Shankara Buliding Products' Q1FY19 results (Outperformer) - Retail growth continues to accelerate…

Q1FY19 result highlights

• Shankara Building Products Ltd (SBPL) net sales increased by 33% yoy to Rs7.8bn(est: Rs7.5bn), EBITDA increased by 25% yoy to Rs488m(est: Rs495m), PAT increased by 13% yoy to Rs195m(est: Rs234m).   
• Retail sales increased by 49% yoy with a SSSG of 29.6%. Channel revenues increased by 33% yoy while Enterprise sales declined by 1% yoy.
• Retail EBITDA increased by 38% yoy with a margin contraction of 80bps yoy to 10.3%. Channel & Enterprise EBITDA decreased by 2% yoy with a margin decline of 100bps yoy to 4.7%. 
• Gross margins declined by 130bps yoy to 12.1%. Staff cost increased by 36% yoy while other expenses were up 5.5% yoy. Resultant EBITDA margin declined by 40bps yoy to 6.2%.  
• Interest cost increased by 41% yoy, depreciation was up  57% yoy, and effective tax rate was up by 130bps yoy resulting in PAT growth of 13% yoy for the quarter

Key positives: Strong Retail segment performance

Key negatives: Decline in Gross margins

Impact on financials: We have reduced our FY19/20 earnings estimate by 10%/8.1%

Valuations & view

SBPL reported strong revenues with continued acceleration in the retail growth. We continue to remain positive on the opportunity size in the space as well as on the company’s internal initiatives to drive revenue growth while keeping balance sheet growth under check. The strategy to focus on market share gain in the near term, we believe, is a step in right direction, as it will strengthen its position in the building materials segment. While this entails some margin trade off, we believe SBPL can recover the same over the longer term. We are factoring overall revenue CAGR of 17%; we expect positive operating leverage to offset the weakness in gross margins, thereby driving EBITDA & PAT CAGR of 20%/26% over FY18-20E. Given the strong opportunity size and continued execution, we maintain Outperformer rating on the stock.