Shankara Build.

CM RATING45/100
Promoted by first generation entrepreneur Sukumar Shrinivas, Bengaluru based Shankara Building Products (SBP) is one of the leading organized retailers of home improvement and building products in India, operating under the trade name, Shankara BuildPro, since the past two decades. As on December 31, 2016, it operated 103 Shankara BuildPro stores spread across nine states and one union territory in India. The company has product portfolio of more than 74 products serving large customer base across various end-user segments in urban and semi-urban markets through its multi-channel sales approach, processing facilities, supply chain and logistics capabilities. The company also provide delivery and facilitate installation services for select product categories.

SBP stores carry reputed third party brands such as Johnson, Sintex, Uttam Galva, Uttam Value, Futura, APL Apollo, Astral Pipes and Alstone and its own brands such as CenturyRoof, Ganga and Loha at its retail stores.

Revenue comprises retail (around 42% of total sales as on Dec16) as well as enterprise and channel sales (58% of total sales as on December 2016). Teh companys enterprise sales cater primarily to large end-users, contractors, and OEMs, while the channel sales caters to dealers and other retailers through its extensive branch network. Companys retail operations are strategically suited to benefit from growth in housing demand, large market for home improvement, and increasing customer involvement in home solution decisions which have created a need for organized speciality home improvement and building product stores.

The company serves home owners, professional customers (such as architects and contractors), and small enterprises, through its retail stores. Under retail operations, it offers a comprehensive range of products and services at its stores, including structural steel, cement, TMT bars, hollow blocks, construction materials, fabrication, pipes and tubes, roofing solutions including colour coated sheets, welding accessories, primers, solar heaters, plumbing, tiles, sanitary ware, water tanks, plywood, kitchen sinks, flooring designing, electrical cabling, fitting, lighting and other allied products. Additionally, in the semi urban markets, SBP also cater to specific agricultural requirements of individual customers and small enterprises.

To cater to its customers, the company also have a robust logistics network which, as of December 31, 2016, consisted of 56 warehouses aggregating 0.59 million sq. ft., and a fleet of 44 owned trucks to augment last mile delivery. A large part of its warehousing backbone is owned which ensures stability of operations. It also helps in catering to the requirements of companys retail outlets.

As on December 31, 2016, it had 11 processing facilities having a total installed capacity of 323,200 million tonnes per annum (mtpa), operating at an average capacity utilization of 93.81% (annualized). In January 2017, SBP commenced production at its stainless steel pipes and tubes processing facility in Jigani, Bengaluru which has an installed capacity of 1,200 mtpa. These capacities can be scaled in a modular manner as per requirement.

Building material requirement for a typical housing unit will comprise of cement (around 18-20%), steel (around 18-20%), plumbing and sanitary ware (around 8-10%), flooring (around 9-10%), roofing and frames ( around 9-10%), bricks, tiles etc (around 9%), electrical (around 7%), paint (around 4%) and rest will be from others and aggregate materials. The companys sales composition is more or less similar to the overall building material requirements for a housing unit.

The Offer and the Objects

The offer comprises fresh issue of Rs 45 crore, which at lower price band of Rs 440 per share, works out to an issue size of 10.27 lakh shares and at higher price band of Rs 460, the issue size works out to 9.78 lakh shares. The offer also comprises of offer for sale of 65.22 lakh shares, which at lower price band of Rs 440 per share, works out to Rs 286.97 crore and at higher price band of Rs 460, the issue size works out to Rs 300.01 crore. The minimum bid lot is 32 equity shares and in multiples of 32 equity shares. The issue is made through the book-building process and will open on 22nd March and will close on 24th March, with anchor investor bidding date of 21st March 2017.

The offer for sale of 65.22 lakh shares is made by selling shareholders comprises of Promoter Sukumar Shrinivas (around 8.16 lakh shares) and institution Fairwinds (around 57.06 lakh shares)

The objects of the fresh issue are prepayment or repayment of loans availed by the company and its subsidiary aggregating to around Rs 34 crore and rest for other general corporate purpose apart from the benefits of listing the equity shares on BSE and NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

Present across the value chain and provides customers a one-stop solution for home improvement and building products.

Increase in population, urbanisation, improving income levels, nuclear families, changing aspirations and trends, brand awareness etc augers well for the future growth of the company.

The home improvement retail market in India is currently around Rs 1.5-1.8 trillion as on FY 2016. Of this, the building material industry is around Rs 4.4-4.8 trillion as on FY 2016 and, as per Crisil Research, it is expected to grow at CAGR of 8-8.5% to Rs 6.8-7 trillion by FY 2021.

The company has recorded a strong same stores sales growth of around 23% and robust retail segment revenue growth of around 29% over the last four years from FY 2012 to FY 2016.

The company is continuously putting efforts to increase its retail sales, which was at 24% in FY 2014 and reached 42% as on December 2016. It is expected to reach to 60% in next 2-3 years on back of opening of new stores, focus on brand building and marketing efforts that the company has undertaken. Retail has higher margins (around 9-10%) than institutions (around 5-6%). The companys operating margins have improved from FY 2014 to FY 2016, and further in the nine months ended December 2016, due to increase of retail contribution in overall sales.

Increase in retail sales has led to lower working capital which will further reduce going forward with further increase in retail contribution in overall sales. Working capital cycle has improved from 71 days in FY12 to 42 days for 9 months ended Dec16.

Weaknesses

As on December 2016, a majority of retail outlets were concentrated in southern and western India and 43 outlets alone are situated in Karnataka State. Any political unrest, state level restrictions or adverse legislations or economic downturn in these states will affect the financials and prospects of the company.

The company operates at low operating margins despite constant increase in the margins and a strong brand and presence across the value chain.

Constant need for meeting and responding the changing customer requirements, expectations, trends and in a timely manner will remain a big challenge for the company.

Uncertainty in housing market, real estate prices and economic conditions and other factors beyond its control can affect the demand of companys products and services and can adversely affect the growth of the company.

Valuation

For FY 2016, consolidated net sales were up 3% to Rs 2035.90 crore. The OPM stood at 5.9%, up by 140 bps on YoY basis, resulting in a 34% increase in OP to Rs 119.70 crore. There was a 22% decrease in other income to Rs 0.70 crore. With a 2% decrease in interest to Rs 46 crore and 8% increase in depreciation to Rs 9.50 crore, consolidated PBT was up by 88% to Rs 64.90 crore. After providing total tax of Rs 23.60 crore, consolidated PAT for FY 2016 stood at Rs 41.30 crore, up by 83% YoY.

For the nine months ended December 2016, consolidated net sales stood at Rs 1709.80 crore with the OPM of 6.4%, leading to OP of Rs 108.90 crore. Interest cost and depreciation stood at Rs 37.50 crore and Rs 8.50 crore, respectively, leading to a PBT of Rs 63 crore. After providing total tax of Rs 21.40 crore, consolidated PAT for the nine months ended December 2016 stood at Rs 41.50 crore.

On a higher price band of Rs 460, the diluted equity share capital of the company stands at Rs 22.85 crore of face value of Rs 10 each. EPS for FY 2016 on diluted equity works out to Rs 18.1. EPS for the nine months ended September 2016 is not annualised due to seasonality of business as generally the second half of every year generates higher revenues as compared to first half. The scrip is offered at P/E multiple of around 25.4 times FY 2016 earnings. There are no comparable listed peers.

Shankara Building Products: Issue highlights
Offer for sale (in Rs crore)
- On lower price band286.97
- On upper price band300.01
Total Issue size for offer for sale ( in no of shares in lakh)65.22
Fresh Issue ( in no of shares in lakh)
- On lower price band10.27
- On upper price band9.78
Issue size of fresh issue (in Rs crore)45.00
Price band (Rs)440-460
Post issue share capital (Rs crore) 22.85
Post-issue Promoter & Group shareholding (%)56.2%
Issue open date22-03-2017
Issue closed date24-03-2017
ListingBSE, NSE
Rating 45/100

Shankara Building Products: Consolidated Financials
1203(12)1303(12)1403(12)1503(12)1603(12)1612(09)
Net Sales1413.701766.601927.101978.802035.901709.80
OPM (%)5.0%4.9%4.6%4.5%5.9%6.4%
OP70.2086.9088.6089.50119.70108.90
Other in. 0.300.300.800.900.700.10
PBDIT70.5087.2089.4090.40120.40109.00
Interest22.8034.9041.6047.0046.0037.50
PBDT47.7052.3047.8043.4074.4071.50
Dep.2.904.605.808.809.508.50
PBT 44.8047.7042.0034.6064.9063.00
EO 0.000.000.000.000.000.00
PBT after EO44.8047.7042.0034.6064.9063.00
Tax (including Deferred Tax)13.9015.9013.3012.0023.6021.40
PAT30.9031.8028.7022.6041.3041.60
MI and share of associates1.000.000.000.000.000.10
Total PAT29.9031.8028.7022.6041.3041.50
EPS*13.113.912.69.918.1#
*EPS is on post issue equity capital of Rs 22.85 crore of face value of Rs 10 each
# EPS for 9 months results are not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database

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