Shankara Building Products – A strong play on Indian building materials growth and home improvement
Shankara is a leading organized retailer of home improvement and building products with presence across a retail network of 116 stores across 9 states and 1 union territory in India. The company caters to various end-user segments in urban and semi-urban markets through its multi-channel sales approach, processing facilities, supply chain and logistics capabilities. Apart from providing its own branded products (CenturyRoof, Ganga and Loha), it also offers products of third party brands like Johnson, Sintex, APL Apollo, Astral Pipes, etc. Shankara also has 12 processing facilities with an installed capacity of 3,24,200 tpa which can be scaled up as per requirement. To cater to this growing retail network, the company has a strong logistics network comprising 56 warehouses and a fleet of 44 owned trucks to boost last mile delivery.
The company’s business can be broadly structured into three segments: 1) retail: comprising 116 stores in nine states and contributing 42% revenue in FY17; 2) enterprise: catering to large end-users, contractors and OEMs, contributing around 33% of FY17 sales; and 3) channel sales: supplying dealers and retailers through the branch network. Channel sales is a low-growth segment and contributed 25% of revenue in FY17.
India’s building products industry is around US$80bn in size for key segments and is growing at 7-8% per year. India has a shortage of around 100m houses; demand for building and home improvement materials is currently supported by low interest rates coupled with government’s multiple housing initiatives. A fragmented industry structure has led to sub-standard products flowing through unorganized channels. We believe the industry transformation, on the back of consumers’ preference for quality products and government tax reforms (GST), could aid the organized sector/channel in gaining market share from unorganized peers. Shankara Building Products (Shankara) is a good proxy to play on the growing demand for organized home improvement and building material store.
Retail business to drive earnings return and ratios:
Retail is a key focus segment for the company. It comprises sales to home owners, professional customers like architects and contractors, and small enterprises. The company’s stores carry 70 product segments (like sanitary, roofing, electrical etc.) across more than 20,000 SKUs.
The company undertakes a detailed survey to gauge a store’s potential by engaging with customers and influencers (architect etc.). Company’s strategy is to make a wide variety of products available and, as such, the company has partnered with more than 100 brands across varied business categories. The retail division generated a 27% revenue CAGR during FY12-17 and average same-store-sales growth of around 22% for the similar period. This segment’s
EBITDA margins have expanded from 2.3% in FY12 to 9.9% in FY17. We believe that an EBITDA margin in the range of 9-10% is sustainable an increasing contribution from the retail segment should result in higher margins going forward.
Although the underlying building materials industry is growing at 7-8% per year, company expects the retail division to grow at 20-25% revenue CAGR for the next 3-4 years backed by same-store-sales growth of around 10-15% and 15-20 additional new stores every year. The company’s retail store expansion strategy is asset light as around 90% of its stores are leased. The initial investment required for setting-up a store (including deposits, interiors and inventory) is around Rs15m. The average revenue breakeven period of a store is 12 months. As per management, the retail segment’s gross margin is around 12-13% and EBITDA at the store level is on the higher side at 11.0-11.5%. The company targets to stabilize rental, manpower and other expenses at around 2% of store revenues.
Shankara’s strength lies in its backward integration of the supply chain and logistic capabilities. Shankara has 12 in-house processing capacities for various building products which it sells through various business segments, and almost 50% of retail sales are of its own products. It also has a network of 56 warehouses that support retail fronts in managing large SKUs and has a fleet of 44 commercial vehicles that support the supply chain. The integration and its back-end network has aided in its growth ahead of the industry. The company has strong brand recognition in South India and it would like to maintain its initial focus in that region only. Shankara has 20 stores in Bangalore city alone, which management believes provides a solid base to penetrate other southern cities.
Enterprise and Channel businesses are important
Enterprise and Channel businesses have a standalone business model and serve SME and Dealers, respectively. Enterprise business offers in-house fabrication work to SME clients. The focus is to increase the share of customized solutions from the current level of 20%. In the Channel business, the company sells various products through its 1951 dealers. This business allows the company to get a deeper understanding of customers’ requirements in a particular catchment area. However, with many brands directly approaching dealers the business is witnessing a sustained decline in revenue and company is de-focusing on this segment.
Retail has driven Shankara’s financial metamorphosis over the past 3 years and this segment (currently 46% of revenue) will continue to grow faster than the other 2 segments, which will help the company sustain its recent transformation. Strong SSG of 20%, minimal capex spends on new stores and efficient working capital management will ensure RoCE improvement. Factoring in the opportunity size and macro tailwinds, the company is expected to outperform over the next few years.