Shankara Buliding Products (CMP: Rs1,495)

Mkt Cap: Rs34.2bn; US$525m   Bloomberg code (SHANKARA IN)

Q2FY18 result highlights

·      Shankara Building Products Ltd (SBPL) net sales declined by 5.1% yoy to Rs5.7bn, EBITDA increased by 10.1% yoy to Rs411m, PAT increased by 28% yoy to Rs173m.

·      On comparable basis, revenues increased by 6.8% yoy. Retail sales increased by 15.2% yoy with a SSSG of 11.4% yoy. Enterprise revenues increased by 7.4% yoy while Channel sales declined by 8.8% yoy.

·      Retail segment sales EBIT declined by 2% yoy with a margin decline of 50bps yoy to 10.5%. Channel & Enterprise segment EBIT increased by 85% yoy with a margin expansion of 290bps yoy to 5.5%.

·      Gross margins improved by 380bps yoy (200bps qoq) to 16.3%. Staff cost increased by 3% yoy while other expenses were up 56% yoy. Resultant EBITDA grew by 10.1% yoy with a margin expansion of 100bps yoy to 7.2%.

·      Interest cost declined by 8% yoy and effective tax rate was lower by 240bps yoy resulting in PAT growth of 28% yoy.

Key positives: Healthy Retail SSSG

Key negatives: Decline in Retail segment EBIT

Impact on financials: Our earnings estimates are unchanged

Valuations & View:

SBPL’s performance during the quarter has been encouraging given the challenging operating environment. Though challenges on GST and RERA will only abate gradually, we believe a low base (due to demonetization) and strong store and product expansion will continue driving growth for SBPL. We remain positive on SBPL’s medium and long term growth prospects and expect financial metrics to continue improving as the mix shifts towards retail. The stock trades at 17xFY19E and 14xFY20E EV/EBITDA. Maintain Outperformer.