The primary market has become active after a long period of time post spectacular listing of retailer Avenue Supermart. Two IPOs will be shortly hitting the market: CL Educate and Shankara Building Products (SBP). We have already commented on CL Educate where the IPO seems good for listing gains but can face competitive headwinds going forward.
SBP however is in a different space altogether. There are few organized players which cater to the building products segment as SBP does. Founded in 1995, the company has a strong management team, most of the members from premier business schools in the country.
SBP is a unique company in the sense that its retail stores offer home improvement and building products. The company offers structural steel, cement, thermo mechanical treatment bars, hollow blocks, pipes and tubes, roofing solutions, welding accessories, primers, solar heaters, plumbing products, tiles, sanitary ware, water tanks, plywood, kitchen sinks, and lighting and other allied products.
The company has backward integrated itself and manufactures, assembles, processes steel pipes and tubes, colour coated roofing sheets and solar panels. Till December 31, 2016 the company had 11 processing facilities with an installed capacity of 323,200 MTPA running at a capacity utilization of 93.81 percent (annualized). In January 2017 SBP commissioned production of a stainless steel pipes and tubes processing facility in Jigani, Bengaluru which has an installed capacity of 1,200 MTPA.
The company has 100 Shankara BuildPro stores in urban and semi-urban markets of Andhra Pradesh, Goa, Gujarat, Karnataka, Kerala, Maharashtra, Odisha, Tamil Nadu, Telangana, and Puducherry the company also sells its products through alternate channels. Its retail stores are based in cities which are witnessing urbanization. The company serves home owners, architects and contractors, small enterprises and housing, general engineering, automotive, renewable energy, agriculture, and construction and infrastructure sectors.
While SBP has a first mover advantage in the home improvement space for an investor what matters is its financials. Just like D Mart, SBP is largely a retailer but its operating margins are much lower at around 5.8 percent. But what is surprising is the low level of inventories and smart working capital management in a segment where product shelf life are supposed to be longer. Further, SBP follows an asset light model of growth with Rs 240 crore of assets supporting a turnover of over Rs 2,000 crore.
What plays against the company is the slow pace of growth. In FY13 the company had sales of Rs 1,766.6 crore while in FY16 it touched Rs 2,035.9 crore a compounded average growth rate of only 3.61 percent. The profit and loss account of the company is not doing justice to its strong balance sheet.
While one can blame the sluggish pace of real estate sector, it needs to be remembered that SBP is in the home improvement space, where the products are also used for refurbishment. Further the issue is largely an offer for sale where an investor is given an exit and only a small portion will be invested in the company.
As for valuations, the issue price of Rs 460 (upper band) discounts its earning per share of Rs 25.33 for FY17 (annualized) by 18.16 times. It may not look too expensive given that the market is willing to pay 50 times earnings for Avenue Supermarts. One can look at the issue purely for listing gains.
However, a company with a strong balance sheet is one to be watched out for when valuations become compelling or the company’s growth engines start firing.