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MOSL: INDIGO PAINTS: Inline sales, sequential gross margin improvement continues

INDIGO PAINTS: Inline sales, sequential gross margin improvement continues

(INDIGOPN IN, Mkt Cap USD0.9b, CMP INR1562, TP INR1800, 15% Upside, Buy)

• INDIGOPN reported an in line set of earnings at the sales and gross profit level. While EBITDA margin appeared to be below our estimate, this was largely due to the bifurcation of IPL ad spends over two quarters in FY22, as the league was played in two phases, unlike the full impact being seen in 1QFY23.
• Sales and margin are expected to improve in subsequent quarters.
• While it is too early to comment on the potential impact of the company's newfound aggression on Tier I and II centers (announced only in 4QFY22), a potential recovery in rural India augurs well for their erstwhile core regions. We maintain our Buy rating on its higher than the industry sales growth outlook, differentiated product portfolio, and less challenging valuation multiples compared to its peers.

Sales and gross profit inline, miss on EBITDA

• INDIGOPN reported a net sales growth of 43.6% YoY at INR2.2b (inline).
• Gross margin contracted by 30bp YoY and 160bp QoQ to 45.2% (est. 43.5%). This, along with lower employee costs as a percentage of sales (-130bp YoY) and lesser other expenses (-190bp YoY), aided the ~280bp YoY expansion (-290bp QoQ) in EBITDA margin to 15.7% (est. 17%).
• A&P spends increased by 34.3% YoY to INR210.9m.
• EBITDA grew by 74.9% YoY to INR353m (est. INR385m).
• PBT increased by 72.7% YoY to INR269m (est. INR324m).
• Adjusted PAT increased by 71.5% YoY to INR199m (est. INR242m).

Highlights from the management commentary

• The management said demand remains strong, and that the dark clouds of material cost escalation and price increases are seemingly behind it.
• The first quarter is usually the weakest for INDIGOPN. It expects 2Q, 3Q, and 4Q to be better sequentially.
• IPL ad spends were fully recognized in 1QFY23 unlike last fiscal, when the league was played across two separate quarters. This was the key reason why EBITDA margin was lower, despite an improvement in gross margin.