Shankara Building Products Ltd.

Transcription

1 Recommendation Subscribe BACKGROUND Price Band Rs.440 Rs. 460 Promoted by Mr. Sukumar Srinivas, Shankara Building Products (SBPL) is Bidding Date Book Running Lead Manager Registrar Sector 22 March - 24 March IDFC Bank, Equirus Capital, HDFC Bank Karvy Computershare Pvt. Ltd. Retail-Building Products Minimum Retail Application- Detail At Cut off Price Number of Shares 32 Minimum Application Money Discount to retail Payment Mode Consolidated Financials (Rs Cr) FY16 No Discount ASBA 9 mths end-dec16 Total Income EBITDA PAT Lower Upper Valuations Band Band Market Cap (Rs in cr) EPS* P/E ratio* EV/EBITDA (adj)* Enterprise Value (Rs Cr) *calculated on annualized numbers Post Issue Shareholding Pattern Promoters 56% Institutions 22% Bodies Corporates & Public 22% Offer structure for different categories QIB (Including Mutual Fund) 50% Non-Institutional 15% Retail 35% Post Issue Equity (Rs. in cr) Issue Size (Rs in cr) Face Value (Rs) 10 Nandish Shah -Research Analyst ( ) nandish.shah@nirmalbang.com one of the leading organized retailers of home improvement and building products based in south India. It currently operates 103 retail shops operating under the trade name of Shankara Buildpro spread across 9 states and 1 union territory in India. They cater to a large customer base across various end user segments in urban and semi urban markets through multi-channel sales approach, processing facilities, and supply chain and logistics capabilities. Objects and Details of the Issue The public issue of SBPL consists of fresh issue of Rs 45 cr and offer for sale of equity shares of Rs 300 cr from promoters group and private equity investor. The object of the issue is mainly to repay the debt and for general corporate purposes Repayment or pre-payment of loans Rs 34cr General corporate purpose of Rs 11cr Investment Rational: a) Asset light strategy for opening retail shops b) Backward integration with processing facilities, owned warehouses and logistics c) Strong track record and sound financial strength d) Presence across the value chain through enterprise and channel sales Valuation and Recommendation Over FY13- FY16 the revenues of SBPL have grown at a CAGR of 4.8% however, growth in the retail segment was 28% CAGR. EBIT in the retail segment has grow at 99% CAGR over with EBIT margin increasing from 1% in FY13 to 6.3% in FY16 and 7.1% for the nine month ended December 2016 as compared to consolidated EBIT margin of 4.7% in FY13 to 5.5% in FY16 and 5.9% for 9 month ended December According to the management, SBPL plans to focus more on the retail segment to drive growth and stabilize the revenue growth in enterprise and channel segment. SBPL has reported healthy RoCE and RoE at 28.2% and 14.2% for FY16 despite aggressive expansion in the retail segment. We expect SBPL to report healthy numbers for FY17 and FY18. On the valuation front, at the upper end of the price band of Rs 460, as per our estimates, SBPL is offered at PE of 18x its FY17E EPS of Rs 25 and 15x its FY18 EPS of 31. We recommend subscribing to the issue. Financial Snapshot FY14 FY15 FY16 Dec16 Revenues EBIDTA % margins PAT % margins December 2016 financial are for 9 month period Source: RHP, Company data, NB Research 1 P a g e

2 Business Shankara Building Products Ltd (SBPL), founded and promoted by Sukumar Srinivas, an alumnus of the Indian Institute of Management (IIM-A) and a first generation entrepreneur currently having 33 years of experience in the building products industry. SBPL has divided its business into three segment namely, 1) Retail, 2) Enterprise sales and 3) Channel sales. SBPL is one of the leading organised retailers of home improvement and building products based on numbers of stores operating under the brand name of Shankara Buildpro. As of 31 st December, 2016 SBPL operated 103 retail shops spread across 9 states and 1 union territory in India. SBPL serve home owners, professional customers (such as architects and contractors), and small enterprises through their retail stores. Under retail operations, they offer a comprehensive range of products like structural steel, cement, TMT bars, hollow blocks, pipes and tubes, roofing solutions, welding accessories etc. SBPL generates nearly 50% of its sales in retail segment through own brands while rest of the 50% is purchased or sourced from reputed third parties vendors. SBPL own brands are Century roof, Ganga and Loha which are sold via retail shops. SBPL carry reputed third party brands from Johnson, Sintex, Uttam Galva, APL Apollo tubes, Astral pipes etc. Another segment is the enterprise segment which caters primarily to large end users, contractors and OEM while the channel sales caters to dealers and other retailers through extensive branch network. In these two operations, SBPL primarily offers steel based products such as structural steel, TMT bars, pipes and tubes and other allied steel products. Investment Rationale Asset light strategy for opening retail shops SBPL operates 103 retail stores as on 31 st December 2016, 86% retail shops are operated under the lease model. As of 31stDecember 2016, SBPL operated 30 stores in Tier-1 cities, 30 stores in Tier-2 cities and 43 stores in tier-3 cities. According to the management, they require nearly Rs1cr per store as initial investment for setting up a retail shop. Of this Rs.50 lakh is invested in inventories, Rs.10 lakh as deposit to the shop owner and rest Rs. 40 lakh for other miscellaneous expenses. Average breakeven time is normally taken as one year. The lease hold deposit is around around 9 months of rentals and the store is taken on lease for a period of 2-3 years. The average rental cost of their lease outlets are Rs and Rs per sq.ft per month for fiscal year ended FY16 and 9 months ended December 2016 respectively. The management plans to stabilize their rental, manpower and other expenses at around 2% of the stores revenues which is much lower compared to other organized retailers. SBPL plans to open more such stores under the brand name of Shankara Buildpro in FY17 and FY18. Below is table giving details for the number of retail shop currently operational along-with the states where they are located. (Table 1) Ma r-13 Ma r-14 Ma r-15 Ma r-16 31s t Dec-16 Karnataka Kerala Telangana Tamil Nadu Andhra Pradesh Goa Gujarat Others States Total Source: RHP, Nirmal Bang Retail Research 2 P a g e

3 Below is the table giving details regarding the sales in the retail category along-with profitability of the retail shops and same stores sales growth. Table: 2 Metric Mar-13 Mar-14 Mar-15 Mar-16 Dec-16 CAGR growth from 2013 to 2016 Number of Retail stores % Total area in (Sq.ft) % Revenue from retail stores (Rs in Cr) % Same stores sales growth 16.7% 13.2% 24.2% 28.3% Retail Segment EBIT (Rs in Cr) % Retail EBIT per store ( Rs in Cr) % Retail EBIT per sq.ft (in. Rs) % Source: RHP, Nirmal Bang Retail Research EBIT: Earnings before interest and taxes. Currently retail contribute nearly 40% of sales which the management plan to increase by focussing on managing the current stores more efficiently and opening more stores. Back-ward integration through processing facilities, owned warehouses and fleet of trucks SBPL has backward integrated through having their own processing facilities in select building products like steel pipes, colour coated roofing sheets, bright rods, galvanized strips and cold rolled strips. The processing facilities help them in offering customized solutions and meet quality standards as well as timely delivery requirement. As on 31 st December 2016, SBPL had 11 processing facilities having total installed capacity of 3,23,200 MTPA operating at an average capacity utilization of 93.81% (annualized). In January 2017, SBPL commenced production of stainless pipes and tubes in Bengaluru which has an installed capacity of 1200 MTPA. These capacities can be increased in a modular manner as per requirement. These processing facilities are housed under three subsidiaries companies namely Taurus Value steel and pipes Pvt Ltd (99.99% owned), Vishal Precision steel tubes and strips Pvt Ltd (99.89% owned) and Centurywell roofing India Pvt Ltd (100% owned) by SBPL. SBPL has 56 owned warehouses (29 operated by the company and 27 operated by subsidiaries) with a space aggregating 0.59 mln sq.ft. SBPL own 44 trucks which help in catering to the requirements of the retail outlets. They have tie-ups with a number of third party logistics provider to efficiently move their products. Strong track record and financial stability SBPL has maintained a strong track record of growth in the retail segment with revenues growing by 28% CAGR over a period of 2013 to So in spite of growing consistently in the retail segment as per table 2, total revenue growth remained at 5% CAGR. In FY16, out of the total revenue, retail contributed nearly 40% while Channel and enterprise segment were at 60% as compared to 22% and 78% respectively in FY13. EBIT in the retail segment has increased from Rs.12.9cr in FY13 to Rs.77.4cr in FY16 and Rs.70.3cr for 9 month ended December EBIT margin in the Retail segment has grown from 1% in FY13 to 6.3% in FY16 and 7.1% for 9 months ended December 2016 as compared to consolidated EBIT margin of 4.7% in FY13 to 5.5% in FY16 and 5.9% for 9 months ended FY16. Lower EBIT margin in the consolidated entity was due to the enterprise and channel segment which command lower margins. Going forward, SBPL plans to focus more on the retail segment and will stabilize the growth in the enterprise and channel segment. According to the management, future focus would remain on opening new retail shops, higher same stores sales growth and improved procurement. With debt repayment of Rs. 34Cr out of the IPO 3 P a g e

4 proceed; interest cost is likely to come down further. With these initiatives we expect SBPL to report strong revenue and EBIDTA growth going ahead. Present across the value chain through enterprise and channel sales. SBPL s business operations are across the entire value chain of processing, channel sales, enterprise sales, retail and other allied services such as delivery and installation. In Enterprise sales, products are sold directly to the enterprise for their end use. SBPL sells third party as well as their own branded steel products to these customers. As of 31 st December 2016, enterprise sales contributed nearly 33% to the net sales while the top ten customers contribute nearly 10% of the total enterprise sales. Other than retail and enterprise sales, SBPL sell their products through dealer or channel partners on a non-exclusive basis. As of 31 st December 2016, SBPL has nearly 1924 dealers. For the 9 month ended December 2016, nearly 28% of the sales came through dealer networks. This creates interface with customers which helps in servicing customer requirements for enterprise clients. However, revenues from enterprise and channel sales have continued to witness de-growth. In FY13, revenues from Channel and Enterprise segment were Rs. 1383cr and for FY16, it reported revenues of Rs.1228cr. EBIT margins for FY13 were 6.4% while in FY16, EBIT margins were 5%. Management plans not to grow these 2 segments over a period of time as they are lower margins, and higher working capital intensive. Industry The current size of the real estate industry (inclusive of residential, commercial, retail, hospitality and educational projects) in India is estimated in the range of Rs trillion ( ). The housing real estate industry accounted for about 80% of the total real estate industry while the balance being contributed by others. The share of the building material is estimated at approximately 45%, which translates to Rs trillion in value terms. Housing demand is primarily a function of population growth. Between 2011 and 2021, India s population is projected to increase by approximately 10%-12% to bln, which see housing demand touch mln. Various schemes by the Government of India like Housing for All project in 2015 and Indira Awaas Yojana (IAY) will boost housing demand in both the urban and rural areas. Building material industry is estimated to reach Rs trillion in , representing a CAGR growth of 8-8.5%. Building material are utilized across real estate construction segment such as residential (individual houses or apartments), commercial (office space), retail (malls and showrooms) etc. Construction of a housing unit involves various building materials, including cement, sand, and steel, bricks, plumbing, sanitary-ware and electrical products. The cost component of the key building materials of a representative housing unit is set forth below: Material cost break-up Cement 18%-20% Steel 18-20% Sand 6%-8% Aggregate 6%-8% Bricks 9%-11% Door frame and shutter 7%-9% Flooring 6%-8% Plumbing 5%-7% Painting 2%-4% Electricals 6%-8% Others 5%-7% Total 100% Source: RHP, Nirmal Bang Retail Research 4 P a g e

5 Risk Inability to manage growth in the retail segment could disrupt the business and have adverse effect on profitability. Majority of the retail stores are currently in Karnataka. So any event negatively impacting this state can have adverse consequences on the growth and profitability of SBPL. Valuation and Recommendation Over FY13- FY16 the revenues of SBPL have grown at a CAGR of 4.8% however, growth in the retail segment was 28% CAGR. EBIT in the retail segment has grow at 99% CAGR over with EBIT margin increasing from 1% in FY13 to 6.3% in FY16 and 7.1% for the nine month ended December 2016 as compared to consolidated EBIT margin of 4.7% in FY13 to 5.5% in FY16 and 5.9% for 9 month ended December According to the management, SBPL plans to focus more on the retail segment to drive growth and stabilize the revenue growth in enterprise and channel segment. SBPL has reported healthy RoCE and RoE at 28.2% and 14.2% for FY16 despite aggressive expansion in the retail segment. We expect SBPL to report healthy numbers for FY17 and FY18. On the valuation front, at the upper end of the price band of Rs 460, as per our estimates, SBPL is offered at PE of 18x its FY17E EPS of Rs 25 and 15x its FY18 EPS of 31. We recommend subscribing to the issue. 5 P a g e

6 Financials Profi t & Loss (Rs cr) FY12 FY13 FY14 FY15 FY16 De c16* Ne t Sal e s 1, , , , , YoY Growth (%) 25.0% 9.1% 2.7% 2.9% Cost of good sold 1, , , , , ,471.5 Employees expenses Other expenses Total Expe ndi ture 1, , , , , ,601.0 EBIDTA EBIDTA Margins (%) 5.0% 4.9% 4.6% 4.5% 5.9% 6.4% Interest Depreciation Other Income Profi t Be fore Tax Extraordinary PBT Afte r Exce pti on Current Tax MAT Credit (0.2) 0.2 Deferred Tax credit/( charge) PAT Minority interest PAT PAT Margins (%) 2.2% 1.8% 1.5% 1.1% 2.0% 2.4% EPS Rs. (Post Issue) P/E Rs 460* B.V Per share P/BV Rs Debt/Equity (x) EV/Sales* EV/EBIDTA* ROCE %* 28.1% 30.7% 28.4% 25.7% 28.2% 29.6% ROE %* 18.5% 15.9% 12.3% 8.9% 14.2% 16.7% Number for December 2016 are for period of nine months *annualised for FY17 Source: RHP, Company data, Nirmal Bang Research 6 P a g e

7 Bal ance sheet FY12 FY13 FY14 FY15 FY16 Dec16* Equity & Liabilities Equity share capital Reserves Total Total Sharehol ders Funds Mi nori ty Interest Long term borrowings Other long term Liabilities Total Non-current Li abi l i ti Short term borrowings Trade payable Other Current Liabilities Short term provisions Total Current Li abi l i ti es Total Equi ty & Li abi l i ti es Assets Fixed Assets Tangible assets Intangible assets Capital work in progress Goodwill on consolidation Deferred Tax Asset Long term Loans & Advances Tota Non-current Assets Current investments Trade receivables Trade Inventories Cash & Bank balance Short term Loans & advances Total Current Assets Total Assets Balance sheet is as on 31st December 2016 Source: RHP, Company data, Nirmal Bang Research 7 P a g e

8 Disclaimer: Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. We have been granted certificate of Registration as a Research Analyst with SEBI. Registration no. is INH for the period to NBSPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst (in case any financial interest is held kindly disclose) NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai Board No. : /8001 Fax. : P a g e