Shankara Building Products Limited - Thrust on retail to boost potential - Angel Broking

Shankara Building Products Ltd (SBPL) is one of the leading organized retailers of home improvement and building products in India. Shankara offers a comprehensive range of products including cement, structural steel, TMT bars, hollow blocks, pipes & tubes, roofing solutions, tiles, sanitary ware, water tanks, plywood, kitchen sinks, lighting and other allied products.

Expanding its footprint in the retail business: SBPL has increased its store count from 43 in FY2012 to 103 in 9MFY2017, with total retail business area of ~0.37mn sq. ft in 9 states and 1 Union Territory. Moreover, the company has plans to increase the store count by 15-20 every year going ahead, which will further boost its growth.

Efforts to shift revenue mix from institutional sales to retail business: Currently, the company's 40% revenue comes from retail business and the balance from institutional sales (channel sales and Enterprise segments). Historically, SBPL has increased its retail revenue from 24% in FY2014 to 42% in 9MFY2017. The company is continuously putting efforts to increase the retail sales, which is expected to reach up to 60% in the next 2-3 years on the back of rise in strong customer relationships, opening of new stores, focus on brand equity and marketability in the home improvement and building space, etc.

Operating margins improve significantly: The Company's operating margin has increased from 4.6% in FY2014 to 6.4% in 9MFY2017 due to a change in revenue mix towards retail business, which is a higher margin business (margin of 9-10%) compared to institutional business like channel sales and Enterprise segments, which has low margins (around ~5%). Going forward, we expect margins to improve on the back of higher revenue from retail sales.

Strong improvement in Financials: SBPL has reported healthy top-line of 9.5% CAGR and bottom-line of 8.4% CAGR over FY2012-16. Further, the company's debt/equity ratio has improved from 1.3 in FY2012 to 0.8 in 9MFY2017 and also the working capital cycle has improved from 71 days in FY2012 to 42 days in 9MFY2017.

Outlook and Valuation: Considering the company's strong retail presence, diversified product offering, substantial same store sales growth (last five years average growth is 23%) and robust retail revenue of ~29% over FY2012-16, we expect that SBPL to witness higher revenues from its retail business going ahead. At the upper end of the price band, the pre issue P/E multiple works out to be 18.2x of its annualized 9MFY17 numbers. On EV/Sales, the issue is valued at 0.6x of annualized 9MFY17 numbers. Considering its long term prospects and reasonable valuation, we recommend Subscribe rating on this issue.

Source : Equity Bulls

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