Shankara Buliding Products' Q2FY20 results (Underperformer) - Recovery to be more gradual...

Q2FY20 result highlights

• Shankara Building Products Ltd (SBPL) net sales decreased by 1.7% yoy to Rs6.3bn(est: Rs6.5bn), EBITDA decreased by 14% yoy to Rs267m, PAT increased by 9.5% yoy to Rs100m.
• Adj for IND AS116 impact, comparable EBITDA decreased by 25% to Rs235m(est:287m) with margin contraction of 110bps to 3.7%.
• Retail sales increased by 1% yoy (LTL sales was down 0.6%yoy). Channel & Enterprise (C&E) revenues decreased by 5% yoy.
• Retail EBITDA decreased by 17% yoy with a margin contraction of 170bps yoy to 8.0%. Channel & Enterprise EBITDA increased by 19% yoy with a margin expansion of 40bps yoy to 2.1%. 
• Gross margins declined by 310bps yoy to 8.9% on account of lower processing margins. Staff cost decreased by 19% yoy while other expenses were down 45% yoy. Resultant EBITDA margin declined by 60bps yoy to 4.2%. 
• Interest cost decreased by 27% yoy on account of debt reduction and depreciation was up 24% yoy for the quarter. PBT was down 19% yoy. Lower tax outgo results in higher PAT growth.

Key positive: Reduction in debt, tight control over overheads

Key negatives: Continued weak performance in retail segment

Impact on financials: Our sales/EBITDA estimates remain largely unchanged. PAT stands increased 19%/10% for FY20/21E due to lower tax rate.

Valuations & view

SBPL’s 2QFY20 performance was below estimates impacted by continued weakness in the retail business. While revenue growth is likely to improve in 2HFY20 (albeit on a weak base), however, given the challenging demand environment & lack of store additions, double-digit growth is unlikely. Further margin expansion will be challenging given the low processing margins. Reduction in debt is positive; however, the business is still evolving and we would await better execution in the retail business to change our stance. We roll forward to FY21E to arrive at revised target price of Rs302. Maintain underperformer rating on the stock.