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SMC's IPO report on Shankara Building Products - IndiaNotes.com
SMC's IPO report on Shankara Building Products
SMC | Published: 22 Mar, 2017  | Source : IndiaNotes.com

Incorporated in 1995, Shankara Building Products Ltd is retailers of home improvement and building products in India. It offers a wide range of products at its stores which includes structural steel, cement, TMT bars, hollow blocks, pipes and tubes, roofing solutions, welding accessories, primers, solar heaters, plumbing, tiles, sanitary ware, water tanks, plywood, kitchen sinks, lighting and other allied products. As of September 24, 2016, it operated 100 Shankara BuildPro stores covering the end-user segments of urban and semi-urban markets in Andhra Pradesh, Goa, Gujarat, Karnataka, Kerala, Maharashtra, Odisha, Tamil Nadu, Telangana, and Puducherry. The company also manufactures, assembles, processes, trades in, imports, exports, or deals in a range of steel sheets, steel roofing sheets, walling products, accessories, and steel structures and purlins used for construction of various types of building structures, as well as steel pipes, tubes and pipe fittings and iron and steel and allied products and engages in general hardware and general wholesale trading activities. It also carries reputed third party brands such as Sintex, Uttam Galva, Uttam Value, Futura, APL Apollo and Alstone and their own brands such as CenturyRoof, Ganga and Loha at their retail stores.


Its Competitive Strengths


Providing its customers a unique experience by offering a comprehensive range of home improvement and building products: The Company offers its retail customers a unique experience by providing them a comprehensive range of home building products under one roof. The company is also strategically located its retail stores in select urban and semi-urban areas which has enabled it to reach out to a larger number of retail customers. It provides window displays of various products, such as model bathrooms with tiles, sanitary, and light fittings, to complete the visual for its customers. The company also provide last mile delivery of its retail products and offers a wide assortment of quality products, arrange delivery and run loyalty programs for the benefit of its customers.


Its strong vendor network and relationship built over two decades: The Company has a wide network of suppliers for its various product offerings. As on December 31, 2016, the company offered its suppliers a growing network of 103 retail outlets spread across 9 states and 1 union territory in Tier-I Cities, Tier-II Cities and Tier-III Cities. As of December 31, 2016, the Company operates 30 stores in Tier-I Cities, 30 stores in Tier-II Cities and 43 stores in Tier-III Cities. The company has been associated with reputed third party brands, including among others, Johnson, Sintex, Uttam Galva, Uttam Value, Futura, APL Apollo, Astral Pipes and Alstone and The company believe that such relationships with marquee suppliers have enhanced its brand equity and marketability.


Its presence across the entire value chain: Its business operations span across the entire value chain of processing, channel sales, enterprise sales, retail sales and other allied services such as delivery and installation. The company believes that its business operations share a symbiotic relationship with each other and contribute to each other’s strength and the company leverages on this unique capability to provide services across each of these operations. Given its large customer base, the Company is also able to manage inventory more efficiently across its network.


Robust back-end infrastructure ensuring efficient supply chain management: The Company has been focused on implementing proper systems and processes since its inception and this has been the foundation for it to scale successfully. Its Company received its ISO 9001 certification in 2003. The company has implemented an efficient ERP system.


Strong track record and financial stability: The Company has maintained a strong track record of growth over the years through expansion of stores, improved procurement costs, higher customer retention and increase in same store sales growth. It has added numerous processing facilities (greenfield and acquisitions), warehousing infrastructure, substantially scaled up its retail operations and added a number of new product categories. All these initiatives, which took time to fructify, have now started yielding results and have prepared a strong base for future growth.


Strategy


Scaling its retail presence: To address the growing demand for home building and home improvement products, the company intends to expand its footprint of Shankara BuildPro stores over the next few years. Towards this objective it has already opened eight new Shankara BuildPro stores in the current Fiscal upto December 31, 2016, and as on December 31, 2016, it operates 103 Shankara BuildPro stores spread across 9 states and 1 union territory in India. The company also leverages on its existing logistics capabilities and backward integrated processing units to further expand its retail operations across India.


Enhancing its product offerings: The Company intends to further enhance and expand its existing product portfolio at its retail stores, by adding more product categories and more brands in existing product categories such as electrical and decorative paints. The company would also focus on building strategic relationships and strengthening its existing relationships with suppliers and manufacturers of home building products.


Increasing its presence in bespoke products: The Company intends to capitalize on its specialization in processing customized steel products by deepening its presence in bespoke products. The Company is backward integrated with its own processing facilities. The company believes that its in house capabilities will enable it to further consolidate its footprint in this market and also enhance its brand equity and marketability. The company intends to offer more customization solutions and further integrate them with its retail outlets.


Further strengthening its value chain: The Company has in the past successfully acquired and integrated certain companies such as CRIPLfor roofing solutions and VPSPL for tube and strips processing. This has enabled it to backward integrate its business operations and strengthen its value chain. The company also intends to continue to explore such business opportunities, including through inorganic acquisitions, and foraying into new product verticals, depending on market conditions and emerging business opportunities. This would enable it to expand its product range and its customization capabilities.


Focus on its brand equity and marketability in the home improvement and building space: The company intends to focus on enhancing its brand equity and marketability through various means, including, expansion of its Shankara BuildPro stores across India. The company believes that such initiatives will enable it to establish a loyal customer base across its target customer categories and further increase its revenue. The company also intends to further strengthen its relationship with its existing customers by increasing the reach of its loyalty programs, providing a wider product mix and invest in branding to ensure higher customer recall. The company further intends to increase its focus on installationservices, through trained workers such as plumbers and carpenters who would complete home improvement projects of its customers and provide end-to-end experience to its customers. The company intend to further evolve its customer connect through an integrated multi - channel sales approach.


Valuation


Considering the P/E valuation on the upper end of the price band of Rs. 460, the stock is priced at pre issue P/E of 18.16x on its FY17 EPS of Rs. 25.33. Post issue, the stock is priced at a P/E of 18.97x on its EPS of Rs. 24.24. Looking at the P/B ratio at Rs. 460 the stock is priced at P/B ratio of 3.03x on the pre issue book value of Rs.151.87 and on the post issue book value of Rs. 171.12 the P/B comes out to 2.69x.On the lower end of the price band of Rs.440 the stock is priced at pre issue P/E of 17.37x on its FY17 EPS of Rs. 25.33.Post issue, the stock is priced at a P/E of 18.15 on its EPS of Rs. 24.24. Looking at the P/B ratio at Rs. 440, the stock is priced at P/B ratio of 2.90x on the pre issue book value of Rs. 151.87 and on the post issue book value of Rs. 171.12 , the P/B comes out to 2.57x.


Industry outlook


India ranked as the 7th largest economy in the world with a GDP of US$ 2,073,543 million for 2015. (Source: World Development Indicators database, World Bank, July 22, 2016 . The current size of the real estate industry (inclusive of residential, commercial, retail, hospitality and educational projects) in India is estimated in the range of Rs 8.5 - 9.0 trillion (2015-16). The housing real estate industry accounted for about 80% of the total real estate industry at about Rs 7-7.5 trillion, the balance being contributed by commercial, retail, hospitality and educational projects. The budget 2017 extended various benefits to the affordable housing sector, including infrastructure status and increased allocation under the Pradhan Mantri Awas Yojana scheme. In terms of the CRISIL Report, the usage of carpet area instead of built-up area and extension of project completion timeline from three to five years under the profit-linked income tax deduction scheme (80-IBA) for developers focusing on affordable housing will further widen the sector’s scope. Further, the demand for cement and steel should generate a positive multiplier effect in employment and incomes, leading to a positive impact on the building material industry in the long run.


Outlook


Company’s 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.


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About SMC
SMC Research, founded in 1990, is India’s leading share and stock broker, provides a wide range of financial services and investment solutions. A blend of extensive experience, diverse talent and client focus has made us the 4th largest broking house in India(Source: Dun and Bradstreet, 2008). Over the years, SMC has expanded its operations domestically as well as internationally. Existing network includes regional offices at Mumbai, Kolkata, Chennai, Cochin, Ahmedabad, Jaipur, Hyderabad, Bangalore plus a growing network of 2100+ offices spread across 425 cities/towns in India.


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