Long-term investors can look at Shankara Building Products' IPO

Shankara Building Products (Shankara) is a South-based home improvement and building materials retailer. Through its 103 stores across India, the company offers various products, namely cement, structural steel, pipes and tubes, roofing solutions, tiles, sanitary ware and lighting, among others. It also caters to the enterprise and channel segments wherein it sells its products to large end-users such as contractors, dealers and other retailers. However, in recent years, the company has been focussing on ramping up its presence in the higher-margin retail segment — which accounts for 42 per cent of revenues currently. This has also helped margins, which should rise further as the share of the retail business increases. Considering reasonable valuations and healthy growth prospects, long-term investors can subscribe to the issue.

At the upper price band and post annualising the nine months FY17 earnings, the company is valued at 18 times earnings on a post-IPO basis. While there is no comparable listed peer, these valuations appear reasonable considering the good scope to improve margins and growth potential in the business. However, given that a large part of its revenues are from Tier-2 and Tier-3 cities, at 60 per cent, recovery in rural demand is crucial for Shankara's growth prospects. Experts believe this recovery will be more gradual in nature.

High concentration in Karnataka, which forms about 52 per cent of Shankara's revenues, is a key downside risk for the company. Slowdown in the real estate market and high competitive pressures are other risks. There is limited visibility and awareness of its brand "Buildpro" and the company will have to work hard to improve the same. The same, however, should come handy for Shankara to meet its plans to increase the share of retail revenues to 60 per cent over the next two-three years. On this front, it also plans to add about 15-20 stores every year and expand its product offerings.

Only Rs 45 crore from the issue proceeds of up to Rs 345 crore will flow into the company as the rest is offer for sale by promoters and other shareholders. The company plans to repay debt worth Rs 34 crore which will bring down its debt-to-equity ratio from current levels of 0.8 times and result in interest cost savings. This will also aid its earnings.

The company's revenues grew at a compounded annual rate of 9.5 per cent during FY12-16 on the back of strong traction in its retail revenues, which grew by 29 per cent annually. While revenues from the channel segment fell three per cent, the enterprise segment grew eight per cent in this period. This softness in non-retail businesses is in-line with the company's strategy and as these businesses grow smaller in size, its overall revenue growth would replicate the high double-digit growth seen in the retail segment. Consequently, expect margins too to improve from about six per cent in FY16, and return on equity from 14 per cent levels.

While the company's expanding product basket, now at over 70, will also help drive revenues, Shankara has also undertaken backward integration to manufacture products like roofing sheets, steel tube processing, etc. More importantly, it has a strong logistics infrastructure comprising 56 warehouses (29 owned) and vehicles. Since a large part is owned, it ensures operational stability.