Hold Shankara Building Products; target of Rs 650: ICICI Direct

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ICICI Direct's research report on Shankara Building Products

The management of Shankara Building Products Ltd (SBPL) now believes that the company’s strong future prospects lies in consolidating its position in the industry rather than aggressive store expansions. It has hence cut its store expansion target to 8-10 stores in FY19 (v/s 15-20 stores guided earlier) and aims for a payback period of 3 years. Also, SBPL shall be putting its core focus on select product categories like plumbing & sanitaryware products to achieve growth ahead. It is also bringing strict financial discipline measures like reducing debtor days, inventories and creditors days to improve its balance sheet strength. While all these measures will make the company structurally strong in the long run, it could slow down SBPL’s growth in the interim. Henceforth, we anticipate the company’s overall revenue growth to slow down to 12.0% CAGR to Rs 3198.9 crore in FY18-20E.

Outlook

We expect SBPL’s topline growth at 12.0% CAGR to Rs 3198.9 in FY18-20E. However, with the management commentary on significant decline in EBITDA margins expected ahead, we lower our EBITDA margin assumption resulting in further sharp earnings downgrades by 44.1%. We now expect its earnings to de-grow by 21.3% CAGR to Rs 45.7 crore in FY18-20E. Hence, we maintain our HOLD recommendation on the stock with an SOTP based target price of Rs 650/share. We value its retail business at Rs 639/share (12x FY20E EV/EBIT). The channel & enterprise business has been valued at Rs 127.9 per share (at 5x FY20E EV/EBIT).

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