I didn’t look at Shankara for a while since at the face of it valuations seemed stretched. But the recent market correction piqued my interest. My research and thoughts are as follows.
The runway growth is very long. India is at the nascent stage of organized retailing. This is more of a norm in developed countries where you don’t see a lot of one-off home improvement stores. This works because people find it easier to associate their needs with a known popular name. At this moment Shankara is not yet a known name in my understanding. So they have to build a brand and hopefully get there. But at a market cap of 3600 crores, I would say we are just scratching the surface of total home improvement market in India.
Growth to be propelled by sales growth in existing stores as well as opening of new stores. Management target 15 to 20% same store sales growth and intend to open 15 to 20 new stores every year. They are also open to inorganic growth via acquisition.
In Q4 concall management said that they do not have any competition in the listed space. They are going to get first mover advantage. The margins are not that great. After two decades of existence they managed an EBITA of ~6.9. This will actively fend off competition since it is not lucrative enough to attract them unlike for instance pathological labs. Even if we consider biggies like Walmart or IKEA they are strictly not in the same business, some products may overlap but is very minimal. For instance Shankara derives more than 65% of sales in construction materials. Besides the management clearly indicted many times over actually that they have established a process based on their learning of all these years that contributes to margin improvements. I don’t think a new player would be able to establish optimum process right from get going.
Management in Q4 concall said that capex per store is 1 crore (includes interior and structural work) and another 0.5 crore for inventories. So a total of 1.5 cr of capex per store. Somewhere I remember them saying (but could not find the source, so I could be wrong) that they break even roughly in over a years time which according to my estimates is bit of a overstatement. But still I think it is an asset light business - any incremental capital to service existing stores is almost nil except for working capital requirements. If they manage to build a name for themselves, the scope is very big.
Over time I expect them to accrue enough reserves which should propel capex for new stores since they only spend 1.5 crores per new store. So eventually for the kind of operations it does and the asset light capex that it demads, the company should become debt free and never have to raise capital. They should be able to fund themselves.
Same store sales number are consistently down. The management indicated that numbers between FY18 and FY17 are not comparable due to GST impact. Barring this, the revenues are up by more than 40% is what management said in Q4.
This is a cyclical business, although retail contribution will help a bit for consistency at the end of the day, these products are mostly one off usages. You will not see repeated customers if there are no new homes built. That being said, India’s average population is very young and I think we will have a lot of construction in the next 10 years aided by nuclear families.
This is strictly my opinion, may not be based on facts - I get a feeling that we are at the middle of the cycle. I read in many places FDIs on construction is peaking. Also a former employee of IIFL told me that IIFL recently created a realty fund for HNI with expected returns of above 14% whose only aim is to invest in realty. If we are at the peak of the cycle, these sales figures are positively influenced. What happens if the cycle reverses, will we see any growth?
More of a question to fellow members. In Slide 27 of Q4 presentation lists same store sales growth at 16.1% but if I calculate the overall sales growth of FY18 w.r.t FY17 I only get a growth of 11.03% which is ominous. I do not understand how could that be mathematically feasible. Even if you assume 0 sales contribution to new stores, if the same store growth rate was 16%, should not the overall sales growth be more than 16% at the least? They however say that numbers are strictly not comparable due to inclusion of excise duty.
I did some guesstimates of future numbers. I made two estimates, a conservative one and a realistic one. The rationale for my assumptions are in the sheet as well.
The following is the conservative guesstimate of future numbers. Capex is not considered, perhaps I will extend it later with capex as well. Obviously these are based on information known to date. Any changes that affects these assumptions in the future will also affect the numbers. So these should be watched periodically to see if the assumptions are intact.
As you can see even assuming a sales growth of only 12% and new store sales of 0 for the respective year, overall sales CAGR comes to 19% and EBITA and PAT at 22%. This could be the reason market has a premium valuation.
The following is the realistic guesstimate of future numbers. Also for realistic I only considered a sales growth of 12% as I believe the present numbers are positively influenced by cycle tailwinds and when it changes we will see an impact.
Shankara Build Pro.xlsx (21.6 KB)
I will leave the interpretation to you. Views are most welcome.
Disc: Invested a small amount recently but actively looking for new entries.