Friday, March 17, 2017

Shankara Building Products IPO Analysis

About the Issue
The company offer comprises of fresh issue of shares and offer for sale to raise around Rs 350 crore. The company is going to raise Rs 45 crore through fresh issue, while the balance amount will be raised through offer for sale of 6521740 equity shares of face value of Rs 10 per share. The issue will remain open from March 22, 2017 to March 24,2017 with a price band of Rs 440-460 per share. The company promoters and PE investor Fairwind will raise through OFS.   
Purpose of the IPO
The company plans to utilise net proceeds from this offer for prepayments or repayments of own and its subsidiary Vishal Precious Steel Tubes and Strips Pvt. Ltd's (VPSPL) debt. The company also proposes to use these funds for undertaking existing activities and for general corporate purposes. The company expects to improve its brand image through listing on the stock exchange. The company will not get any get benefit from OFS.
Industry outlook
India is ranked as the seventh largest economy in the world with GDP growth of 7.1%, which is expected to grow to 7.9% in FY17. The per capita income is also increasing at a healthy rate of 7.3% over FY15-16. This trend is expected to continue as government is planning to implement 7th Pay Commission.
Housing industry is likely to grow due to rapid urbanisation, government push for affordable housing and other infrastructure-related incentives. We can see growth in demand for players in housing industry. Many government schemes such as Pradhan Mantri Awaas Yogana and Smart Cities project would push the demand in this sector. The company's subsidiary in financing housing sector will eventually drive the growth in this sector.

Company outlook
The company is a leading organised retailer of home improvement and building products which have presence across 10 states of India. Its major customer base comprises of home owners, professional customers like architect and contractors; and small enterprises spread in urban and semi-urban markets. The company has 100 retail counters spread across the country providing wide range of products like structural steel, cement, TMT bars, hallow blocks, roofing solutions, solar heaters, sanitary wares, etc. It has good third party brands such as Sintex, Uttam Galva, APL Apollo, etc. The company has strong logistics capabilities, supply chain network and in-house warehousing facility. The company has acquired CRIPL and VPSPL which provide backward integration to its product line and help in business operations and value chain. It has increased its brand equity and marketability with increase in number of stores named "Shakara BuildPro "

The company has wide range of logistic network, i.e. 58 warehouses of total size of 0.58 million sq.ft. and 47 fleet of truck. In enterprise network, the company serves large end-users, contractors, OEM's projects, etc. Retail customers have a major contribution of 39.68% in its total sales. The company's revenue increased at CAGR of 8.38% over FY12-16, while, EBITDA grew at CAGR of 11.34% over FY12-16 and PAT grew at CAGR of 7.94% over the same period.
The company enjoys strong parentage from experienced and qualified management. Sukumar Srinivas, MD of the company; is Alumnus of IIMA with 33 years’ experience in building product industry, and has also been associated as President of Karnataka Pipes Dealer's Association. His vast experience and position has helped the company spread its network in the southern region.
Financial Performance

Revenue has been growing at CAGR of 8.38% over FY12-16. In FY16, the company's revenue grew by 3.46% as compared to FY15, which has shown slower growth rate as compared to previous years. Its EBITDA has been growing at CAGR of 11.34% in FY12-16. PAT has been growing at CAGR of 7.94% in FY12-16. The company delivered RONW of 14.31% in FY16. As we can see from financials, revenue growth is decreasing from 2012-16, affecting the growth in EBITDA and bottomline which ultimately affected earning per share of the company.
Peer Comparison and Valuation
Since there are no listed peers in the same line of business and operations, we cannot do peer comparison of the company. 
We valued company at the upper price band of Rs.460, which gives P/E of 88.80x with EPS Rs.5.18, which is overvalued. Considering slower growth rate and higher valuation of the company, we recommend our investors to avoid subscribing in this IPO.  

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