Shankara Buliding Products' Q3FY19 results (Underperformer) - Challenges persist…

Q3FY19 result highlights

• Shankara Building Products Ltd (SBPL) net sales decreased by 3.1% yoy to Rs6.05bn(est: Rs6.3bn), EBITDA decreased by 44% yoy to Rs230m(est: Rs283m), PAT decreased by 86% yoy to Rs25m(est: Rs68m).   
• Retail sales increased by 12% yoy (SSS was down 1% yoy). Channel & Enterprise (C&E) revenues decreased by 17% yoy.
• Retail EBITDA decreased by 15% yoy with a margin contraction of 250bps yoy to 7.9%. Channel & Enterprise EBITDA decreased by 82% yoy with a margin decline of 430bps yoy to 1.1%. 
• Gross margins declined by 320bps yoy to 10.9% on account of lower processing margins. Staff cost increased by 4% yoy while other expenses were down 17% yoy. Resultant EBITDA margin declined by 270bps yoy to 3.8%.  
• Interest cost increased by 38% yoy, depreciation was up 47% yoy, other income was up 85% yoy and effective tax rate was down 820bps yoy. PAT declined by 86% yoy for the quarter.

Key negatives: Flat Retail SSS, Muted performance in Channel & Enterprise segment

Impact on financials: We have cut FY19/20E earnings by 37%/33%.

Valuations & view

SBPL’s earnings growth was below estimates impacted by continued moderation in Retail SSSG as well as weak C&E performance due to contraction in processing margins. We expect retail sales to remain muted in the near term on account of a) higher contribution from steel/steel linked products which have been impacted by volatile steel prices and b) high base in coming quarters. While the company is undertaking initiatives to correct the issues in processing business, the recovery in profitability is likely to be more gradual, thereby impacting the overall earnings trajectory. We are now factoring 20% sales CAGR for retail business over FY18-20E; however, given the headwinds in processing business, margin expansion is unlikely. While opportunity size is huge, given the evolving nature of the business model & medium term headwinds, earnings visibility is expected to be weak. We would await for better execution. Maintain Underperformer.