Analysts Cut Price Target of Shankara by up to 60%
KEY TRIGGER Experts who were bullish on the stock till recently gave sell calls after the company changed its business strategy
Our Bureau (ET)
Much-hyped building product retailer Shankara Building Products has destroyed nearly 72% of investor wealth in the past nine months despite 10 analysts tracking the stock giving buy recommendations.
The stock, which was trading at ₹1,945 in April, closed at ₹579.60 on Wednesday. In the past 15 days, almost all brokerages have cut their target price by up to 60% and EBITDA by 25% for next two years after the company changed its business strategy of achieving higher revenue growth in retail segment at much lower margins.
“In the near term, this change in the business strategy is likely to result in significant earnings reduction and we believe that positive impact of these changes is likely to be reflected after 2-3 quarters,” said Teena Virmani, analyst, Kotak Securities. “We also reduce our valuation multiples for the retail segment owing to decline in margins, earnings growth as well as lower return ratios as against our earlier expectation.”
On the business update call on November 20, 2018, management provided further inputs on its new strategy, which aims at improving balance sheet but with a sharp reduction in business margins. It guided FY19 revenue for the retail segment to be about ₹1,500, implying about 25% growth compared with FY 2018.
Kotak Securities has reduced the target price of Shanakar Products from ₹1,552 to ₹620 while Emkay Share & Stock Brokers which as a target price of ₹2,155 has suspended the coverage on the stock. Most of the other brokerages also have halved their target price in the last two weeks.
“Given the rising business concerns and a lack of clarity from management, we are suspending our coverage on the stock,” said a note by Emkay Global.
The reduction in margins to 6-8% in retail segment is beyond expectations and this is leading to a sharp downward revision in the earnings of the company going forward, said analysts.
“We cut our FY19 and 20 EBITDA by 14% and 19% to factor in this margin weakness and believe that uncertainty about customer response to Shankara’s changed business model would weigh on performance” said Avi Mehta, analyst, IIFL.