Indigo Paints growth accelerates as operating leverage lifts margins

Investment View and Valuation

Motilal Oswal Financial Services Limited (MOFSL) retains its BUY rating on Indigo Paints and raises its FY27E and FY28E earnings-per-share estimates by 4–5 per cent. The broker believes the company’s Strategy 2.0, focused on non-metro towns, deeper distribution and increased investment in influencers, is delivering results.

The positive view is also supported by expected growth outperformance, Apple Chemie synergies, capacity expansion, distribution gains and valuation multiples that MOFSL considers favourable versus peers. The target price is Rs 1,450, based on 30 times FY28E earnings per share, compared with the current market price of Rs 1,143.

Strong 1QFY27 Revenue Performance

Indigo Paints reported a strong 1QFY27. Consolidated revenue increased 20 per cent year-on-year from a low base of negative 0.7 per cent to Rs 3,697 million, although it was below MOFSL’s estimate of Rs 3,876 million. Standalone revenue rose 19 per cent year-on-year on a flat base, supported by double-digit value and volume growth.

Apple Chemie delivered 40 per cent year-on-year revenue growth to Rs 196 million. Management said demand momentum from 4QFY26 continued into 1QFY27, with July demand better than June. It also stated that secondary growth was healthy without material channel inventory filling.

Category-wise Growth

Premium emulsions continued to gain portfolio share, supported by in-house dealer, contractor and painter loyalty programmes and influencer-led below-the-line activities.

Operating Leverage Drives Margin Expansion

Profitability exceeded MOFSL’s expectations despite elevated and volatile raw-material costs. Gross margin declined 130 basis points year-on-year to 44.6 per cent, broadly in line with the broker’s 44.5 per cent estimate. Advertising and promotion expense declined to 4.3 per cent of revenue from 6.8 per cent in 1QFY26, partly because of a strategic pause during the IPL and a shift towards influencer engagement.

Operating leverage and cost optimisation lifted EBITDA margin by 240 basis points year-on-year to 16.8 per cent, above MOFSL’s 15 per cent estimate. EBITDA rose 40 per cent to Rs 620 million, compared with the estimate of Rs 581 million.

Other income increased 71 per cent year-on-year to Rs 102 million, partly due to mark-to-market gains on treasury investments. Profit before tax consequently rose 61 per cent to Rs 560 million, versus the estimate of Rs 449 million. Adjusted profit after tax also grew 61 per cent to Rs 417 million, compared with Rs 335 million estimated by MOFSL.

Management Outlook and Growth Priorities

Management expects 2QFY27 gross margin to remain weak and volatile because of an adverse product mix and high-cost inventory. However, it expects industry margins to normalise over time. Raw-material prices have cooled from peak levels but remain elevated year-on-year following supply-chain disruption and inflation associated with the Iran war.

Indigo Paints plans to increase its focus on high-end wood coatings. It has recruited a team in selected large wood-coating markets and developed products for phased launches during September and October. Management is prioritising accelerated revenue growth even at a marginal cost to bottom-line growth and aims to grow significantly ahead of the industry.

No major capital expenditure is planned until FY29 because the heavy investment cycle is largely complete. Improving capacity availability and operating leverage are expected to support growth and cash generation.

MOFSL Estimates

MOFSL forecasts revenue and EBITDA compound annual growth of 15 per cent and 17 per cent, respectively, over FY26–FY28E. It expects EBITDA margins of 18.3 per cent in FY27E and 18.6 per cent in FY28E.

Key Near-term Risks

• Raw-material inflation and volatility.
• Product-mix-related pressure on gross margins.
• High-cost inventory affecting near-term profitability.
• Potential profitability costs from investments aimed at accelerating growth.