Shankara Building Products Expects More Pain

Shankara Building Products Ltd., which has lost about 70 percent of its market value in the last one year due to expensive valuation and weak earnings growth, expects more stress as it focuses on competition and improving its balance sheet.

The home improvement products maker plans to offer lowest prices to its customers to become the “best priced store” and increase “cash sales” over credit, Sukumar Srinivas, managing director of Shankara Building, said in a conference call on Nov. 30. That will weigh on its margin at least in the ongoing financial year, he said. “But it will lead to a healthy balance sheet. This strategy will ensure lower receivables, inventory and bank borrowings by March 2019.”

Shankara Building expects its earnings before interest, tax, depreciation and amortisation margin for the financial year 2019 to be in the range of 4.5-5 percent against 6.9 percent it earned in the previous year. According to BloombergQuint's estimates, that could lower the company's earnings per share by 38 percent in financial year 2019.

Shares of the company tumbled as much as 70 percent from its all-time high in December last year. The stock had jumped nearly five times in just nine months post its listing in April 2017, making the valuation expensive. Also, higher raw material prices, heavy rains in south India, which led to weak earnings in the first half of financial year 2019, and a cut down in its expansion plan of the retail segment impacted the share price in the last one-year.

IDFC Securities, however, is not optimistic about its turnaround strategy. The brokerage downgraded Shankara Building to ‘Underperform' from ‘Neutral' and lowered the target price nearly by half to Rs 525 citing high competition, weak potential benefit of change in strategy and doubts about execution.

ICICI Securities, too, cut the rating to ‘Hold' from ‘Buy' and lowered the target price to Rs 675 citing downward revision in retail margin guidance. The brokerage, however, remains positive on the new strategy of the company and expects a strong retail segment growth, but at least after three to four quarters.

Of the nine analysts who track the stock, four have a ‘Buy' rating and an average target price of Rs 1,226, implying an upside potential of 77 percent, according to Bloomberg.

Retail-Focus Hurts

Higher margin retail sales contributed nearly three-fourths to its operating profit in the last financial year, and the rest came from the channel and enterprise segment. The new management's initiative to provide the best price, loyalty discounts and cutting sales on credit could lower the margin by at least 300 basis points, according to the company.

But it's confident that it can improve its balance sheet. The South-based house-building products maker expects its receivable days—average number of days taken to collect payment after a sale—to reduce to 25 days. That, it said, could reduce the company's working capital cycle down to 44 days by March compared with 66 days, the highest in three years.

The shorter the working capital cycle, the faster the company is able to free up its cash stuck in working capital. Businesses try to shorten the working capital cycle to improve the short-term liquidity condition and increase efficiency.