Shankara Build Pro - Building Materials Organised Retail

(Bheeshma Sanghani, PhD) #151

Shankara is a very working capital intensive operation and requires a lot of it. Currently, its internal cash flows are not sufficient to cover these needs and thus, will have to be funded by additional debt or additional equity.

It would be more prudent for it to scale down its operations than risk stretching its balance sheet further. Its return ratios are fairly good uptil this point but are going down as it seeks to grow. I don’t think it can handle any more debt on its balance sheet and will certainly face issues servicing it going forward.

(Amit) #152

Very well put by you. The management has said they would like to strengthen the balance sheet rather than increasing store count going forward.

Business strategy:

  1. Bring down receivables which may impact margins in short term, Receivables are difficult to drop as it is outside management control, key risk > 90 days receivables.
  2. Management focussing on bring payables down so as to get benefical supply deal from suppliers
  3. Do more cash sales at 2% discount which will impact margins
  4. Next 2 quarterns will be good from top line but margins will be depressed
  5. Managment focus is on improving SSGR for same store sales rather than margins going forward
  6. Expansion is on kind of hold for now as they are looking to strengthen the balance sheet
  7. Growth factor may be off from the stock for some time
  8. Business facing competetive pressure in near term and has to give discounts
  9. New products growth and retail sales growth, Same store sales growth are key metrics to look at going forward
  10. They need to raise short term debt to serve working capital needs
  11. Processing margins are down and it wil be depressed in near term

Stock has fallen in line with business situation with some speculations element adding to price.

Hope management clears out most of concerns circuilating around. Next 3-4 quarters will remains challenged.

(senthil kamaraj) #153

Amansa has added another 2.9 lakh shares today in two bulk deals. takes the total stake in the company to 7.4%.

(gautham1) #154

The stock has fallen 72% from 52 week high. But still trades at a market cap of 1527 crore and a PE of 23!.
As per an old management interview, middle class home buyers, home contractors and small builders are the major customers. In my opinion, these people look to buy cement from place x, steel from place y, tiles from place z, etc. Everything under one roof (which apparently is shankara’s moat) is not an important factor.

(Niraj Kumar) #155

After Amit Mantri twitter pointing to some potential issues I try to analyse potential issue. One thing which don’t gel well with retail story is company claim that it’s rent is less than 1 perc of its retail turnover. My guess is even in outskirts of cities and tier 1 and tier 2 and tier 3 cities rent in India is quite high and not likely to cost less than 5 percentage of retail sell unless it is company owned which is not the case. My guess is that company was into steel processing and latter projected itself as multiple construction retail chain however it is in begining stages of this transformation and as this retail story catches up with market they played it well and started doing some acquisition of stores to feel the gap. It seems company do projected false story to investor even though idea of it transforming into retail stores may be excellent.

(Abhishek Jain) #156

They started buying since March at 1700/1800 levels…bought a bulk in march/april at such high valuation.
Recent buy is at 700 odds.
And this guy Akash Prakash of Amansa seems to be so overconfident while picking valuables.
I wonder if we really need to trust these big guys.

(kdjolly) #157

(Niraj Kumar) #158

In India corporate governance issue run very deep. MD of this company is IIM Ahmedabad alumni and atleast in TV channels and concall come across as a intelligent sounding business man however whole retail story of Shankara is filled with inconsistency and trying to confuse investors through false projection. In India even after issues come to light promoters keep narrating false stories to confuse and trap new investors. I fell to understand what promoters gain by doing this kind of manipulation may be small amount of money but if they have focussed on executing this idea in fair manner they may have become homedepot of India or likes but insanity and greed has not limit.

(Karan Sharma) #159

Concall summary of the management call done on 30th Nov 2018 to update the change in business strategy

Link: Shankara - Business Strategy

(Amit) #160

How do you come to this conclusion? Could you provide facts behind your conclusion or is it just another kick to the speculation can down the road?

(Niraj Kumar) #161

Fraud is not easy thing to judge completely just based on available public information otherwise how can market give a market cap of close to 1 billion US dollar for a story stock without much real retail business. There is no need for me to go into details few parameters is enough to reach this conclusion.
(1) How can retail chain has rental cost of only .8 perc of revenue in India. Is real estate so cheap in Bangalore .
(2) If company has success n profitable retail shops than what is need to acquire other retail chain than just opening its own retail chain which cannot cost more than 1 cr per store in any case.
(3) If concall of company is carefully listened than claim of management are at odds with each other at different point of time.
Rest it is your money and you are free to keep invested if you are convinced. But it appears a dude company where facts don’t add up for me

(Bheeshma Sanghani, PhD) #162

Cant comment on management intent but perhaps the drop in share price has been equated with management intent.

In my view, the problems of Shankara are operational in nature and the root cause is mismatch in working capital cycle with cash flow leading to a debt buildup. These issues are not beyond repair but will take time to rectify. It cant be denied though that the balance sheet has been stretched and maybe needs to be recapitalized in the near term.

Scaling down operations, while important at this time, comes with its own set of issues. Its a tricky catch-22 situation and hopefully the management will come out of it.

Chain stores have good economics in general and what needs to be seen is the reduction in the working capital cycle. Currently its 75 days. Maybe a 45 day cycle would change its fortunes.


(Raj A A) #163

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.

(Rajneesh Sharma) #164

(Parthiv Jethi) #165

Singapore based investors acquires substantial ~7% stake in Shankara on 6 Dec.18.

28ED2924_7AAC_4C50_97D6_B1296F3A7BD6_093957.pdf (55.4 KB)

(Varun) #166

they did not add 7% stake… they already hold 6.94% stake. they added .56% stake

disc: not invested…

(Susindar) #167

Very bad results for the quarter. What’s shocking is the price movement months before the result as if everyone knew the result beforehand! Shocking lapse in corporate governance.

The positive is focus on retail business where the margins are decreasing too.