Shankara Build Pro - Building Materials Organised Retail

(Amit) #1

Shankara Building Products -

Promoter - Mr. Sukumar Srinivas (IIM Alumnus)

Shankara Building Products Ltd (SBPL) is one of the leading organised retailers of home
improvement and building products in India based on number of stores. As on December 31, 2016, it operated 103 Shankara BuildPro stores spread across 9 states and 1 union territory in India. It caters to a 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. Its 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 specialty home improvement and building product stores. SBPL’s
growth is further driven by its ability to make available an assortment of quality products under
a trusted corporate brand built over two decades. It also provides delivery and facilitates
installation services for select product categories.

Business Units: 3 (Retail, Processing, Enterprise)


Promoter stake: 56.20 %

Based on IPO upper range of price 460 and Considering March EPS of 26, PE comes out to be 17.69. At the issue price, the stock was valued at 0.6 times on an EV/sales basis

Current Price = 686, Forward EPS FY 18 expected Projection of 33, Forward PE comes out to be 20.78

Retail stores growth from same store sales growth could reach 30-33% in FY2018
Net Revenue growth from FY 12-16 is CAGR 9.55%

Moat #1:Low cost player in Integrated Building Material, Scalable, Backward Integration
Moat #2: No competitor who provides integrated building materials under one roof
Moat #3: Agency Moat. Builder, Carpenters, Electricians and other Tradies can buy from the store and pass on the price increase to the customer. When the customer is not directly involved in the purchasing decision then higher prices can be used to bribe the purchaser’s agent (builder or other tradies) and can result in higher profit margins and sales volume. This is called as Agency problem. In similar instances globally, it has been found that margins remain low so as to offer quality, cheapest cost material, diverse product range to the customer. For ex: Bunnings. It is hard to keep margins in double digits in this business. So, you can play valuation on Sales volume and low cost advantage.
Moat #4: High entry barrier due to lot of moving parts. Typically it is very hard to keep this business profitable. Only few players can enter the integrated building materials retail Brick and Mortar Business. Lot of Regulatory approvals, Land Leases and Capital is required. Management is very critical to keep the cost optimized and manage moving parts including Suppliers, Customers, Technology, Logistics, Inventory, warehousing, Payable, Receivables, Capital Allocation, Store Geo Presence, Same Sales Growth. For ex: Masters chain in Australia got busted in no time due to incumbent player Bunnings. It is not easy to make money in this business as there are lot of moving parts.

Tailwind: Housing for all, Urbanisation, Increase in Population growth (projection of 11% from 2011-2021), GST (Unorganised to Organised), Have own Steel brands, Organised retail projected to grow at 22-24%.

Retail Key Products: Cement, Structural Steel,Bricks, Plumbing(PVC Pipes),Ceramic tiles, Sanitary Ware, Plywood, Laminates, Lighting.

Retail sale of above products constitute 34-38% of total sales. The balance takes place via institutional and wholesale channels.

Investment Rational:
a) Asset light strategy for opening retail shops
b) Backward integration with processing facilities, owned
warehouses and logistics
c) Strong track record and sound financial strength
d) Presence across the value chain through enterprise and channel


Management Latest Interview on April 06, 2017

  • 15 to 20 store addition every year
  • Consolidation in South India, looking to diversify geographically in next 2 years
  • Margin improving albeit little, Aim to focus on Profit Margins…6.5% this year

As per US data complied by Prof Damodran,

Yellow highlighted data shows Building materials valuation on P/S, Net Margins, EV/Sales


Disc: Invested 2-3% of PF recently,

(Amit) #2

This comes as PE of 38 with EPS of 18 for Dec 2016, but with FY2018 forward valuation of EPS 33 current price is still reasonable at PE 22. I see more expansion in this counter. Already up 8-10% today. I have seen investor comments as this being a volatile stock. It is one way up swing catching up on valuations.


Disc: Accumulated more today. Shankara constitutes 7% of portfolio now.

(Amit) #3

(Aniket Gore) #4

Good interview today by Shankara Building Products MD Srinivas…

BUILD-MAT business will be over 50% of topline for 2017-18. (Est. 2600 - 2700 corres)

Same Store Growth of 20% yoy, and 20 new stores to be added this year.

BUILD-MAT business looks poised to grow at 30% CAGR over coming years…

(abhi2525) #5

My Analysis for Shankara

What does the company do?
Shankara Building Products Limited is one the of India’s leading organized retailers of home improvement and building product. The company IPOed in April 2017 at an issue price of Rs. 460. The company serves home owners, architects/contractors, small enterprises, general engineering, automotive, renewable energy, agriculture, and construction and infrastructure sectors. Moreover, Shankara carries reputed third party brands such as Sintex, Uttam Galva, Uttam Value, Futura, APL Apollo, and Alstone along with its own brands such as CenturyRoof, Ganga, and Loha at its retail stores. As on June 18th, 2017, the company operated 112 stores with c40% stores in Karnataka.
Key observations
• The company was started by a first generation entrepreneur, Mr. Sukumar Srinavas in 1995 as a trading company and after the IPO, he still owns 56.2% of the company. This is a great positive in my view, given the fact that first generation backed companies tend to do better than others in the market and his majority stake – Implying his skin is very much in the game. This provides comfort.
• During the last 5 years (FY12-17), revenue has grown at a CAGR of 10.5%, PBT at 17.4% and PAT at 15.2%. The EBITDA margins has shown improvements, climbing to 6.7% in FY17 from 2.8% in FY15 and hints at the economies of scale and the benefits from ERP implementation (This is where Wal-Mart won over others) kicking in. Same store sales growth has been healthy at c24%and more importantly, the growth rate itself has been growing consistently. Sales per square foot has been growing consistently at a range of 27% as well.
• The company has been generating higher CFOs than PAT and this is very positive in our view. Cash earnings are higher than accrual earnings and provides comfort in an industry where cash generation capabilities are a serious drag.
• The company operates in three divisions – Retail, Enterprise and Channel sales. Retail constituted 43% of sales in FY17, up from 39% in FY16 and the company is focused on this segment, given its higher margin profile. Which is the correct thing to do in my view. Operating margins in retail segment increased to 9.9% in FY17 from 9.5% in FY16, while the same for Channel & Enterprise increased to 6.4% from 4.9%.
• Asset base has a grown at a rate of 29% over FY12-17 and this points at the business being very capital intensive. This is not great since revenues has grown slower than this. However, the company has improved its net working capital to Rs. 110 crore from Rs.136 crore, has been consistently reducing receivables days (45 from 54) and has been able to elongate its payables days to 26 from 19 as well. This does point to good capital allocation skills of the management.
• Speaking of capital allocation skills, the return on capital employed has increased to c36% from 27% in FY14 and return on equities is at a respectable 15.2% (pretty flat since FY13), if not downright great. The company has made good improvement in reducing leveraging and this is a key metric to monitor in future given capital intensive nature of the business.
• Employee cost has increased to 2.1% of revenues in FY17 from 0.8% in FY12 and this is positive – They are paying for the right kind of people. Anything less than 4% is comfortable in my view.
• 52% of the revenues come from just Karnataka and this provides a key growth driver – There is a lot of room to grow even in just the adjacent states. However, the company has reduced no. of stores in Maharashtra and we need to understand the reasons behind it. Are they unable to scale up/penetrate other states and what is the extent of these limitations.
• Top 10 customers account for just 4% of sales overall, while in Enterprise and Channel sales, top 10% customers account for just 7%. This reduces client concentration risks and helps in reducing competitive advantages of the customers
• Inventories has grown to 12% of the sales in FY17 compared to just 8% in FY12, but this needs to be seen in light of increasing sales. It’s still in comfortable range.
Does the company have a moat around its business?
• Shankara’s key moat lies in its presence across the home building value chain. Its operations span across the entire value chain of processing, channel sales, enterprise sales, retail sales, and other allied services such as delivery and installation. No other listed player does this and the convenience to customers, more so from retail, is unparalleled.
• Efficient utilization of IT systems and ERP as a whole. This industry requires very efficient handling of inventories and logistics, which can be the game changer. Shankara maniac like obsession with perfecting IT systems to track movement of goods and squeeze margins out of the efficiencies gained is the key to increasing margins with increasing scale.
• In continuation with above, another key moat is backward integration with a fleet of 56 warehouses, 47 trucks and processing facilities for steel pipes & tubes, roofing sheets, bright rods, and strips, which is running at 94% capacity utilization.
• Brand – While the brand appears to be well known in Bangalore and nearby areas, it remains to be seen if the brand can have a recall value which will translate to people willing to pay a premium to buy from Shankara.
• Very strong and able management – Mr Srinivas has strong supply chain background from IIM A and appears to be a great at capital allocation. This is a good asset to have in the industry.
What exciting about Shankara?
• Huge industry tailwinds and management’s ability to capture it – The housing sector and the home furnishings sector is set to increase at a secular rate. More urban housing, more aspirational buying and tax breaks combined with more people earning more will drive the sector. Maintaining a brand image will take Shankara to next level of growth and the opportunity size is immense, if the management is able to capture it. The party has just started, as they say, in the segment.
• Strong financial metrics – The Company has just not been able to generate good returns, but also increase the returns on incremental capital (greater than 35%), which is very attractive in an industry like this. We need to monitor working capital, debt levels and ROCE very closely.
• Moat in terms of completeness of products available at one place which reduces auxiliary costs for the customers and the same margins can be grabbed.
• Able management – I believe the management quality is the key in this company. They are focused and it needs to be monitored. An able and energetic management can make money even in an un-attractive industry.
What are the concerns?
• The general concerns applicable to slow down in real estate sector applies here. How can the management mitigate those is the key. Targeting retail segment and home furnishings products is a step in the right direction.
• Most of the stores are on lease contracts and this poses a risk in terms of price increase by the owners.
• Growth has been muted over the years. We need to watch new stores and sales per store growth very, very closely.
• The business has low entry barriers and the company could face increased competition, which would impact the company’s profitability. Moat in terms of brand, switching costs and presence needs to be built in fast.
So what to do now?
• Valuations- The business looks good and the nos. are improving, strengthening the hypothesis that this is a good business to be in. The stock is trading at EV/Sales of 0/9x, Price/Sales of 0.8x, Price to Earnings of 33x. The implied growth rate in the current price comes out to be around 36%, which is at a higher end.
• Given that similar companies trade at 1.2x EV/Sales, Price/Sales of 1x, and PE of 20-50 x (too big a range) and most importantly, the implied perpetual growth rate of 36%, the stock is trading at near-higher than its intrinsic value and there is not enough margin of safety. We should definitely buy this to hold for a period of 7-10 years, but wait for a margin of safety of at-least 25-30% from the current prices.

(Aniket Gore) #6

The initial thesis as you correctly state is based on good promoter credibility, decent track record in last 5 years, opportunity for steady (25%) expansion each year for a long time together with new product additions, and general demand strength in the Building Materials industry.

SBP is relatively unique as a retailer who combines several products under one roof (not yet widely seen in India, where each product vertical sold by individual retailers).

We have to continue to monitor execution, and understand Same Store Growth (20% for last year) and other metrics.

Management guided 18% topline growth for FY 17-18, with Retail Division doing more than 50% of topline.

If they will achieve that, this would imply Retail division sales growing at over 30% yoy.

Non Retail business should remain relatively flat / grow much slower, as its much lower RoCE.

As mix improves in favour of Retail, overall metrics will continue to improve.

Company is present in a sector where there is a lot of interest, and should SBP execute well over the coming 3 to 4 years, they should command a high multiple. While opportunity is massive, execution needs to be monitored.

Disc: Invested.

(MHS) #7

Latest Investor Presentation: Lots of info about industry size and opportunity:

Affordable Housing - the opportunity
(Amar) #8

Stock up nearly 50% in a month, just wondering what is brewing here…

(Saji John) #9

Institutional investors hike stake in Shankara Building Products
13th Jul 2017
Institutional investors led by mutual funds and foreign portfolio investors (FPIs) have increased their stake in Shankara Building Products (SBPL) by nearly 11 percentage points in past three months.
The total institutional investors holding in the company increased 10.96 percentage points to 23.71% in June quarter. They held 12.75% stake at the end of March quarter. Mutual funds raised their holdings in the company to 12.24% from 5.06%, while FPIs to 7.27% (4.7%) and of alternate investments funds to 4.17% (1.58%).

(Amit) #10

I have read the annual report 2015-16 for Home depot which is similar business to Shankara Buildpro business. Home Depot is in the mature phase whereas Shankara is in Aggressive growth Expansion Phase. There are lot of commonalities between these 2 businesses which I captured below.

The aim is to find risks in Shankara business looking from Home depot lens.

Source: Home Depot Annual report

Gross Profit

Gross Margin of Home Depot amazes me at over 34% in 2015 & 2016. There was improvement in margins due to lower crude effect.

Inflation/deflation effect on Business

Key Risks

  1. Strong competition could adversely affect prices and demand for our products and services and could decrease our market share. – [Shankara Context] Valid
  2. We may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect our relationship with customers, our reputation, the demand for our products and services, and our market share. - [Shankara Context] Valid
  3. Our success depends upon our ability to attract, develop and retain highly qualified associates while also controlling our labour costs. - [Shankara Context] Valid
  4. A failure of a key information technology system or process could adversely affect our business. - [Shankara Context] Valid
  5. If our efforts to maintain the privacy and security of customer, associate, supplier and Company information are not successful, we could incur substantial additional costs and reputational damage, and could become subject to further litigation and enforcement actions - [Shankara Context] Valid
  6. We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business. - [Shankara Context] Valid
  7. Uncertainty regarding the housing market, economic conditions, political climate and other factors beyond our control could adversely affect demand for our products and services, our costs of doing business and our financial performance. - [Shankara Context] Valid
  8. If we fail to identify and develop relationships with a sufficient number of qualified suppliers, or if our suppliers experience financial difficulties or other challenges, our ability to timely and efficiently access products that meet our high standards for quality could be adversely affected. - [Shankara Context] Valid
  9. The implementation of our supply chain and technology initiatives could disrupt our operations in the near term, and these initiatives might not provide the anticipated benefits or might fail. - [Shankara Context] Valid
  10. Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business. - [Shankara Context] Valid
  11. If we are unable to effectively manage and expand our alliances and relationships with selected suppliers of both brand name and proprietary products, we may be unable to effectively execute our strategy to differentiate ourselves from our competitors. - [Shankara Context] Valid
  12. Our proprietary products subject us to certain increased risks. - [Shankara Context] Valid
  13. If we are unable to manage effectively our installation services business, we could suffer lost sales and be subject to fines, lawsuits and reputational damage, or the loss of our general contractor licenses. - [Shankara Context] Valid
  14. We may be unsuccessful in implementing our growth strategy, which could have an adverse impact on our financial condition and results of operation. - [Shankara Context] Valid
  15. Our costs of doing business could increase as a result of changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations. [Shankara Context] Valid but largely reduced due to GST
  16. The inflation or deflation of commodity prices could affect our prices, demand for our products, our sales and our profit margins. - [Shankara Context] Valid

(008shailesh008) #11

@aammiitt2 Speaking generally, most of the points you mentioned above remain common for all business at large.

(madhavikkutti) #12

My curiosity is on whether Shankara is currently at an inflection point and poised to zoom ahead? If you look at the history of home depot, the company started its operations in 1978. It opened its 100th shop in 1989. There upon, it grew at a scorching pace to open its 2000th shop by 2005. Shankara currently has 100+ shops. Is it now ready to grow from 100 to 2000 shops in 16 years time as home depot did?

(Saji John) #13

Steady quarterly results from Shankara. It could be a great wealth creator! Latest investor presentation

(Amit) #14

Maiden Investor Concall Transcript…

The first para is where Shankara explaining their business model.

This company need not be overlooked.

(madhavikkutti) #15

(Saji John) #16

ICICI direct has initiated coverage with TP of 1725

(Deepak Venkatesh) #17


Edelweiss came out with a report a few days ago. Please find attached.


shankara-building-products-ltd–best-of-both-worlds.pdf (1.1 MB)

(madhavikkutti) #18

Here is the ICICI Direct 15-Sep report:

(khs) #19

Investor presentation:

(madhavikkutti) #20