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Stock Recommendation | SHANKARA BUILDING PRODUCTS LTD – BUY – Target Price : 1537
Publish date: NOVEMBER 14, 2018
Shankara Building Products Ltd revenues were lower than our estimates due to impact of heavy floods in Kerala and South Karnataka. Margins were also impacted by lower margins in retail segment, lower processing margins and inventory loss. Company is looking at higher revenue trajectory and in this process, margins may get impacted to some extent as a trade-off between higher revenues and slightly lower than expected margins.
■ Revenue growth of 12.6% YoY is led by incremental stores, increase in average ticket size as well as addition of new products. Net profits were impacted by fall in margins and declined by 49% YoY.
■ Company added 2 stores in Q2FY19 and increased the proportion of retail segment sales to 52% from 48% in Q2FY18 with new store addition and store upgradation.
At current price of Rs 970, stock is trading at 19.4x P/E and 10.1x EV/EBITDA on FY20 estimates. We continue to remain positive on the company as it is likely to benefit from increasing shift towards organized retail in home building segment. Company is witnessing improved traction in the retail segment, addition of more brands and addition of large format stores at low rentals. We, however, revise our margin estimates downwards to factor in the impact of Kerala floods, lower margins in channel and enterprise segment as well as change in the strategy of the company towards higher revenue growth at slightly lower margins. We arrive at a revised price target of Rs 1537 based on 20x EV/EBITDA for retail business and 4x EV/EBITDA for channel and enterprise business. (Rs 2017 earlier). Maintain BUY.
Revenue growth of the company was impacted by floods in Kerala and heavy rainfall in South Karnataka. Sales from Kerala contributed nearly 10.6% of the total sales in H1FY19 and hence was impacted adversely during the quarter due to floods. Kerala revenues were down by 40% QoQ and 15% YoY and inventory worth Rs 31.4 mn was damaged owing to floods.
Retail segment sales were up by 37% YoY and enterprise segment sales were up by 23% while channel sales were down by 8% YoY for H1FY19. Decline in the channel segment revenues is a conscious strategy of the management in order to focus more on high margin retail segment growth. Company added 5 stores in H1FY19 taking the total store count to 134 in H1FY19 as compared to 118 in H1FY18. It increased the proportion of retail segment sales to 52% from 48% last year with new store addition and store upgradation.
Same store sales growth for the company during H1FY19 stood at 24.2% while the comparable sales growth in H1FY19 stood at 18.3%. Company has also explained the methodology regarding SSSG calculation. The definition of SSSG (Same Store Sales Growth) considers stores that were in operation for at least 12 months at the end of the period. The definition of comparable sales method considers stores that have completed at least 12 months of operations. Revenues from these stores become comparable in the immediate following month after their 12th month of operation
During H1FY19, company added 5 stores taking the total store count to 134 and retail area also increased by 28.1% YoY to 5,65,202 sq ft. With addition of large format stores, average store size has also increased from 3738 sq ft in H1FY18 to 4218 sq ft in H1FY19. Company plans to add further 10-15 stores (as against earlier estimate of 15-20 stores) this year along with addition through organic growth. Revenues from retail stores were up by 37.3% YoY in H1FY19 but margins have declined to 10% in H1FY19 as compared to 10.8% in H1FY18.
We maintain our revenue estimates and expect revenues to grow at a CAGR of 11.5% between FY18-20.
Margins for Q2FY19 witnessed a decline due to fall in retail segment margins as well as sharp decline in channel and enterprise segment margins. Margins were also impacted by lower margins in retail segment, lower processing margins and inventory loss owing to floods and heavy rainfall in South India. Overall loss due to floods was Rs 31 mn and company recovered Rs 13 mn via auction and remaining claims of Rs 18 mn are yet to be settled with insurance company so it has been written off from channel EBITDA. Retail segment margins stood at 9.7% for Q2FY19 (versus 10.3% in Q1FY19) and channel/enterprise margins stood negative at 0.6% for Q2FY19 (versus 3.4% in FY18). Company has mentioned that processing margins are likely to remain weak for next couple of quarters which can continue to impact channel and enterprise segment margins going forward.
Retail segment margins are likely to remain strong going forward also with addition of new brands and improvement in same store sales growth. We revise our estimates for margins to factor in the impact of Kerala floods, lower margins for channel and enterprise segment as well as change in the strategy of the company to focus on revenue growth at slightly lower margins. We expect margins of 6%/7% for FY19/20 respectively (7.4%/7.4% estimated earlier for FY19/20 respectively).
Net profits were impacted by fall in margins and declined by 49% YoY. Borrowings have witnessed an increase which resulted in higher interest expense for the quarter. Increase in borrowings is partly attributed to higher working capital requirements as creditors were paid off during the quarter. Debtor days have also come down to 47 days at the end of Q2FY19 as compared to 61 days in March, 2018.
We revise our estimates and expect net profits to grow at a CAGR of 24.5% between FY18-20 to be led by healthy growth in retail segment revenues and improvement in margins by FY20.
At current price of Rs 970, stock is trading at 19.4x P/E and 10.1x EV/EBITDA on FY20 estimates. We continue to remain positive on the company as it is likely to benefit from increasing shift towards organized retail in home building segment. Company is witnessing improved traction in the retail segment, addition of more brands and addition of large format stores at low rentals. We, however, revise our margin estimates downwards to factor in the impact of Kerala floods, lower margins in channel and enterprise segment as well as change in the strategy of the company towards higher revenue growth and slightly lower margins. We arrive at a revised price target of Rs 1537 based on 20x EV/EBITDA for retail business and 4x EV/EBITDA for channel and enterprise business. (Rs 2017 earlier). Maintain BUY.
Shankara Building Products is one of India’s leading organized retailers of home improvement and building products in India, based on the number of stores operating under brand “Shankara Buildpro”. Company has three segments – Retail, Enterprise and Channel and also has processing capabilities of 323200 tonnes per annum in products like Steel tubes, galvanized strips, cold rolled strips, bright rods, scaffolding.
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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