shankara build Management discussions

I. Overview

Shankara Building Products Limited (hereinafter referred as "Shankara" or "We") is a leading organized retailer of home improvement and building products in India operating under the brand name of Shankara Build Pro. We run 107 fulfillment centers out of which 91 are stores and 16 warehouses spread across Karnataka, Kerala, Andhra Pradesh, Telangana, Tamil Nadu, Maharashtra, Gujarat, Odisha, Madhya Pradesh, and Pondicherry. Our products are also available on our online website www.buildpro.store. Our product portfolio is spread across categories of construction materials, plumbing, sanitary ware, flooring, electrical, and interior exterior finishing. We have tied up with leading brands across all product categories. Our customers include homeowners as well as professional customers like architect, contractors, interior designers, developers, plumbers, electricians, tile layers, masons, carpenters, painters etc., as well as small enterprises. In our steel business, we also cater to a large number of medium and small industries. Our customers are spread across tier 1, 2 and 3 locations.

In addition to the retail segment, we also have two legacy business segments of enterprise and channel. In the enterprise segment we cater to the requirements of large end users, contractors and original equipment manufacturer. In the channel segment, we cater to dealers and other retailers through our branch network. The common theme across all segments is a customer-centric approach to business. We have a large logistics and supply chain operation which support the front-end of the business. We have limited steel processing facilities in the space of roofing and steel tubes.

Key Announcements in FY23

Transforming ecosystem with technology and innovation

Shankara is also adding a marketplace model. We have an online platform www.buildpro.store which catalogue a large range of our products and facilitates easy online transactions. As we have a large number of physical stores Shankara is well poised to offer an Omni channel platform for all construction – related material.

Mobile app

The Company successfully launched a mobile app Shankara Buildpro on android and IOS. We are working to utilize tech to improve footfalls in our fulfillment centers working on a model of eyeballs to footfalls.

Addition of Luxury brands

The Company added new brands like Grohe, Hans Grohe, Duravit, Roca, Philips and Viega in the CP and Sanitary segment. We have also launched our own tile brand "Fotia" which is gaining acceptance in parts of South India.

II. Industry Structure and Developments

The retail sector plays a vital role in the Indian economy and contributes about 10% of Indias GDP. The real estate industry is fast growing and expected to contribute about 13% of the Country GDP by 2025. Its contribution to the Indian Economy is second only to the agriculture sector. The Indian real estate sector is expected to be worth 1 trillion dollars by 2030.

It may be observed that both the retail sector and the construction/real estate sector are emerging as key contributors to Indias fast growing economy. Despite head winds in the global economy India is expected to grow at 6% in 2023-24 and emerge as the fastest growing major economy in the world.

As of March 2023, India was the worlds second-largest producer of crude steel. The Government has taken various steps to boost this sector. The National Steel Policy, 2017 was a right step in this direction. It allowed 100% Foreign Direct Investment (FDI) in the steel sector under the automatic route

III. Building material industry structure

The year 2022-23 saw a recovery for the construction materials sector. Growth in the building materials industry is crucial for the economy as a whole because it employs more than 51 million people and account for roughly 10% of the nations GDP. The Union Budget 2022-2023 will boost the prospects for steel sector and building material product companies in India. The Central Government Budget provides INR 10 lakh crores allocation for development of the infrastructure sector. One of the main factors influencing the sector growth is the governments goal of creating a $5 trillion economy, and the resulting investment in infrastructure The Union Budget 2022-23 makes a strong push for infrastructure-led growth in the country, with capital outlay for infrastructure projects raised by 35% in FY2023 emphasizing on R&D, technology, and digitalization, SEZ legislation, funding schemes for new metro rail systems, urban planning for sustainable living. The cumulative allocation to flagship schemes like Pradhan Mantri Awas Yojana and Jal Jeevan Mission has been increased by 39.3% year-on-year, which is a positive for long steel and pipe manufacturers. On the raw material side, the extension of customs duty waiver on ferrous scrap in FY2023 is a welcome development for secondary steel manufacturers.

IV. Opportunities and Threats

As elaborated above, the building material and steel industry in India is very large and runs into thousands of crores. As your Company is in this sector, we see good opportunities for growth. Shankara is located largely in Southern and Western India. This is the faster growing region of the Country. The India growth story has moved beyond the metros and larger cities to the smaller towns and rural areas. Shankara has a substantial presence beyond the metros. The building material industry is seeing constant changes over the last few years. Customer preferences are continuously changing with the introduction of new materials, larger design offerings, and enhanced competition, both domestic and international. There have been disruptions in the way business is being done. Many new start-ups have entered this space and are trying to convert the business into a tech driven market place.

Uncertainties always exist in any economy. Our financial performance depends significantly on the stability of the housing, residential construction and home improvements market. Uncertainty about these markets, or the economy could adversely impact our customers confidence or financial condition, causing them not to purchase home improvement products and services. Every business environment has significant competition inbuilt in it. We believe that this industry is a very operations intensive business with low margins. The ability of a large player to operate at fine cost structures may be a challenge. However, Shankara is a well-poised to withstand competition. The Company has built a lot of insight in this industry in its 50 years journey which will stand us in good stead. Shankaras approach is now more marketplace oriented. We have over a 100 fulfillment centers with about 90 offline stores, a robust e-commerce platform which combine to give us an excellent Omni channel. This places us ahead of the current competition.

V. Segment wise or Product wise performance

Our business is structured across three key revenue streams – retail, enterprise and channel. The retail segment is the largest and the fastest growing segment of the Company. Retail contributes ~55.5% of the total revenues of the Company and grew at 58.78% in FY 23. The enterprise business contributes ~18.8% of the total revenues. In the enterprise segment we are looking to focus on margin accretive opportunities. The emphasis is more on bottom line growth rather than topline growth for this segment. The channel business contributes to ~25.7% of the total revenues. The following chart captures the revenue share of the key business segments and how their share has changed over the last few years.

I. Retail segment

We are a leading organized retailer of home improvement and building products in India with 107 fulfillment centers out of which 91 are stores and 16 warehouses (as on 31st March, 2023). Our retail operations are spread across South, West and East India. We carry 1,00,000+ SKUs across the entire home construction and renovation lifecycle through our fulfillment center.

Our retail revenue was 2,235.71 crores in FY23 which was 55.5 % of our total sales. Our comparable sales growth gained momentum with each passing quarter of the year. Our segment EBITDA margins stood at 5.56% in FY 23. Our retail footprint spans ~4,58,412 lakh sq.ft. Our average store size is ~5,037 sq.ft. As of now we continue to focus on South India.

II. Enterprise segment

In this segment, we cater to the requirements of large end users, contractors and OEMs. We generated revenues of 757.22 crores in FY 2023, a growth of 49.95% over the previous year. Enterprise customers are more demanding in terms of quality parameters and specifications. This can be partly catered to with our integrated processing facilities. Our sales in this segment for Q1 was 163.48 crores, Q2 was 198.32 crores, Q3 was 215.32 crores & Q4 was 180.10 crores.

III. Channel segment

In this segment we cater to dealers and other retailers through our branch network. The Channel segment continues to be a strategic business for us. It builds understanding of the markets and the emerging trends. The channel business recorded revenues of 1036.79 crores for FY 23 as compared to 505.34 crores for FY22 recording a growth of 105.16%. The Channel business also helps us in our other business segments. It helps optimize costs and helps us in securing scale benefits.

Processing

We have reduced production and turnovers in these processing units which are housed in our subsidiaries. Our processing units complement the three business verticals of retail, channel & enterprise. We make certain roofing products in our own brand which have a good market in our retail segment. We focus on customizing some of our products which cater to needs of certain enterprise customers. We now have 13 functional processing units. These units are not very capital intensive.

Supply chain management

Supply chain is an integral part of our business. We have a warehousing network spread over ~ 5,33,073 sq.ft. This helps us deliver our cluster based retail stores in an efficient manner. It is very critical in ensuring storage of material and timely delivery to our retail units. The Company owns most of our warehousing space. We also own a fleet of trucks. Additionally, we do utilize the services of outside agencies for transporting our materials.

VI. Outlook

The Indian economy is poised to grow at 6% for the year 2023-24. The Annual Budget presented by the Union Government emphasized considerably on infrastructure and the housing sector. The Budget has allotted considerable resources for the same. ( in crores) Ministry of Defense : 5.94 Ministry of Road Transport and Highways : 2.70 Ministry of Railways : 2.41 Ministry of Rural Development : 1.60

Considering the above Shankara hopes to see a favorable environment. The real estate and building industry is also witnessing substantial demand in residential and in the commercial sector. This augurs well for the Company.

VII. Risks and Concerns

As our investor, you already understand that risks are part of any business. It is not possible to detail every risk to the business. For our business, we have identified key risks:

Business Risks: A significant portion of our business is generated from a large number of customers. Our business operations may fluctuate due to a variety of factors such as loss of key customers, fluctuation in demand and sales volume, timing and size of customer capital spends, inventory management practices

. Market Risks: The fragmented unorganized market and owner driven competition at a fairly large scale affects the environment. The intensity of competition has moved beyond metros. Financial Risks: We have a very diversified customer base. A lot of our sales is credit based. Therefore, in case the customer reneges on payments, this could lead to bad-debts and affect profitability.

Interest rates have been increasing in the recent past. Further increase of interest rates could affect the profit margins accruing to the Company.

VIII. Internal control systems and their adequacy

In accordance with the provision of Section 134(5) (e) of the Companies Act, 2013, and as per the provisions of the SEBI (LODR), Regulations, 2015, the Company has an Internal Control System, The internal control forms an integral part of the Companys corporate governance and plays a critical role in managing operational risks. The Company has a robust Risk Management Policy, which provides an overall framework for Risk Management in the Company. The key elements of the companys risk management framework have been captured in the risk management policy, which details the process for identifying, escalating, prioritizing, mitigating, and monitoring key risk events and action plans. The Companys existing framework provides for risk reviews at various levels based on companys organizational structure matrix. Periodic assessment of risks, potential impact relating to business growth, profitability, talent engagement, and market position are conducted.

The Company has adopted accounting policies which are in line with Indian Accounting Standards ("Ind AS"). Pursuant to the provisions of the Section 134(5) (f) of the Act, the Company during the year devised proper systems and continued to ensure compliance with the provisions of all applicable laws. Any matter that required attention was immediately dealt with. The compliance system was largely found to be adequate and operating effectively. The Directors have in the Directors Responsibility Statement under paragraph (f) confirmed the same to this effect. The Internal Auditors monitor and evaluate the effectiveness and adequacy of internal control system in the Company, its compliance with operating systems, accounting procedures and policies at all locations of the Company and its subsidiaries.

IX. Discussion on financial performance with respect to operational performance.

Financial Highlights/ Year Ending 31st March	2022-23		2021-22
	Consolidated	Standalone	Consolidated	Standalone
Revenue from operations	4,029.72	4,036.22	2,418.40	2,328.75
Total Income	4,037.42	4,043.53	2,421.50	2,331.15
Earnings Before Interest, Exceptional
Items & Taxes (EBIT)	108.62	97.79	70.43	57.40
Profit/(Loss) before Exceptional items & tax	84.37	76.25	46.06	36.29
Exceptional Items	-	-	-	-
Profit/(Loss) before tax	84.37	76.25	46.06	36.29
Tax expenses	21.32	19.23	11.74	9.05
Profit/ (Loss) after tax	63.05	57.02	34.32	27.24
Other comprehensive income	0.12	0.10	(0.03)	0.06
Equity dividend %	-	-	-	1%
Share Capital	22.85	22.85	22.85	22.85
Other Equity	620.24	435.19	533.11	354.11
Net worth	643.09	458.04	555.96	376.96

Share Capital

During 2022-23, the Company allotted 14,00,000 (Fourteen Lakh) Warrants, each carrying a Right to subscribe to one Equity Share per Warrant, at a price of 750/- per Warrant ("Warrant Price"), aggregating to 105,00,00,000/-(Rupees One Hundred and Five crores) to APL Apollo Mart Limited ("Acquirer"), a wholly owned subsidiary of APL Apollo Tubes Limited.

Reserve & Surplus

On standalone and consolidated basis, the balance of security premium as at March 31, 2023 amounted to 111.28 crores.

Goodwill

On a consolidated basis, carrying value of goodwill as at March 31, 2023 stood at 14.04 crores.

Trade Receivables

On a consolidated basis trade receivable amounted to 511.06 crores (previous year

354.00 crores) net of provision for doubtful debts of 3.82 crores (previous year 8.18 crores).

Loans and Advances

It represents employee advances. On a consolidated basis loans and advances amounting to 1.28 crores.

Borrowings

On a consolidated basis, borrowing current as at March 31, 2023 is 55.75 crores and non-current borrowing 26.85

Other Income

Please refer note no. 32 in consolidated financials.

Expenditure

The employee benefits expenses increased to

48.24 crores compared to previous year at

41.34 crores on consolidated basis.

Profit before Tax

Our Profit before tax stood at 84.37 crores in FY23 with a growth of 83.17% compared to previous year FY22.

Tax Expense

For the year ended March 31, 2023, there was a tax expense of 19.23 crores (Previous year: tax expense of 9.05 crores) on a standalone basis. On a consolidated basis, tax expense was 21.32 crores (previous year 11.74 crores).

Net Profit

On consolidated basis, the net profit of the Company amounted to 63.05 crores as against a

34.32 crores during the previous year. Total Comprehensive profit for the year is 0.12 crores as compared to (0.03) crores during previous year. On standalone basis, the net profit of the Company amounted to 57.02 crores as against a

27.24 crores during the previous year. Total Comprehensive profit for the year is 0.10 crores as compared to 0.06 crores during previous year.

Earnings per Share

Basic Earnings per share computed based on number of common stock outstanding, as on the Balance Sheet date is 27.59 per share (Previous year: 15.02 per share) on a consolidated basis and 24.95 per share (Previous year: 11.92 per share) on a standalone basis

X. Material developments in Human Resources/Industrial Relations front, including number of people employed

Shankara considers its employees as an integral part of their family. The goal of the HR Team is to ensure that all the employees are engaged, motivated and working towards achieving the Companys strategic objectives. Necessary training is conducted on an ongoing basis during the year. The Company had to take utmost care in maintaining the safety and welfare of all employees and their families.

XI. Key financial ratios:

The comparison of key financial ratios for FY 23 and FY 22 is detailed below:

Particulars	2022-23	2021- 22
	Consolidated
Debtor Turnover in Days	39	56
(on gross sales)
Inventory Turnover in Days	39	45
Interest Coverage Ratio	4.48	2.89
Current Ratio	1.63	1.77
Debt Equity Ratio	0.11	0.21
Operating Profit Margin (%)	3.1	3.63
Net Profit Margin (%)	1.56	1.42
Return on Net Worth	9.81	6.17

ENERGY CONSERVATION, TECHNOLOGY ABSORPTION, R&D CELL AND FOREIGN EXCHANGE EARNINGS AND OUTGO

(Pursuant to Section 134 (3) (m) of the Companies Act, 2013, read with Rule 8 of the Companies (Accounts) Rules, 2014)

Subsidiary Companies:

Taurus Value Steel & Pipes Pvt. Ltd	Units	Amount in	Rate/Unit
Total Energy purchased	3,82,726	60,61,253	15.84

Vishal Precision Steel Tubes & Strips Pvt. Ltd	Units	Amount in	Rate/Unit
Total Energy purchased	26,64,345	2,77,58,599	10.42

Centurywells Roofing India Pvt. Ltd	Units	Amount in	Rate/Unit
Total Energy purchased	1,79,886	20,99,306	11.67

	For Shankara Building Products Limited
Place: Bengaluru	Sukumar Srinivas
Date: May 11, 2023	Managing Director
	DIN: 01668064