Shankara Build Pro – Building Materials Organised Retail

Tracking the company for last few quarters
The company changed its business strategy to deliver topline growth in fy19 at the cost of margin which slaughtered the stock because margins took dip along with earnings. But now the margins are stable and topline bottomline all are growing very fast. So what the mgmt did in FY19 now we are seeing the results.
Sharing concall notes for the Q4FY23

Q4FY23

1. Let me straightaway get into the industry dynamics and business scenario in the Q4 of the financial year ending FY ’23. In FY 2023, building materials sector has experienced a consistent growth and business expansion. The thrust in infrastructure development, coupled with the uptake in real estate demand helped the industry to bounce back strongly to the pre-COVID levels. Demand for new building and redevelopment projects have risen in both the residential and the commercial sectors. People’s preferences have shifted in the last 2 years towards larger homes and changes in architecture and interior design.
2. The building material industry is predicted to be strong in FY ’24 due to all these factors and the government’s sustained focus on expanding infrastructure, low-cost housing and rural housing
3. On the back of a recovery in the entire home improvement industry our top line increased by 67% in FY ’23. Consistent efforts have been taken over the last few years to strengthen our balance sheet, and that has also yielded good results. We have received tremendous response from the market and customers, clearly indicating that customers are looking for a one-stop solution for all building materials. We aim to make home building easier for our customers
4. SSSG at Q4 end is 53%. As stated, we have achieved a strong SSSG for the quarter and for the year
5. Our working capital cycle for Q4 came below 1 month and the net operating cash flow for the year was at INR92 crores.
6. Future guidance: We continue to aspire to grow our top line by 25% to 30% in FY ’24. We are also working hard to improve our profitability. will try to improve ebitda margin by 50 to 100 bps.
7. Revenue segments and their margins: In FY ’23, we did a total turnover of INR361 crores of our nonsteel products, as compared to INR200 crores in FY ’22, registering a growth of around 80%. We are working towards achieving 20% to 25% of our total volumes in this vertical in the next 4 to 5 years.
   So the steel products will be the gross margin of around 3.5% to 4%, wherein non-steel, it will be around 10% on average
8. ROCE: In FY ’23, our return ratios improved. For FY ’23, ROCE stood at 15.03%, a substantial improvement over the 10.4% achievement in the previous year. We are confident of improving our return ratio in the coming year.
   Our current ROCE is around 15% and our working capital is already reduced to, let’s say, 30 days, 31 days. So what other measures you would require for us so far the ROCE to move to let’s say, 30% or so? : Better margin. So we are focusing on better margin this financial year. And within the same number of days of working capital, really it will help us to improve our ROCE.
   Yes. We are certainly looking at the margin expansion. As my colleague here said, I think the way to improve the ROCE now currently, I mean, we have at least in mind, the target figure of 20%. We have moved from 10% to 15%. So we have a target figure of 20 this year. And we believe that the – on the back of an expansion of margin is where the ROCE should start improving.
   On the ROCE, you’re guiding for about 25%, 30% odd growth in your top line and about 1%, 1.5% improvement in your margins. And given where your working capital is right now, and I assume it’s going to be the same for the next year. So don’t we see, sir, your number should be significantly better than 20% in terms of ROCE? No, I think we will still be cautious in the guidance.
9. Hopeful of keeping wc days to 30.
10. New Stores: We believe that we can definitely add even in the current year, I’m talking about FY ’24. So I think we can manage with our existing square footage probably with a marginal increase, we are planning about 2 to 3 stores addition in this coming year. So with the margin increase, we can manage with the same square footage that we have
11. Finance cost to remain around similar levels of 24-30 cr for this year.
12. Right now, the focus is very much South India. We also believe, as I’ve mentioned earlier, that we do have scope to further expand in South India. So as of now, for the next couple of years, we are not really looking at moving beyond our – let’s say, comfort zone
13. Retail vs non retail: We are currently at around – when we look at the breakup of our retail and non-retail. I think in the last year, we were at broadly around 50-50 broadly, between a retail and the non-retail part. So I think, we will probably grow another 4% to 5%. So the retail this year should be targeted close to around 55% of our sales
14. 70% volume growth in FY23.
15. To receive 70 cr in November from warrents issued. With that company will become net debt free.
16. And last question, in terms of your free cash flow, right? So what do you intend – can we maintain the similar kind of cash flows for the next year? Or how are you thinking about it? Sukumar Srinivas: Yes, we can deal with in the improvement in the cash flow. We are expecting better net cash from the operating activities
17. On competition: And on the online business, how do you see the competition playing out, right now? Because what I understand is it may not be directly competing, but there are established players like off business, which is there, for example, Grasim is also planning to kind of go aggressive on an online platform. The details are not yet out, but they have a similar B2B online platform. How do you see the competition in the entire online space? Sukumar Srinivas: I think most of the players there are many, many, and many have come in. I mean many startups have come in, many – of course, some of the established players, like you mentioned, are either partly there coming in. But what I find significant traction has not really happened. And if one would just sort of broadly compare some of the existing e-commerce sites in building materials to us, I can easily say that probably in the variety and the range of products, we may be amongst the best. And what we generally find as of now is the online is still look more like a catalogue reference. People do a lot of reference on the online and then come offline to the stores. So most of these people are also talking of what can they do on the offline space. So I think, ultimately, in the building materials space, an online plus an off-line, what we call as an omnichannel is what is really probably at this stage, looking like a win-win combo. So because even if you look at the international markets and even the Western countries, where – there has not been significant growth in the building materials sector linked with the online platforms. So I think it will take a little time. So right now, I mean, it’s too early days to comment on the competition.

Conclusion: The company has shown massive earnings growth in last few quarters however the stock price went nowhere. In the upcoming Quarters also the earnings growth will be huge. In Q2FY23 concall notes the mgmt told of 25-30% growth and delivered massive 67% growth so mgmt is like under promise and over deliver type. This is a candidate for sureshot upmove. Won’t talk much about valuation a pe ratio of 26 with earnings growth twice that of PE stock will always look cheap. But the main things is growth in earnings is what will drive the share price. There are many such examples (adf foods, repro, ugro capital, idfc first bank, mas finance) where stock price goes nowhere for few quarters whereas earnings kept on continue to explode and then suddenly the stock gives 50-60% move in few weeks. Hoping for the same here.This is my thesis.
Disclosure: Invested.