Shankara Buliding Products' Q2FY19 results (Downgrade to Neutral) - Cost pressures and transitionary challenges impact earnings
Q2FY19 result highlights
- Shankara Building Products Ltd (SBPL) net sales increased by 12.6% yoy to Rs6.4bn(est: Rs6.6bn), EBITDA decreased by 24% yoy to Rs311m(est: Rs443m), PAT decreased by 47% yoy to Rs91m(est: Rs174m).
- Retail sales increased by 26% yoy. Channel & Enterprise (C&E) revenues increased by 1% yoy.
- Retail EBITDA increased by 15% yoy with a margin contraction of 80bps yoy to 9.7%. Channel & Enterprise EBITDA decreased by 69% yoy with a margin decline of 380bps yoy to 1.7%.
- Gross margins declined by 430bps yoy to 12% on account of lower processing margins. Staff cost increased by 15% yoy while other expenses were down 22% yoy. Resultant EBITDA margin declined by 240bps yoy to 4.8%.
- Interest cost increased by 29% yoy, depreciation was up 49% yoy, other income was up 780% yoy and effective tax rate was down 530bps yoy. PAT declined by 47% yoy for the quarter.
Key positives: Healthy retail sales growth
Key negatives: Muted performance in Channel & Enterprise segment
Impact on financials: Factoring weak performance in 1HFY19, we have cut FY19/20E earnings by 26%/20%.
Valuations & view
SBPL’s earnings growth was below estimates impacted by moderation in Retail SSSG on account of seasonality as well as weak C&E performance due to inventory loss and contraction in processing margins. With the company’s focus on driving revenue growth, we expect retail sales growth (factoring 26% CAGR over FY18-20E) to remain healthy; however, focus on cash sales and improving balance sheet position will curtail growth in the C&E business. Further, with company’s strategy to improve value proposition in the retail segment and recovery in processing margins likely to be more gradual, we believe, consolidated margin expansion is unlikely, resulting in EBITDA/PAT CAGR of 11%/13% over FY18-20E. While opportunity size is huge, given the evolving nature of the business model & medium term headwinds, earnings visibility is expected to be weak. We downgrade the stock to Neutral.​
Shankara Building Products Ltd. Shankara Building Products Ltd is an Indian-based company, which is engaged in the business of organized retailer of home and building products. The Company's business units include retail, processing and enterprise. Retail unit's products include cement, scaffolding, msand, steel pipes, roofing solution, plumbing, electrical, paints, tiles, exterior cladding and solar products. Processing unit's products include steel tubes, galvanised strips, cold rolled strips, colour coated roofing sheets, bright rods and scaffolding. Enterprise unit's products include steel tubes, cement and other building products. Some of these Principals include JSW, Sintex, Uttam Group and APL Apollo.
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