Shankara Buliding Products' Q3FY18 results (Outperformer) - Retail growth accelerates!

Q3FY18 result highlights

• Shankara Building Products Ltd (SBPL) net sales increased by 15.5% yoy to Rs6.2bn, EBITDA increased by 13% yoy to Rs408m, PAT increased by 29% yoy to Rs176.5m.   
• Comparable sales increased by 30% yoy. Retail sales increased by 32% yoy (comparable sales 49% yoy) with a SSSG of 22% yoy (comparable SSSG was 37% yoy). Channel & Enterprise revenues increased by 1.1% and 5.1% yoy (comparable sales of 13.7% and 18.3% yoy) respectively.   
• Retail EBIT increased by 72% yoy with a margin expansion of 250bps yoy to 10.4%. Channel & Enterprise EBIT decreased by 36% yoy with a margin decline of 340bps yoy to 5.4%. 
• Gross margins declined by 130bps yoy to 14.1%. Staff cost increased by 31% yoy while other expenses were down 10.4% yoy. Resultant EBITDA margin declined by 20bps yoy to 6.5%.  
• Interest cost declined by 16% yoy and effective tax rate was up by 140bps yoy resulting in PAT growth of 29% yoy

Key positives: Strong Retail segment performance

Key negatives: Decline in Channel & Enterprise EBIT margins

Impact on financials: Factoring lower channel and enterprise margins, we have cut our FY18E earnings by 5%.

Valuations & view

After issues related to GST and RERA implementation impacted 1HFY18 retail performance for SBPL, retail growth has sharply accelerated in Q3FY18. Organic improvement through store refurbishment and increasing the product basket coupled with inorganic growth through extremely accretive acquisitions are likely to drive SBPL’s retail business revenue growth to over 25% annually. We believe the opportunity in terms of increasing salience of higher margin products and continuing to consolidate markets through acquisitions is immense. Given the company’s strong track record of execution and a vast untapped opportunity, we believe there can be significant upsides to our 29% earnings CAGR estimates over FY17-20E. Maintain Outperformer.