Shankara Building Products Limited (SHANKARA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Shankara Building Products Q1 FY '25 Earnings Conference Call, hosted by Arihant Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Miraj Shah from Arihant Capital. Thank you, and over to you, sir.

Hello. Good day, and good afternoon to everyone, and thank you for joining on the Shankara Building Products Q1 FY '25 Earnings Conference Call. Today from the management, we have Mr. Alex Varghese, the CFO; Mr. Dhananjay Mirlay Srinivas, Vice President; and Mr. C. Ravikumar, Executive Director. Without further ado, I'll hand over the call to Mr. Dhananjay for his opening remarks. Over to you, sir.

Thank you. A very good afternoon, and a very warm welcome to Shankara Building Products Limited earnings conference call for the quarter ended June 30, 2024. Joining me today are Mr. C. Ravikumar, our Executive Director; and Mr. Alex Varghese, our CFO. Before we begin, I would like to remind everyone that this call may contain forward-looking statements, which are predictions, projections or other estimates about future events. These statements are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially. Our presentation for this call has been uploaded to the exchange. I hope you have all had an opportunity to review it. Despite the election next quarter, witnessing slow construction activity, Shankara Building Products has demonstrated resilience. We achieved a steel volume growth of 20% year-on-year and a robust non-steel revenue growth of 35% year-on-year. With overall revenues growing by 14% year-on-year, reaching INR 1,291 crores for this quarter. This was despite the steel prices softening during the last quarter. Speaking on some of our performance drivers this quarter, we've seen good performance across our different segments. Our steel vertical continued to generate steady growth in revenues and volumes, steel volumes reaching 177-kilo tonnes this quarter, a 20% year-on-year increase, though steel prices softening led to the segment's revenue growth by 12% year-on-year to INR 1,154 crores. Historically, our key strength has been in steel tubes and pipes, where we command our market -- command a sizable market share. We have consistently prioritized value-added steel segments, such as flat, long products, roofing and TMT, which is yielding results. This strategic focus has led a remarkable 44% year-on-year growth in our steel flat products, driven by the strength of our existing brands and our omnichannel reach. Our non-steel vertical showed a remarkable growth of 35% year-on-year, driven by all subsegments: plumbing, fittings, sanitaryware, tiles, electricals, paint, hardware and accessories. The strength of our existing brands and expansion of our partnerships with marquee domestic and international brands continue to yield results. Notably, tiles and electricals have grown by over 60%. Our brand, Fotia, has generated INR 31 crores in revenue this quarter. We are also excited to announce that this quarter, we have also launched quartz sinks under the Fotia brand. And we continue to explore more opportunities as we move ahead. With improving economies in the nonsteel segment, our EBITDA margin for the segment has improved to 6.5%. As we have highlighted in the past, our gross margin in this business stands at around 10% to 12%, and thus, we are confident that the EBITDA margins in this segment will further improve as the operating leverage kicks in. Our retail model continues to remain resilient, leveraging our brand strength and a wide product portfolio to create customer pull at stores. The average ticket size at our stores has increased by 23% year-on-year to approximately INR 5,800 in Q1 FY 2025, primarily led by product portfolio expansion, which helps us gain an increased pocket share of our customers. Our retail footfall was, however, down this quarter in the backdrop of slow construction activity amid election and monsoons. Nevertheless, our inquiry pipeline is encouraging, and we expect a positive trajectory in the coming quarters. Leveraging mix change and increased value-added offerings, our segment EBITDA margin has expanded to 5.7% this quarter. We continue to grow aggressively in the Western and Central regions, particularly in Maharashtra and Madhya Pradesh. Both these regions witnessed a 55 -- 52% year-on-year growth in revenues this quarter and contributed to 13% and 3% of our total revenues, respectively. With a robust growth in this region, our non-retail vertical has ensured a much faster growth over the past few quarters. This growth in non-retail business in West and Central forms a stepping stone for expansion of our retail business as we establish and expand our presence in these regions. To boost our growth in non-steel, we have opened 3 new fulfillment centers exclusively for non-steel in Karnataka and 1 hybrid store in Kerala. We have also identified 10 new strategic locations to set up new fulfillment centers over the next 6 to 9 months. Our Fotia display center in Morbi is all set to open by September 2024 to enhance the visibility of our brand and help us expand our presence, span India in the coming years. We continue to explore strategic opportunities in the e-commerce space and are working on our online marketplace to further bolster our omnichannel approach. Our steadfast commitment to growing value-added segments for profitable growth, in line with our vision, led to a 20% year-on-year increase in our EBITDA, with a 15 basis point improvement in our EBITDA margins, to 3.2%. However, due to an increase in our acceptances during this quarter, our finance cost has increased significantly, resulting in a profit after tax at INR 16 crores. This was primarily due to the increased receivables this quarter, given weak cash flow in the sector as well as rapid expansion into West and Central regions. However, we hope the situation will normalize in the coming quarters. As you are aware, to simplify our business structure, we are demerging our building materials marketplace business, which has consistently delivered significant value. The marketplace business generated INR 1,178 crores in revenue. And the manufacturing business generated INR 335 crores in revenue this quarter. We are in the process of optimizing operational efficiency and competitiveness in the manufacturing business. The demerger scheme has received approval from SEBI, and we have begun filing with [ MCIT ]. We expect the scheme to be implemented by Q4 FY 2025. We are well positioned to capitalize on the opportunities in the construction and real estate sector as market solution improves. With a solid foundation and ongoing strategic initiatives, our aim is to continue our growth momentum, while focusing on improving margins. With this, I would now hand over the call to the moderator for the Q&A session. Thank you.

[Operator Instructions] We have our first question from the line of Keshav Garg from Counter Cyclical BMS.

Sir, I'm trying to understand, our interest costs have shortened dramatically from INR 9 crores to INR 16 crores quarter-on-quarter and from INR 7 crores to more than double to INR 16 crores year-on-year, whereas the working capital days, according to your presentation, remains same, like, 30 degree -- sorry, 30 days. So what does that -- I mean, how is this sustainable?

So when you're seeing the payables, there are -- some acceptance are there. There, we are bearing the interest cost. So that has led into higher bit of interest in this quarter comparing it with Q1 and Q4 of FY '24.

And there's also been this huge softness of demand due to the election, coupled with all the seasonal issues and monsoon. So it's been -- we see it in our receivables across the board.

So then how come your receivable days are only 30? Sir, receivables at its journey, then your receivables are [ in the thousands ]?

No, the payable -- our payable, we conclude the acceptance also. [indiscernible]

So basically, on your payables, you have ended up paying interest. Is that correct?

Yes. Yes.

Okay. So now moving forward, if we -- now in the interest cost, will it remain at the same level, around INR 16 crores? Or again, it is expected to go back to around INR 7 crores, INR 8 crores, INR 9 crores levels?

For now, one more quarter, we may continue the same, too, and...

We are looking to normalize the situation and get back to how it was, but we are looking at -- as the monsoons are still intensified in the South and Western regions and the way the markets have been going on in the last 1.5 months, we think that this will continue for a few quarters and then we should normalize.

No. But is it not better to just compromise on the sales growth rather than face the challenge of bad debt also and then pay interest on the payables also. I mean, that kind of unprofitable growth is of no consequence actually.

No. Because there are no bad debts, actually, in our result. But then you can see we are expanding more into Western and Central India, so we're…

And see, this is more of a temporary blip. See, till the receivables can kind of normalize, and with the growth still happening in Western and Central India and most of it being steel growth and more of a non-retail growth, there has been more with our consumables and other big industries where payments are fair. But there has been a delay, thanks to the macroeconomic conditions going on.

[Operator Instructions] The next question is from the line of Rahul Jain Dhruv from Pegasus Growth.

I was trying to match up the numbers that you have mentioned in the presentation. You have non-retail and retail broken up separately, right? And you have EBITDA for both of them. If you add up the EBITDA, it basically adds up to around INR 48 crores. But if you look at the reported EBITDA, it's around 40.7. I just want to know what's the difference between the 2.

So that is unallocated expense that had not been captured in the segment EBITDA. When you're seeing the reported number, that number -- their expense also will be different and final EBITDA will come to INR 41 crores.

Sorry, I didn't get the last part. Say it again?

Unallocated expense has not been captured in the segment EBITDA for retail and non-retail. So reported number and their expense has been continued on a [ concerning ] level. Net EBITDA will be around INR 41 crores.

Okay. Okay. Second thing, so you've given the EBITDA for, I think, the non-steel business. So if I take the same number of INR 48 crores to work back the EBITDA for steel business, is it the right number to take?

Yes. Can you the repeat the question again if you don't mind?

So you have given a breakup of steel and nonsteel also, right? Where you have given the EBITDA for the non-steel business at around, whatever, 6.5% on INR 137 crores, which is 9% -- INR 9 crores. So if I had to work back the steel EBITDA based on that, then I have to take the same INR 48 crore number?

On retail, when you're seeing the steel EBITDA will be approximately around 4 percentage. And while you are thinking about steel, steel will be approximately around -- INR 33 crores will be steel EBITDA.

Steel EBITDA is INR 33 crores. Okay. All right. Just one more thing, and this is on the payables that you mentioned that you are paying interest on. And you clearly said a couple of quarters, while actually in the initial 3 months you mentioned, that we are expecting it to normalize in the coming quarters. I'm just trying to understand the difference between the 2. Will this be a one-off? Or will this continue for another few quarters?

So that will continue for another 1 or 2 quarters. Yes, it will continue.

Right. And is this change in policy that was taken recently? Or is this something which you have been doing in the past?

The change has been taken recently because the rise of the quarter is there so we started then in the interest cost. So that -- the change has been taken recently.

Okay. Can I just ask one last question? I'm sorry about this. What would be your total debt at the end of the quarter?

Around INR 620 crores including acceptance.

Sorry, how much?

INR 620 crores including acceptance.

INR 620 crores?

Yes.

On top -- okay. So if you remove the acceptance, as I'm saying, remove the payables, what will be the actual debt on the books?

It's around INR 100 crores.

We have our next question from the line of Vinod Chandra, a shareholder.

I just have one question. One question is already covered. So one question is about, like, in the one of the previous calls, we were comparing as [ S V Mark ], one of your competitors. And you just said that it is not exactly a competitor, but kind of a super distributor. So -- and we are a retail distributor. So I just want to understand whether is that the case, because it means like we are buying from them or we are directly buying from the -- our manufacturer?

So majority of our products are steel [ cube ] and I think that come directly from the manufacturer. We do buy certain products from [ S V Mark ], where [ there's ] a stock gap where we do require certain materials immediately in certain territories, but it's more of a stock gap and more of a small purchase. And as we continue to say, they are super distributor super stockist. They do not go down to the B2C or even the small B2Bs.

Okay. And do we also do kind of a super distributor business? Or we are only doing retail business?

We do, do distribution business, but we are more localized in the sense that we do statewide, citywide. And so we do have multiple hub-and-spoke models and multiple warehouses across the South, West and East. So you could say we do, definitely, distribution. Some products in the super, but somewhere in the medium, you could say. I mean, midsized.

We have our next question from the line of [ Manish Beria ], an Individual Investor.

Yes. So I wanted to ask this question. So how much this table had increased in this quarter from the 31st March level? And the second is what is the effective cost of interest on this acceptance, I mean, so it's 5%? Or 10%? And then the third one, so when you have these receivables, so maybe there is a pressure like you have more payables, but you have to receive more also from the customer. So that's the reason, I mean your payable is increasing, I mean, because you're not collecting so much from the customers, no? So in that sense, you have to pay to the payables the interest costs. So are you also, in this business model, has a right to collect something from the receivables? I mean, do they stay beyond a certain period or something like that?

So I'll just answer your last part, while we get the other numbers for you. But what has happened is, as you know, this is a very competitive industry market. You cannot really charge our customers for the receivable interest that is paid because of delayed payments. So we do have to bear those costs of interest. So -- because of the way the market is set up and the way the industry is, that would not be possible. So hence, this quarter, we have been faced with the brunt of and billing the receivables. And after this, with the period that we do, especially in extreme situation, we do charge interest. But these are -- majority of our regular customers who have been, I would say, as a whole, market condition of cash flow has been crunched in the last 3, 4 months. This has all been a cause of that. But we do charge interest to customers after a stipulated period.

And the other 2?

Yes, regarding the payable, so in the payable acceptance, in the month of March, it was around INR 375 crores. It has increased to INR 500 crores. There is an increase of around INR 125 crores. So we are bearing the interest cost.

And what is the cost of interest generally you pay on this INR 500 crores I mean?

Approximately around 9.2% to 9.5%.

We have our next question from the line of Sreemant Dudhoria from Sree Capital.

Firstly, our number. What has been your CFO in this quarter, cash flow from operations, post your working capital?

For quarter 1, normally, the cash flow, we won't give the detail in our financial presentation. So 6 months in, we'll disclose the number. We'll get back to you on that.

No. I wanted to set this number in context of the stretched payables that you're having. Is the higher EBITDA growth is really meaningful? Is it clearly leading to cash-in-hand? That's the context for this question.

Given the working capital increase, it will be lower. And as a -- it's not really -- what is this. It will normalize. I think, the receivables. Once the receivables are realized, we will normalize within the next few quarters. So then this will go back to how they were before.

Okay. And what is the interest cost that you now expect for the full year, given that it may take some quarters to normalize the higher payable cycle that we are in now?

So it will convert to 99.25% in the rate. The value is -- I'm not able to quantify now. So we are working hard to release it. So we won't be able to say anything regarding that right now. We are confident on the order.

So if I have to ask this another way, in the past, we have been riding at about 20%, 25% EPS growth on an annualized basis. Now in this context of a higher interest expense, do you see -- do you maintain that guidance for the current year?

Our growth will continue. I think we're still looking at 20%, 25% EBITDA growth, so -- and EPS as well. So EPS may be somewhat go up or down. EBITDA growth will definitely be at 20%, 25%.

Yes, I think this is what I was looking for because -- what is the number that you can make because you are seeing 20% 25% EBITDA?

So we're working on the similar number as last year.

We'll come back to the exact number. But for across the top line and EBITDA growth, we're still looking at 20%, 25%.

Sir, a few questions on the Fotia Ceramica brand. Now that you're expanding this brand beyond the single product, are you looking to add more categories within this brand now?

Not immediately. I think we have experimented with core sales. Got some good success in Karnataka market and Kerala market. We are looking at, here, maybe a few value-added products to that, maybe accessories, maybe add-ons. And we're also looking at bringing more luxury tiles as well. So I think maybe in this 1, 2 -- in this coming quarter, we may have a few more related accessory line products coming in. But I think for this year, we are kind of grow the 2 categories added with accessories and things. And we will announce it when we plan on adding a few more categories.

Okay. So as you expand the category, and since this is your own brand, you can also explain your marketing strategy for this label, because unlike the other brands, which you sell in segments, which are well renowned brands, can you talk about that?

So one thing is I think we do have a good channel network quality, thanks to the legacy we have and the brand name of Shankara built for itself. So I think we are leveraging that currently. We are also leveraging the success we've seen in brand building for Fotia Ceramica in terms of tiles in Kerala and other Southern regions. So far, as we're getting mileage through that. We will definitely be looking at advertisement and more markets actually coming forward. I think the focus currently now is how to kind of get back our receivables, payables and get the kind of -- everything else back on track, and then we'll get back to marketing. Because as you know, the overall market conditions is -- last 4, 5 months have been difficult. So we're still focusing on the top-line growth, making sure EBITDA remains healthy and grows and continue focusing on bringing more products in Fotia.

Okay. And last one, do you look to grow inorganically in the Building Products segment or through franchisee stores in the near term?

We're always open to any such opportunities. Immediately, nothing is in the pipeline, but there could be some opportunities coming up in the future. We're always open to the fact to grow inorganically as well.

[Operator Instructions] The next question is from the line of Rishikesh from Robo Capital.

Am I audible?

Yes.

Sir, firstly, regarding store growth, how many stores are you looking to grow going ahead?

So we've already -- this quarter, we've opened 4 stores, 1 hybrid and 3 new. And in the coming 6 months, we're looking around 10 fulfillment centers to come up.

Okay. So -- and currently, we have around 19?

22.

Okay. So if you are growing 10 stores per year, that is the run rate that you're looking for?

It's not a store, it's a little fulfillment center. So this would be across the board. So currently, if you look at our fulfillment centers, we're around 125, 126. This should grow to around 135 to 136 by the end of this year.

Okay, okay. And just one more question. If we see before FY '23, for many years, our revenue used to be flattish and FY '23 onwards, they have started growing. So just wanted to understand what exactly has changed in the business and the revenue growth trajectory.

Two things. I think one is right after the COVID market and everything else. There was a big pent-up demand that came in, so that definitely helped us grow. And at that time, we were on balance sheet strengthening and we're cleaning up and consolidating a lot during the COVID time and the year before COVID. The last 2, 3 years, we've been on the growth trajectory. We are focusing on top line as well as trying to maintain our bottom line. And we have grown more in our -- we've grown more in, you can say, brownfield growth and other growth as well. So we've been seeing a lot more catalysts and product portfolio and expansion for growth. So across the board, including with now an aggressive growing in Western and Central regions, all of this has brought in a big boost to our growth percentage.

Okay. So it's I'm asking because basically, even when we have, let's say, around INR 2,000, INR 2,300 kind of range of revenues, that time, we had around same number or approx range of stores that we have now. And with some addition in stores, in solutions and centers and now we are doing almost double, and we are talking about growing our revenues 20% to 25%. So just wanted to get a sense that, firstly, why we had a stagnant revenue growth before COVID. And now what has changed that we will be doing 20% to 25%?

So 2, 3 things, I think, earlier, we had just started into the non-steel verticals and other value-added steel verticals. We are still kind of running the business and learning the different complexities of steel verticals. There has been -- COVID has helped us kind of consolidate and get back to planning and strategy. And we feel that some of our fulfillment centers efficiency could be increased, and that's how we did see a big growth in those areas. We focused a lot more in the Central and Western areas and you see 50% growth there. We also still feel that the existing fulfillment centers, we can definitely, at least, grow by [ 70%, 75% ] more, with the existing centers we have. And now to continue this aggressive growth, we have already brought in 4 fulfillment centers this last quarter, and we're looking to bring in 10 new centers in the coming year. So I think a mix of stores, fulfillment centers, planning and opportunity.