Shankara Building Products hosted a conference call on May 21, 2024. In the conference call the company was represented by Mr Alex Varghese –CFO and Mr Dhananjay Mirlay-Vice

Key takeaways of the call

Revenues:

FY 2024 has presented several challenges for the entire building materials and construction industry along with high interest rate and persistent inflation. The year further unfolded with adverse climate conditions with flooding in few pockets and subsequently softened construction activities and discretionary spending amid on-going elections. Despite this FY2024 was a successful year for the company. The company achieved its highest revenue and profits in FY2024.

Revenue for the financial year FY2024 stood at Rs 4828 crore a growth of 20% YoY.

The company’s profit outpaced revenue growth due to enhanced contribution from value added steel and non steel offerings.

Margins:

EBITDA for the financial year FY2024 increased by 25% YoY toRs 156 crore and net profit grew by 29% YoY to Rs 81 crore.

EBITDA margin stood at 3.2% an increase of 12 bps when compared to FY2023. In addition to strong brand in the south and robust operating model growth has been possible due to strategic initiatives under taken by the company over the last few years which has made the company’s business model more resilient and offset industry headwinds successfully.

Strategic initiatives: A) Expansion of steel offerings and added diverse range of value added products. Traditionally the company’s revenues were reliant on steel tubes and pipes . The company has taken a conscious decision to add more products in its steel portfolio which includes TMT’s, roofs & sheets,flats. The company has also forged few good partnerships over the few years.

Steel volumes during FY2024 stood at 6.5 lac tons an increase of 27% YoY . A substantial portion of this volume growth was from value added steel products which witnessed a growth of 43% YoY compared to pipe and tube volume growth of 20%. Omni channel presence helped the company to increase its market share in this business. This has helped the company to increase the EBITDA margin in non retail segment from 1.1% in FY2023 to 1.5% in FY2024.

B) Continued focus on growing the non steel business which grew by CAGR of 50% in the last 3 years and by 30% YoY in FY2024. The company has witnessed a healthy growth across all its product verticals including plumbing, fitting, paints, sanitary ware and electrical. Along with strong presence, the company is adding marquee suppliers to its brand portfolio both domestic and international. The company has added 2 exclusive non steel stores and converted 3 stores in Karnataka into hybrid stores comprising of both steel and non steel products in April 2024.

Gross margin in non-steel has been in the range of 10-12% and as the company has scaled up its presence its EBITDA margin has increased to 6% in FY2024.

C: The company’s private label Fotia Ceramica has demonstrated healthy performance with revenue reaching Rs. 116 crore (+50% YoY) in its second year of operations. The company has achieved sizeable growth in Tamil Nadu and Kerala markets and is now focusing on Telengana, Karnataka and Maharashtra markets.

The company plan to inaugurate tile display centre in Morbi in Jun-24, aimed at expanding Fotia’s presence pan India and explore other opportunities in the coming years.

D) The company’s efforts to diversify beyond South India has yielded fruitful results, with Western and Central India together contributing 14% to the company’s revenue during the fiscal year FY2024. Western and Central India has grown by 46% and 39% respectively in FY2024.

Working capital, debt and cash balance: Working capital for the company stood at 30 days with net debt of Rs 49 crore as on March 31,2024 as against Rs 71 crore as on March 31,2023.

Of the total debt of Rs 83 crore as on Mar 31,2024, Rs 75 crore will go to market place and Rs 8 crore to manufacturing.

Cash balance stood at Rs 34 crore as on Mar 31,2024 as against Rs 12 crore as on March 31,2023.

Of the total cash Rs 29 crore will go to market place and rs 5 crore will go to manufacturing post de-merger.

De-merger: The company has taken steps to de-merge its business into building materials market place and manufacturing respectively. The company is awaiting SEBI approval on de-merger and expects the de-merger process to be completed by Q4FY2025.

Indicative revenue of Market place stood at Rs 3836 crore while manufacturing revenue stood at Rs 993 crore in FY2024.

Manufacturing vertical: The company has 3 subsidiaries under manufacturing vertical. Growth in manufacturing vertical will be driven by adding more value added products. The company is currently operating at around 50% capacity utilization and plans to increase the same and also sales will be direct to the market.

The company EBITDA in manufacturing division is around Rs 1500/ ton as such has sufficient room for expansion.

There will be no CAPEX in manufacturing division post de-merger.

Hybrid stores: The company spends around Rs 2-3 crore capex for setting up hybrid stores and plans to open 2-3 hybrid stores annually.

Outlook: The company is focused on sustained and profitable growth with asset light store expansion and better working capital management.

The company’s believes that the construction industry will be the focus point post elections. The company is well positioned to capitalize on the opportunities in the construction industry. The company will continue to work towards strategic opportunities in the e-commerce space to boaster the company’s omni channel approach. The growth will be achieved with the focus on improving margins.

The company expects revenue from steel business to grow at a CAGR of 20-30% in the next few years and non steel to grow at a CAGR of 30-35%.

Growth in revenue will driven by increase in mix of products and addition of value added products, increase in wallet share of the customers and to grow at a rapid pace and consolidate its position in Western and Central India along with opening 2-3 stores in strategic locations.

Margin: The company expects to achieve margin of 3.5-3.75% for market place business and 3.3%-3.5% at consolidated level for FY2025.

Retail margin stood at 6% in FY2024 and with increase in contribution from non-steel products and value added products the company expects the margin to be sustainable and increase it to 6.5%.

Dividend: The board has recommended dividend of Rs 3 per equity share of face value Rs 10 each.

Management commentary:

Commenting on the performance, Mr. Sukumar Srinivas, Managing Director, Shankara Building Products Ltd said: “FY2024 marks a successful year for Shankara, showcasing the resilience of our business model. Amidst one of the most challenging periods for the building materials sector, I’m delighted to announce that we have achieved our highest-ever annual revenue and profits. Notably, our steel volume experienced a 27% growth, while the non-steel vertical saw a 30% growth, driven by market share gains across all sub- segments. Our commitment to profitable growth has resulted in even stronger profit growth compared to our revenue, with an enhanced mix towards value-added steel and non-steel offerings. Fotia, in particular, has demonstrated exceptional progress with a 50% growth. Our efforts to diversify beyond South India have yielded fruitful results, with Western India contributing 11% to our revenue during the fiscal year. In line with our strategic objectives, we are in the process of demerging our building materials marketplace, a move aimed at streamlining our business structure and facilitate a focused capital allocation strategy under our new generation management. With a resilient foundation and strategic initiatives in place, we are poised for sustained growth in the coming years.