Shankara Building Products Limited (SHANKARA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Shankara Building Products Limited Q1 FY '26 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, Aviras. Good morning, everyone, and thank you for taking out the time to join us in this Q1 FY '26 Earnings Conference Call of Shankara Building Products Limited. The investor presentation and press release 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. Dhananjay Mirlay Srinivas, Executive Director; and Mr. Alex Varghese, Chief Financial Officer. We will begin with a brief overview of the quarter from Mr. Dhananjay Mirlay Srinivas, 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. These risks and uncertainties have been detailed in our annual report. With that, I would now like to hand over the call to Mr. Srinivas. Over to you, sir.

Good morning, and thank you for joining us today for the Q1 FY '26 Earnings Call of Shankara Building Products Limited. As we start this new financial year, I'm pleased to present an overview of our recent performance and highlight the key developments of the quarter. We are happy to report that we have continued our robust volume growth in the steel business. This quarter, we achieved a significant milestone by delivering 2.38 lakh tonnes in steel volumes. This represents a 35% year-on-year growth and stands at our highest ever Q1 volume, setting a strong tone for FY '26. Our non-steel business recorded a 5% growth year-on-year. EBITDA margins improved to 3.58% in Q1 FY '26 compared to 3.2% in Q4 FY '25 and Q1 of FY '25. As a result, EBITDA rose to INR 59 crores, reflecting a 43% year-on-year growth. Despite our expanding scale, we maintained strict control over working capital, which averaged 29 days this quarter versus 30 days in FY '25. This working capital discipline also allowed us to keep our finance costs in check. As a result, net profit for the quarter stood at INR 32 crores, marking a 102% year-on-year increase. We remain the clear market leader in South India across both retail and non-retail verticals. Retail growth was healthy as our same-store sales growth -- SSSG, reached 22% in Q1 FY '26, up from 14% in FY '25. The first quarter saw subdued demand for steel and building materials. There was an earlier onset of monsoons in May, in many parts of the country, and infrastructure and construction activities witnessed a slower-than-anticipated recovery. In spite of these challenging conditions, Shankara recorded a double-digit growth in both volume and value coming in at 35% and 27%, respectively. All our steel segments saw good growth led by flat products at 65%, roofing at 35%, pipes and tubes at 32%; all year-on-year. Our non-steel segment faced headwinds and recorded only a 5% growth year-on-year, led by our plumbing products at a 15% growth and relatively flat sales in the other segments consisting of tiles, fittings, et cetera. On the operational front, we have inaugurated 2 new fulfilment centers, one in Jabalpur, MP, further cementing our presence in Central India; and 2, in Gannavaram near Vijayawada AP, strengthening logistics and service capacity in that region. We continue to follow our approach to establish a strong steel foundation first before expanding to non-steel operations. Another notable development this quarter was a margin improvement in both non-retail and manufacturing operations, which had faced headwinds in the previous year. In regards to our demerger process, all matters as required by NCLT have been provided. The matter is in front of the Honorable Tribunal, and the next hearing is scheduled for end August '25, where we anticipate receiving the final NCLT order on the scheme of the demerger. All requisite actions from our side are complete and upon receipt of the NCLT order, we will promptly move forward with ROC filings and related processes. Consequently, we now anticipate concluding the demerger in Q3 FY '26. We are confident of continuing our growth story in the ensuing quarters and are on track for achieving our target of 1 million tonnes for FY '26. The company is working hard to achieve the targeted non-steel numbers in the coming quarters. RBI's recent policy measures, including rate cuts and liquidity infusions should provide some impetus to the construction, realty and building material industry. Shankara continues to be a unique marketplace in the building material industry with a strong presence in steel and a growing non-steel business. Shankara has 126 fulfillment centers, which includes 93 operational stores spread across 1.3 million square feet in 10 states and 1 union territory of India. Shankara has a strong logistics network, ensuring seamless access for our customers. Our operations have penetrated at a grassroot level with a strong presence in Tier 2 and Tier 3 towns and cities apart from key metros and capitals in our geography. We are truly an omnichannel marketplace, representing multi-brands across multiple verticals, giving our customers last mile service. Shankara is a trusted leader in the building materials sector, committed to quality, affordability and customer satisfaction. Thank you all for your attention. We are now ready to open the floor for any questions you may have.

[Operator Instructions] The first question is from the line of Naitik from NV Alpha Fund.

Congrats on a good set of numbers. My first question is, sir, we have seen margins improve significantly in our Enterprise segment. So just wanted to understand are these margins sustainable in the Enterprise segment? Or are there any one-offs in this?

Yes. Yes, the Enterprise business, yes. I think one of the key factors that has happened in Q1 is there has not been a very -- I mean, let's say, a huge inventory drop as such. So that has certainly helped us in sustaining margins in the quarter 1. So I believe that if the overall -- looking at the current conditions, I do believe that Enterprise margins are sustainable.

Right. So the 2%, 2.5% margins are sustainable in the Enterprise segment?

Yes.

Because we have not seen such margins in the past 7, 8 quarters. That's the reason I'm asking.

Yes.

Right. And sir, my second question is despite such high growth in Enterprise channel, which I assume would majorly be steel and less growth in the non-steel retail business, our working capital has stayed very much in control. So is it safe to assume that the non-steel retail segment is more working capital intensive than the steel business?

Definitely, I think non-steel, we do have a little bit more of inventory holding because of how we cater to customers branching over multiple verticals and SKUs. So there is a limited amount of increase, you would say, in working capital for non-steel.

So what is the difference in the working capital, sir, if I may ask, between non-steel and steel?

Yes. Non–steel approximately around 40 days of net working capital is there, where, as Mr. Dhananjay said, inventory will be on the higher side. We'll be giving more inventory over there.

Sorry, sir, I did not get the number. You mentioned one...

Non-steel will be around 40 days of working capital because inventory hedge is a bit higher.

The next question is from the line of [ Kushal Kasliwal ] from InVed Research.

Sir, just a long-term perspective on the company and -- pardon me if this is a repetitive question because I have started looking at your company very recently -- sir, what has changed for the company in the last 2, 3 years? Because previously, we were not growing as ambitiously. And our same-store sales growth also seems to be like very high versus some of the other peers, which have also reported their numbers. So what has been a key differentiator for the company over the last 2, 3 years?

I think the key differentiator is the company has really have started focusing on growth in this competitive environment. In the past, there was a little greater focus, particularly the pre-COVID and around the COVID times, where we were a little more focused on the margin and the bottom line only. Then I think the key change was if we miss the bus in growth, I think the company stands to lose overall in the long-term perspective. I think that would be the key change that has happened over the last 4 to 5 years.

Sir, some of our peers are actually calling out decline in steel business and talking about the pan-India decline on Y-o-Y basis, but we have seen 22% same-store sales growth. So any reason why we have like a very different kind of result versus the overall market? Are we taking market share? Or what is happening?

I think 2 things are happening. One is certainly, we would have taken some market share. Second thing is we did -- if you see in our results, in the steel segment, we have grown quite substantially in the flat products, where we also had a slightly lower base. We have been talking about in the last 1 year, 1.5 years, we've been saying that the company's focus is going to be greater in the flat products area. So I think that has also yielded better results and resulting in good growth.

The next question is from the line of [ Ankit Shah from Fusion Capital ].

Congrats on a great set of numbers and continuing the growth momentum. My question was on our NCLT case. So I was going through the case details. In the last 2 months, like on 26th May and 27 June, there were 2 hearings subject on the final hearing. So what happened on that every time it is 1 month delay. So is there any confusion on that date?

There is no confusion. I would not like to take this answer on a public forum. So there is -- to be very honest, there's absolutely no confusion. I think it is just -- I mean, procedural or I don't know what been delays, that's all I can say as of now. As far as we go, whatever has been formalities, everything has been fulfilled -- well, well in advance.

Okay. So we are confident of completing the entire demerger and listing in Q3 FY '26, right?

I mean we were very confident to close it in H1 itself. But I mean, the honorable courts, a little bit, we are at the mercy of the courts. So we can't really predict as to exactly how they would react or if there's a leave of the judge on the in the bench on a particular date, things could get delayed. But yes, we do hope and we anticipate that we should get it done because once the NCLT process is over, I think a lot of it then comes back on to the company where the next bit of the procedures have to be fulfilled. So a lot of formalities after that, but which is more in our control.

The next question is from the line of [ Nishant Bhatt ] from Equity Works Limited.

First of all, congratulations on a great set of numbers and on the margin expansion. After a long time there has been a margin expansion in the company. My question was regarding 2 things. First is the Fotia Ceramics, right? How has that part been building out? What are the consumer feedback you are getting from that buildout?

So when it comes to Fotia, we've got great feedback from customers in terms of quality and our pricing. I think we are doing well in that segment. But as you know, overall, the ceramic segment has been a bit dull for the last 6 months in the market. So we are also facing a bit of a slowdown there. But we are confident that we can stick to our growth plans and continue building the brand.

Okay. And my next question was regarding the same thing. The ceramic segment, I think overall, the market was subpar for the past 3 to 4 years because of no exports from the Morbi region. Currently, I think because the U.K. FTA has been announced. And do you think because of that some exports can happen and it will help in easing out for the domestic branded players?

I think it's too early days to understand the entire FTA agreement. But yes, positively looking at it, it could help us to a small extent.

[Operator Instructions] The next question is from the line of Dhwanil Desai from Turtle Capital.

Sir, first question is on the building products side, the non-steel business. The entire industry has been operating in a very challenging environment since last 2, 3 years, but we have been able to grow at a very decent pace. Probably this is the first quarter where we are seeing very significant moderation in growth. So one is something which has changed or now going forward, should we assume that because of the higher base, now feel kind of more be aligned with the growth that is happening in the industry? How should we look at the growth going forward?

So I think what has also happened is compared to -- one is we had a lower base and we were growing rapidly. We've also seen the last 3 months, there has been more of a hit in the 2 big southern states we operate in being Karnataka and Andhra/Telangana. I think that is also with a bit of a slowdown in Kerala as well in cash flows. I think that's kind of what has hit many players in this industry. And since our non-steel is government to South, we also did face a brunt in that. I think going forward, we are looking to still keep up to our guidance numbers, still push our growth. I think the company is working hard towards that. And I think it's too early to say whether it will be muted for the whole year, but we are definitely looking to get back on that growth momentum.

Okay. Second question on the steel side. Since we are not adding more square footages and the number of stores, a large part of our growth has to come from SSSG as you have also indicated in the presentation. So generally, sir, our understanding is that in retail business to sustain this kind of SSSG is very, very difficult. So what are we doing to ensure that we are currently at 20% plus kind of SSSG that we sustain this number?

I think one of the things which I have been -- I mean, I mentioned even about a year earlier is that the first objective is to try and sweat out our existing retail stores and our fulfillment centers to the maximum possible. I think that's something we have been working very, very, very hard to keep pushing our existing stores to the maximum level possible. And though we have added 2 stores this quarter -- I think you will find that in the ensuing the second half of the year, we will be adding 2, 3 more stores. So it is not that we are not going to be adding new outlets at all. We have been definitely very slow at adding outlets in the last 2, 3 years, but that will slowly but steadily gain momentum over the next few years. We are also completely aware that to sustain such high SSSGs are going to be difficult without opening stores in the future. So we have been -- our simple strategy in the last 3 years has been sweat it out, push and see that we get the maximum out of our existing stores. So I think, yes, like you correctly mentioned, I think the -- that kind of a momentum on SSSG going forward will be tougher without adding newer opportunities and adding newer centers. So I think that is something we are very much working at.

And one follow-up on this. So I think we did very well on the flat side. And I think -- so is this also one of the reasons why our SSSG has been higher because the flagship products have been added and it has grown much faster because of the low base?

Very much, very much.

Okay. And that -- you think that on flat, higher than company growth is possible given the low base and much larger market?

Definitely.

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

Congratulations for a great set of numbers. Sir, just first up, I mean, do we have any kind of inventory gain in this quarter? As you indicated in the last quarter, I think we have some steel prices increase in the month of March and April, and so some inventory gain was expected this quarter.

Yes, there are some inventory gain in this quarter, approximately around INR 5 crores inventory gain we got in this quarter.

INR 5 crores inventory gain. And how has been the steel prices? I mean, in the coming quarters, we expect, I mean, any kind of inventory gain or loss? Some indication on that would be helpful, sir.

The steel prices did go up in April and then it sort of plateaued in May and it has come down in June and July too. So we are more or less where we started and March is where we are pretty much back there as far as July goes. But the good news is that it is sort of plateauing out and it's at least what we anticipate in the next 2 months, certainly, I think it will be a sort of a steady pricing rather than a downward pricing, which we saw over the whole of last year. So I think it's sort of plateauing out, yes.

Plateauing. So ideally, in the coming quarters, we should not be expecting any kind of -- I mean, any major inventory gain or loss. I mean, it largely -- I mean, will be flattish, right?

Yes.

Okay. Fair enough. I got that. And now if I have to bifurcate this, I mean, demerger that is expected, now if you want to bifurcate whatever interest expense, how should one look at? I mean this INR 12 crores per quarter of interest and depreciation, INR 4 crores per quarter. So how should one look at individually for manufacturing and the marketplace business, if that you can provide?

So first quarter, you are saying INR 9 crores is towards marketplace and around INR 3 crores is towards manufacturing.

Sir, your voice was muffled. Can you just repeat, please?

Out of INR 12 crores, around INR 9 crores is towards marketplace and INR 3 crores is towards manufacturing.

Okay. That's interest. And what about depreciation?

Depreciation will be almost similar, around INR 4 crores. Depreciation will be around INR 2 crores each in both the...

INR 2 crores each. So interest cost, INR 9 crores is for marketplace in the first quarter and depreciation about INR 2 crores?

Correct.

And how would the debt bifurcation be? I mean, what would be current debt? And how will the individual business be allocated that debt?

No current debt is around INR 550 crores, including acceptance. In that around INR 125 crores is manufacturing and the balance is the marketplace.

So INR 125 crores is manufacturing and balance would be marketplace?

Yes.

That's very clear. And sir, in terms of your margins aspiration in your marketplace, so currently, this quarter, it was around 3.3%, right? So how should one look at -- I mean, if we have to see next 2 years, what sort of aspiration we can have in the marketplace EBITDA margins?

Yes, we are looking at building up in the next couple of years, we should move up to closer to 4%.

In next 2 years, 4%, which was close to about 3.3% right, in this quarter?

From the current level.