Shankara Building Products Limited (SHANKARA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Shankara Building Limited (sic) [ Shankara Building Products Limited ] Q3 and 9 Months FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sayam Pokharna from TIL Advisors. Thank you, and over to you, sir.

Thank you, Rutuja. Good morning, everyone, and thank you for joining us in this Q3 and 9-month FY '25 Earnings Conference Call of Shankara Building Products Limited. The investor presentation has already been uploaded on the stock exchange and on the company website. If you wish to be added to our mailing list, please feel free to write to us. To take us through today's results, we have with us from the management team, Mr. Sukumar Srinivas, Managing Director; Mr. C. Ravikumar, Director; Mr. Dhananjay Mirlay Srinivas, Vice President; and Mr. Alex Varghese, Chief Financial Officer. We will begin with a brief overview of the quarter and the 9-month performance from Mr. Dhananjay, followed by a Q&A session. Please note that any forward-looking statements made during this call should be considered in conjunction with the risks and uncertainties that we face. With that, I would now like to hand over the call to Mr. Dhananjay. Over to you, sir.

Thank you, Sayam. Good morning, dear investors, welcome to the Q3 and 9 months FY '25 earnings call of Shankara Building Products Limited. We sincerely appreciate your presence today as we delve into our performance during this period. I would like to provide you with a comprehensive overview of our achievements, challenges and strategic initiatives. Let me begin by highlighting some key aspects of our performance for Q3 FY '25. We achieved a significant milestone in our steel segment, recording our highest ever quarterly sales volume of 2.15 lakh tonnes. This represents a 37% year-on-year growth, showcasing our strong market position and operational efficiency. For the 9-month FY '25 period, we maintained this robust momentum with a 27% volume growth, reaching a cumulative of 5.84 lakh tonnes year-to-date. This performance was driven by substantial growth in all our verticals in South India, complemented by encouraging traction in West and Central India. However, as many of you are aware, the steel industry has been navigating through a challenging period characterized by depressed realizations. We experienced a blended 6% decrease in realizations in Q2, followed by a further 3% reduction in Q3, resulting in an approximate total decline of approximately 10% in steel prices year-to-date. This reduction has impacted our performance in 2 significant ways. It has limited our top line growth, which could have been higher by another 8% to 10%, and it has compressed our margins due to inventory losses. The impact of these inventory losses was evident in our Q3 EBITDA margins, mirroring the effect we saw in Q2. So far in 9 months FY '25, we have observed an adverse impact of approximately INR 22 crores on account of inventory losses. Despite our best efforts to operate efficiently in the face of such headwinds, our EBITDA margins for the quarter stood at 2.84% lower compared to 3.42% in Q3 FY '24 and relatively flat compared to Q2 of FY '25. It is important to contextualize our performance within the broader macro environment, which is in particular challenging in this financial year due to multiple factors. We witnessed a slowdown in government spending across infrastructure-related projects following the initial election-related disturbance in Q1. This impacted both our steel and non-steel marketplace business. This was further compounded by factors such as heavy monsoon, tepid steel prices and a general weakness in retail demand. Despite these challenges, I want to assure you that our primary focus remains on scaling volumes. We are fully geared to meet our annual target of 0.8 million tonnes for FY '25 and are setting our sights for 1 million tonnes in FY '26. This ambition underscores our confidence in our operational capabilities and market positioning. On a more positive note, I'm pleased to report that our non-steel product segment is performing well. This quarter, we achieved record sales of INR 154 crores in this segment, reflecting a 19% year-on-year growth in Q3 and even higher 29% growth in 9 months FY '25. The non-steel product segment is now creating critical mass and has exceeded 10% of our top line for the first time in the 9 months of FY '25, marking a notable milestone in our diversification strategy. Within the non-steel segment, our key categories such as plumbing, fittings, sanitaryware and tiles are all performing strongly. Additionally, we are seeing encouraging growth in electricals and paints a bit a lower base. The response to our own brand, Fotia, has been particularly gratifying, and we have expanded its product range to include Quartz sinks and adhesives beyond the initial offering of tiles. We have started expanding the geographical footprint of Fotia after the initial launch in Kerala. We [Technical Difficulty] and we have a limited presence in Bangalore. To further enhance our value proposition as a one-stop solution for all building material needs, we have been consistently expanding our supplier partnerships. We are now working with the majority of leading brands across all product categories, ensuring that we can meet the diverse needs of our customers. Geographically, we continue to perform strongly, not only in our established stronghold of South India, but also in new markets in West and Central India. As you may recall, we adopted a non-retail first approach in these markets, new markets with plans to expand into retail subsequently. I'm pleased to report that the growth from these new markets has been impressive with Maharashtra emerging as a significant win for Shankara beyond our traditional Southern states. Moreover, we are seeing encouraging growth beyond our traditional tubes and pipes dominated product segments, particularly in newer categories such as flats. We have grown about 37% year-on-year in 9 months FY '25 in flats. Our strategy is clearly focused on being omnichannel with all efforts directed towards achieving higher volumetric growth. We aim to avoid constraints associated with any particular vertical and are pursuing our growth across all fronts. Our extensive market presence through 126 operational fulfillment centers, including our stores, ensures we are visible and accessible in our chosen markets, catering to all categories of customers regardless of size. This comprehensive approach is what sets Shankara apart today's competitive landscape where scale has become the new mantra for success in the building materials marketplace and distribution industry. On the financial management front, we have maintained tight control over working capital, allowing us to moderate financial costs while still delivering revenue growth. Over the last 2 quarters, the conscious effort of our team has led to reduction in financial costs. We continue to optimize our working capital management. Lastly, I want to update you on the progress of our demerger. We have scheduled a shareholder Extraordinary General Meeting, EGM, on February 12 to vote on the demerger proposal. Subject to the results of this meeting and subsequent regulatory processes, we anticipate completing the entire demerger process by H1 FY '26. In conclusion, while we navigate through challenges in the current market environment, our diversification strategy, focus on volume growth and expansion into new markets and product categories position us well for sustainable long-term growth. We remain committed to creating value for our shareholders and look forward to your continued support. Thank you for your attention, and we are now ready to open the floor for any questions you may have.

[Operator Instructions] The first question is from the line of Viraj Mehta from Enigma.

Sir, my first question is regarding the slowdown in the sales growth of the non-steel business. On such a low base, we have grown less than 20% this quarter and which is an aberration for us. So how should an investor think about that piece? Because in the past, you have always grown multifold of that in terms of percentage terms. So what is it? Like is the base catching up? How do you think about that, please?

I don't think it's a base that is catching up. What has happened, the overall environment has been pretty subdued. So I think if you see our competition in the industry or the fellow competitors in this industry are at single-digit kind of numbers in terms of growth. I think relative to that, our performance has been pretty good. We have achieved the 20% plus in this quarter 2. So I would still say that there is no such impact. I think it's a general environment issues that have led to a slight slowdown in quarter 3. I think we will catch up on that in the coming quarter.

Right. Right, sir. And my second question is a broader question on steel. So you talked that you have had INR 22 crores of inventory loss in this year because the steel prices obviously have fallen. But sir, if I look at the historicals of our company, whenever steel prices go up, we don't seem to get the inventory gains part. So how does the channel work? Like when there are inventory gains, you just don't get it? Like how does that piece work? Can you explain, please?

I won't say that it is really true. I mean, whenever there is a significant increase in the price of steel, there is a gain, too. So I won't just say that it's -- I mean, it's sort of a zero-sum game when it goes up and we face all the -- I mean, take only the downside. I think it sort of balances out in a period of time. So I think it plays out both ways.

So assuming, let's say, next year, we see INR 5,000 increase in steel prices on an average, would it be fair to say that at least some part of it, we will get as inventory gains next year, if I'm saying if again?

Yes. Whatever the inventory you have at the start of the period, whenever these gains happen, see, very small increase in prices do not have too much of an impact on the inventory gain because the market is still competitive. Though the price, whatever is sitting on inventory, yes, we will gain some of the gains, I mean, whatever happens in terms of the price increases.

Right. And sir, my last question is on debt reduction. Our interest cost still continues to remain reasonably high at almost INR 12 crores, INR 13 crores a quarter. What are our debt levels today? And how do you plan to decrease it over next year or so or with higher growth, at least if the debt remains constant? Like what is your thinking around that part, please?

Yes, level -- I mean, our first thought is that, if we can hold the debt constant with an increase in the volumes, that is what we are really striving very hard. Even if you see between Q2 and Q3, the overall interest levels have remained more or less static despite the volumes having gone up significantly. So we are very -- working very hard to hold this as our current -- the current strategy, let's say. The focus is on that.

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

Sir, I wanted to talk about the creditor discounting number. I mean, what -- I think we've been discussing that number for the last 2 quarters, there was a slight reduction last quarter. Can you talk about what is the figure as of this quarter? And what do you see going forward?

For creditor for acceptance it's around INR 400 crores. So comparing to the last quarter around INR 460 crores, we have reduced around INR 60 crores we have reduced in this quarter.

So that basically means that this has now become a permanent part of our funding structure. Should I assume that? Because that basically means that we will also be retaining a high interest cost going forward?

See, one of the key strategies we are working to reduce the interest cost is, we're trying to take out a lot of our -- we are looking at outside channel financing or a debt financing strategy, which we have started working from the last quarter itself. So once that really gains traction, we will be able to further reduce the interest cost from the debt side -- on our debt side.

Sir, I'm just trying to understand structurally last year -- compared to last year to this year, that number has kind of gone up.

Gone up. Yes, yes, yes. But the attempt is very sincerely on to try and reduce it despite the growth.

Okay. Sir, the reason why I'm saying this is that, I mean, any distribution model typically has systems in place to make sure that there are no inventory losses because you're purely buying and selling, right? I mean, you want to make sure that the inventory losses are practically nothing. But you've had INR 22 crores of loss over there. And I don't know whether it's actually at the operating level or after interest. But typically, there has to be a system because I'm trying to say, looking at it from the investor's perspective, you're building a beautiful distribution business on the building materials side. But a big part of your revenue, which is around whatever, 89%, 90% right now is steel. And that's where you -- every 2 or 3 years, you have this big thing. And I remember tracking the stock a long time back as well. I think there was 1 March -- 1 quarter in, I think, March '23, I think it was, where there was a huge loss. So I'm just saying that what we are having is a major variation in the steel business. And there has to be a way if you are a pure retailer or a distributor to make sure that there are no such major variations, right?

Yes. I mean, yes, partially, you are right. I mean, there is -- I mean, we are subject to the steel prices going up and down. So that is an area where we do not have much cover that we can take.

Yes. I mean, I'm probably trying to reiterate the same thing over here. I'm saying that if you basically -- the same way that you have taken a conscious decision of not going for increase in the network and you're still at 92%.

I think what really will help us as we diversify more and more into the non-steel, this whole -- I mean, this steel fluctuation, price fluctuations will get mitigated. To a certain extent, it will certainly -- today, the non-steel is about 10%, but our target in the next 5 years is to take it up to 20%, 25%. I think as the share increases, we will be able to mitigate some of the vicissitudes of the steel prices.

Okay. So should we expect these kind of variations to come through again in the future as well?

It's very difficult to predict on the steel pricing that what's really typically likely to happen. But I think broadly, we have seen some -- last quarter was certainly better compared to Q2. I'm hoping that this quarter will more or less stabilize, right? As of now, there is some talk of some increases from the JSW, et cetera, for this month. And it all depends on the global steel cycle, et cetera. However, I would say that it's more or less plateauing out now as far as the steel pricing goes on the bottom side.

So that means the creditor discounting will effectively go away from next year? That's what you expect?

Yes.

Okay. Just one last thing, sir, and this is on your quarterly presentation. I -- we've been tracking the historic numbers and the variables that you've been giving out. And they keep kind of changing over a period of time, not in terms of the numbers, but in terms of what you give out till some time back, you used to have the EBITDA number for steel, non-steel, retail, non-retail, all of that used to be given out. Now, suddenly for the last 2 quarters, we don't have those. I think we had a similar period between September '20 and March '22 also where a lot of those numbers were not given out. So I'm just trying to say if there could be some consistency in what you give so that people can track it properly.

Sure. Your point is well noted.

So would you be giving out the steel and non-steel margins for the last 2 quarters?

I mean, we will work it out with the -- I mean, with our IR, and we'll definitely do that from the future.

The next question is from the line of Love Gupta from Counter Cyclical Investments.

So last quarter, you mentioned that you would be approaching about INR 50 crores EBITDA at like 3%, 3.5% margin. So what were the particular reasons that you fell short? And by when can we see you achieving such numbers?

I think last quarter, if I just add that the inventory hit, I think we have achieved the 3.5% EBITDA. Even for the whole year, if you look at the 9 months, we've almost lost close to INR 22 crores by way of the inventory hit. I think if that had not happened, I think we are very much on track with that 3.5% EBITDA higher than the 3% that we have normally guided. So I think -- I mean, we keep our fingers crossed certainly, but the company is working towards the same. And if this quarter is a fairly steady period, we are fairly confident we'll be back in the 3-plus kind of EBITDA this quarter itself.

Okay. And also, what were the inventory losses for this quarter in particular?

The last quarter?

Yes, Q3.

Last quarter was about INR 10 crores.

[Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital.

Am I audible, sir?

Very much.

Yes, yes. Sir, just first up on the interest cost, I mean, you mentioned we want to keep the debt level constant, right? So ideally, the interest cost that we are seeing right now that will remain stable going forward?

It should be fairly stable.

It should be fairly stable, right? Okay. Okay. Understood. And on the EBITDA margin on the retail front, I mean, currently, we are at about maybe what 5%, 5.5% kind of EBITDA margin in retail, right? So what sort of aspiration we see that in retail business over the next maybe what, 1 to 2 years?

In couple of years, definitely, we would like that to go by at least 1 percentage point.

In 2 years, we are expecting at least 1% improvement, right?

Yes, yes.

And what will drive that? Will that be as a mix of...

It's purely from the mix of products in the non-steel that gains more trajectory.

Okay. So can you also suggest what was the -- I mean, steel versus non-steel margins in this quarter or in the 9 months?

I think -- yes, I'll just give it to you a quick -- just give me the number.

Yes.

The steel EBITDA margin coming around -- hello, is it audible?

Yes, yes, please.

Yes. Steel EBITDA margin was coming around the 2% whereas non-steel was around 4.5%.

Okay. 4.5%? Okay. Non-steel is 4.5% and steel is 2%.

Yes, 2.5% I'm sorry, steel was around 2.5% and non-steel was around 5.5%.

5.5%? And you mentioned that we want to increase the share of non-steel from 10% to 25%. So in how many years we are targeting that?

We are targeting that in the next 4 years, 4 to 5 years.

In 4 to 5 years. Okay. Okay. Understood. And then what sort of retail growth we are expecting? I mean, if we have to see next 2 years?

Sorry?

The retail segment growth.

See, we are now more or less talking about a marketplace kind of a model, if you see our presentation for the last couple of years. So we are taking the [ stalls ]. So we are coming out with the classification what we had earlier done on channel enterprise and retail. So we are now calling it all as a marketplace portion. Definitely in this, there is a focus today, our retail is around 52%, 53% of the total sales. So we would like to sustain that going forward.

No, we would like to sustain this mix, I mean, retail versus non-retail.

Yes, yes.

But what sort of growth we are looking at? I mean, if you have to see next 2 years CAGR, what sort of growth we are looking at in the retail segment?

The same percentage will be what will reflect the total numbers.

Okay. I mean, just -- I mean, this...

Once the demerger is done, another thing is the numbers will come out because there will be 2 separate entities where the numbers will also -- will come out very much more clearly.

Okay. Okay. And so any range we can put to it? I mean, 15%, 20% or 20%, 25% kind of a growth we are targeting in this segment?

Yes. If we are looking at an overall top line growth of around 20-odd percent, so you will see the same reflection happening in the retail part of it also.

Okay. Okay. So overall, we are looking at 20% kind of a growth, right, on the revenue side, not on the volumes we have already given.

So this is revenue is what I'm talking about, yes.

[Operator Instructions] The next question is from the line of Mann Ashar from GrowthSphere Ventures.

Sir, just wanted to understand the competitive intensity of the landscape of yours, as well as other B2B companies and brick-and-mortar store business model. Sir, since there are many competitors who have entered in this space through the supply chain management business model who are basically consolidating the supply chain -- basically consolidating the demand and then distributing the same amongst the smaller players. And they have scaled up like anything, and those are profitable as well. They have little to no investment, no PPE, no investment in inventory. So just wanted to understand how do you think that will still have the edge in this competitive environment in our B2B segment?

See, I think one of the key things, some of the newer players who have come into this line have -- even if they have not kept sufficient inventory, they have been very liberal with their kind of credit period that they are offering. So many of them who are doing about, let's say, INR 10,000 crores to INR 15,000 crores of top line, they are looking at almost 1/3 INR 3,000 crores to INR 4,000 crores kind of debtors level. So I think that is one area we have not really been that liberal in terms of giving it out. So this is something that is differentiating us from some of the new players. They have gained traction, no doubt. But we also see that there is some -- of course, many of them are lining up for IPOs and so on in the near future. So we'll have to see what is the further -- I mean, how they move their businesses prior to an IPO. But to some extent, we feel that this competitive intensity has slightly come down in the last couple of months.

Okay. Okay. Sir, but do you think that those companies have had some effect on our business as well, because at the end of the day, their gain is somebody else's loss, right? So they have scaled up like anything, and we have been struggling in terms of a bit of that type of growth. So just wanted to understand from that perspective.

See, despite handling a conventional business with a reporting balance sheet with all the impact of being a listed company and so on, we have still registered a 37% volume growth this year. I think that is pretty good compared to the industry standards where the overall industry has grown by about 6% to 8% over the year. I think growing at 37% or 35% top line, I mean, volume growth is quite significant. So -- and we don't have also the [Technical Difficulty].

I'm sorry to interrupt you, sir. We cannot hear you. [Audio Gap] Sir, we are unable to hear you. Hello?

Hello? Can you hear me now?

Yes.

Yes. So I don't know where went blank. But taking over the last question about the growth, I think we have done a 37% volume growth this year. I think that itself has been quite significant. So I don't know -- I mean, this is quite remarkable to us, given the competitive environment. So I think we have done pretty well in terms of our growth.

[Operator Instructions] The next question is from the line of Keshav Garg from Counter Cyclical PMS.

Sir, I'm trying to understand that, sir, last year, we raised INR 100 crores equity. And despite raising that much money, we -- our interest cost has still gone up significantly year-on-year by almost 50%. So I mean -- and sir, consequently, our profit after tax is down. So then what's the point of this growth in top line, volume growth when it is not percolating down to the bottom line?