19030.83 Lakhs in terms of cash and cash equivalents, Bank balances, short-term and long-term investment instruments.

D&A, property plant and equipment

On a standalone basis, the D&A expense increased from H 3434.66 Lakhs in FY 2022-23 to H 4617.76 Lakhs in FY 2023-24 primarily due to higher depreciation incurred following the addition in plant and machinery worth H 2,30,161.90 Lakhs for the new plant at Pudukkottai, Tamil Nadu. Subsequently, post the capitalisation of the assets, the Capital Work in Progress (CWIP) decreased significantly. Work has also started at the proposed new water-based factory in Jodhpur, Rajasthan.

Interest coverage ratio and finance costs

Indigo Paints on a standalone basis is a zero-debt company and the major portion of the finance cost of H 159.07 Lakhs pertains to the lease liabilities. On a consolidated basis, there was a debt of H 308.07 Lakhs pertaining to Apple Chemie India Ltd, a majority of which is for setting up an additional manufacturing facility at Nagpur and working capital requirements.

Human Resource

Indigo Paints acknowledges the value of its workforce. The Companys efficient workforce has been consistently driving the Company to new heights of success, achieving the set goals and enabling the Company to maintain a competitive edge. In FY 2023-24, the Company has significantly increased its salesforce to improve influencer engagement.

The Company aims to build a strong leadership succession plan while simultaneously nurturing an inclusive and diverse workforce. The Company is committed to providing competitive compensation and benefits packages, along with ample opportunities for professional development and career growth. Its focus on training and skill development ensures that the employees have the tools and resources they need to excel in their roles and contribute meaningfully to the companys goals. Employee safety is a strategic priority at Indigo Paints. The comprehensive health and safety programme goes beyond compliance, incorporating regular training, advanced equipment and strict protocols to ensure a safe work environment for everyone.

The Companys overarching culture plays a central role in fostering individual high performance and creating a sustainable business environment. As the Company has only a few hierarchical levels, employees enjoy a high degree of autonomy and a strong sense of ownership and accountability. The company fosters a flexible, efficient and goal-oriented work environment and encourages profit sharing to effectively reward productive staff. Indigo Paints has a competent talent pool comprising 1,112 employees as of 31^st March, 2024.

For a detailed report, refer to page number 024.

Information technology

The Companys technology plays a vital role in its daily business operations. Indigo Paints has made significant investments to upgrade technology infrastructure, facilitate efficient monitoring of operations and subsequently enhance shareholder value. These investments include implementing technology-driven tools such as the IT-SAP system, streamline processes related to raw material procurement, finished goods, vendor and supplier payments as well as effective receivables management. Additionally, a robust data analytics and reporting system has been developed by the Company .

Risk Management

Indigo Paints understands the necessity of robust risk management and thereby has employed a structured and disciplined approach to effectively identify, quantify and manage all potential risks. This approach is in accordance with the Companys Risk Management Policy aims to ensure sustainable growth and stability for the business.

As per the policy, all process owners within the Company bear the responsibility to detect and mitigate key risks within their respective domains. This coordinated approach enables the Company to safeguard its business value from uncertainties and potential losses effectively.

The Risk Management Committee, along with the Internal Audit Committee, periodically reviews and monitors the risks and checks the efficiency of mitigation plans. This process ensures that any new material risks are promptly identified, added to the Risk Register and the required mitigation strategy is employed to safeguard the Company from its impact. Risk management has played a crucial role in contributing to the Companys overall stability and growth, thus reinforcing its commitment to sustaining business value.

Growth strategy and outlook

Following the Companys Strategy 2.0, Indigo Paints has witnessed industry leading growth for 4 quarters in a row and it expects to continue the growth momentum, increase its market share and retain a competitive edge.

The Company has made significant investments in its manufacturing capabilities to cater to the increasing demand. A water-based plant with automatic storage and retrieval system, capable of manufacturing more than 50,000 KLPA, was commissioned in Pudukkottai, Tamil

Nadu. Two more plants are under construction – a water-based plant with capacity of 90,000 KLPA and a solvent-based plant with a capacity of 12,000 KLPA are located at Jodhpur facility. Additionally, the Company is also planning to double the existing putty manufacturing capacity at the Jodhpur facility.

Internal control system

The Company has established internal control systems that are appropriate for the nature of its business, as well as the scale and complexity of its operations. These systems include well-defined policies and procedures designed to ensure the effectiveness and efficiency of its operations, reliability of financial reporting, compliance with applicable laws and regulations, prevention and detection of fraud and errors, and safeguarding of assets. Regular examinations by internal auditors are conducted to assess the adequacy and effectiveness of these internal controls, following a risk-based audit strategy. The internal audit plan is reviewed and approved by the Audit Committee, which also evaluates the sufficiency and effectiveness of the Companys internal financial controls and monitors the implementation of audit recommendations. The Audit Committee is kept informed of significant audit findings and activities, and appropriate corrective measures are undertaken accordingly.

Disclaimer

Certain statements in the MDA section concerning future prospects may be forward-looking statements which involve a number of underlying identified/ non-identified risks and uncertainties that could cause actual results to differ materially. In addition to the foregoing changes in the macro-environment, a global pandemic like Covid-19 may pose an unforeseen, unprecedented, unascertainable and constantly evolving risk(s), inter-alia, to the Company and the environment in which it operates. The results of these assumptions made, relying on available internal and external information, are the basis for determining certain facts and figures stated in the report. Since the factors underlying these assumptions are subject to change over time, the estimates on which they are based are also subject to change accordingly. These forward-looking statements represent only the Companys current intentions, beliefs or expectations, and any forward-looking statement speaks only as of the date on which it was made. The Company assumes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise.