Shankara Building Products IPO review: Should you invest?

The upcoming IPO of Shankara Building Products, which will open for subscription on 22 March, will clash with CL Educate in the market which is trading higher after BJP’s emphatic win in Uttar Pradesh. Shankara Building Products IPO is priced in the range of INR440 to 460 per share and will remain open till 24 March. Investors can place bids for 32 shares and in multiples thereafter.  The IPO will raise INR82.55 crore (INR825.5 million) through a mix of new shares and an Offer for Sale (OFS) by existing shareholders. The IPO will be managed by IDFC Bank, Equirus Capital and HDFC Bank while Karvy Computershare has been appointed the registrar.

We just had the hugely-subscribed IPO of Avenue Supermarts which has caused quite a stir in the market. Apart from the superb response to Avenue Supermarts, listed players Future Retail, V-Mart Retail etc also did well. So one can say that retail stocks are currently toast of the market. As an organised player in home improvement and building products retailing industry in India, Shankara Building Products comes across as an interesting concept. It is interesting as retailing is usually restricted to well-defined consumption goods such as food, grocery, and apparels. It is not that retailing doesn’t exist in building products (in fact some manufacturers such as JSW and Cera are known to be pushing retail operations extensively); but the practice is limited to certain products and is mostly to promote single category products.

It is easy to get exuberant when almost all IPOs are getting oversubscribed and listing with gains. However, these very conditions require caution to be exercised by IPO investor as offer pricing tend to go higher with rise in risk appetite. Through Shankara Building Products IPO review, we try to assess if the offer is worth subscribing by retail investors.

Shankara Building Products IPO Review: Less Fresh, More OFS

The public offer comes as a mix of fresh shares but existing shareholders don’t want to let go of this sweet time of sell some shares. As one can expect, repayment or pre-payment of loans finds its way in usage of IPO proceeds. Out of the INR45 crore the company will get, it plans to use INR34 crore for reducing debt levels. This is a positive indication but is unlikely to help the company in a big way as the company’s total debt as of 31 December 2016 stood at a whopping INR279.7 crore.

OFS is the other component in the IPO and existing shareholders plan to sell 6,521,740 shares worth INR300 crore. Out of this, promoter Sukumar Srinivas plans to sell shares worth INR37.55 crore but majority of the shares are being sold by Fairwinds (Reliance Private Equity). Fairwinds owns 7,346,450 shares (33.59% equity stake) in Shankara and will be selling 5,705,488 shares through the IPO.

Shankara Building Products IPO Review: Business background

As mentioned above, Shankara Building Products is a retailer of home improvement and building products and operates 103 Shankara BuildPro stores in 9 states and 1 union territory. The company operates into two categories – retail and enterprise. In retail operations, it offers a comprehensive range of products at its stores, including structural steel, cement, TMT bars, hollow blocks, pipes and tubes, roofing solutions, welding accessories, primers, solar heaters, plumbing, tiles, sanitary ware, water tanks, plywood, kitchen sinks, lighting and other allied products. The company carries reputed third party brands such as Johnson, Sintex, Uttam Galva, Uttam Value, Futura, APL Apollo, Astral Pipes and Alstone and its own brands such as CenturyRoof, Ganga and Loha. Retail sales made 41.86% of its revenues in the nine months ended 31 December 2016.

Its enterprise sales cater primarily to large end-users, contractors, and OEMs, while the channel sales caters to dealers and other retailers through its extensive branch network. In these operations, it primarily offers steel based products, such as structural steel, TMT bars, pipes and tubes and other allied steel products. In the latest nine months, enterprise business contributed 33.35% of the top line.

Channel sales, catering to dealers and other retailers through its branch network, is also an important vertical and it contributed 24.79% of revenues in the latest reporting period.

Shankara Building Products IPO Review: Financial performance

Shankara Building Products operates in a market where scaling up operations is a major challenge. Opening physical stores and stuffing them with wares is an expensive business and rental costs end up eating significantly into margins. Out of the 103 stores the company operates, 86 stores are on leased premises. Despite the fact that it is not a scalable business model, Shankara Building Products has done well to grow its revenues in each of the last four years. The trend is continuing this year as well with the company on track to post another year of record revenues.

Coming to profits, its performance has not been consistent but this is understandable as profits can swing wildly in low margin businesses. Consistent with this, its margins have also fluctuated in recent years in the range of 1.1% to 2.4%. The best margin figure was achieved in the latest nine months. A positive trend we observed in the profit and loss account is the reduction in finance costs as a percentage of revenues. This is the second biggest cost for the company after stock-in-trade. Finance cost is even higher than employee benefit expenses and thus, a declining trend on this front is a great development.

Shankara Building Products IPO Review: Should you invest?

As we have noted above, it is not an easy business and kudos to Sukumar Srinivas and his management team for running the show efficiently. We are quite impressed with the way the bsueinss has shaped up in recent years. At a glance, this business may give an impression of being in the nature of ‘one-off’ and that’s probably true for building material line but home improvement is something of a constant requirement. The idea is still picking up and there is ample headroom for growth.

Read Also: Upcoming IPOs in 2017 to keep an eye on

In terms of valuations, the company earned INR18.9 per share in FY 2016 on consolidated basis, which means the IPO is offered at a PE ratio of 24.3 times at the upper price band. For the latest nine months, the figures are better with EPS of INR19. Simply annualization this leads to EPS of INR25.3 and PE ratio of 18.2. This pricing means the promoters are leaving something on the table.

The key question for investors is if they are fine putting their money in a low margin business. Despite all the positives, this company is unlikely to see materially higher margins any time soon so that’s a call investors need to take. Although margins are low and growth prospects are not exceptionally bright, Shankara Building Products IPO review tells that the offer is priced fairly.