Sell Shankara Building Products; target of Rs 620: Kotak Securities

Kotak Securities' research report on Shankara Building Products

Shankara building products in its conference call has updated on the business strategy of achieving higher revenue growth in retail segment but at much lower margins which came as a negative surprise. It is transitioning into a low price retailer with focus on plumbing and sanitaryware as key growth drivers in the retail segment. Company expects healthy growth in the retail segment and expects debt to reduce from the current levels with working capital improvement. 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. Though we revise our revenue estimates upwards slightly, we revise our EBITDA estimates downwards by 18.7%/26.1% for FY19/20 and PAT estimates downwards by 38%/41% for FY19/20 respectively to reflect the change in the business strategy.

Outlook

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. We thus downgrade the stock to SELL from BUY earlier.