Rating Rationale
February 15, 2019 | Mumbai
Shankara Building Products Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.384 Crore
Long Term Rating CRISIL A/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.60 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the bank facilities of Shankara Building Products Limited (Shankara; a part of the Shankara Buildpro group) to 'Negative' from 'Stable' while reaffirming the rating at 'CRISIL A'. The short term rating and commercial paper has been reaffirmed at 'CRISIL A1'.
 
The outlook revision reflects expected deterioration in the Shankara Buildpro group's business risk profile due to lower than anticipated profit margins for fiscal 2019. Operating profit margins were at 4.8% & 3.9% in Q2FY19 & Q3FY19 respectively which were lower than CRISIL's earlier expectations at 6.7% for entire fiscal 19. Lower profitability in the recent quarters have led to weakening of interest service coverage ratio to 2.4 times during the first nine months of fiscal 2019. Drop in profit margin is mainly on account of unanticipated inventory write off around Rs.10 crore in Q3FY19 and due to change in strategy of group towards a tighter working capital management. Volatility in the steel prices in the last quarter led to inventory loss of around Rs 10 crore. Any further write offs in inventory due to volatility in raw material prices and impact of change of business strategy on overall debt levels would remain as key monitorables over the medium term.
 
The ratings also factor in the Shankara Buildpro group's established presence in the building material distribution and retailing businesses, diversified product offering, geographical diversity, extensive experience of the promoter, long association with vendors and track record of profitable growth. These strengths are partially offset by presence in an industry where demand is linked to economic cycles and susceptibility of profit margins to any sharp variation in raw material price.

Analytical Approach

For arriving at the ratings, CRISIL has combined the financial and business risk profiles of Shankara and its wholly owned subsidiaries, Taurus Value Steel & Pipes Pvt Ltd (Taurus), Vishal Precision Steel Tubes & Strips Pvt Ltd (Vishal), and Centurywells Roofing India Pvt Ltd (Centurywells). This is because all these entities, collectively referred to as the Shankara Buildpro group, have a common management and strong operational and financial links. CRISIL has applied parent notch up criteria, for arriving at the ratings of each entity.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established market position
The group started operations as a distributor of pipes in 1995 and has since diversified into retailing building materials as well. It has a wide network of over 1,500+ dealers, 0.69 million square feet (sq ft) of warehouse space, and 134 retail outlets. The group also has an in-house pipe and colour-coated roofing sheet processing capacity of 3.32 lakh tonne per annum.

* Diversified product offering and wide geographical presence
Longstanding relationship with suppliers such as JSW Steel Ltd, TATA Steel Ltd, Sintex, Uttam Galva, APL Apollo, Kajaria, and Cera enabled the group to offer a diverse range of building materials. This gives the group a competitive edge.

* Extensive experience of the promoter
The promoter has about three decades of experience and is assisted by a competent second line of management.

* Comfortable financial risk profile
Networth was strong at Rs 431 crore and gearing comfortable at 1 time as on March 31, 2018. Debt protection metrics though have moderated in 9MFY19, with interest coverage of 2.4 times as against CRISIL's expectation of 3.9 times for fiscal 2019; however, it is expected to improve to above 3 times over the medium term.

Weaknesses
* Presence in industry where demand is linked to economic cycles
The group is exposed to variation in demand for real estate and home improvement. Due to its wide geographical presence and product profile, it has been able to maintain steady growth in revenue and profitability in the past. However, many of the group's retail showrooms have a short track record and hence, continued growth in scale and profitability in the cyclical business will remain a key monitorable over the medium term. 

* Susceptibility to fluctuations in input prices
Operating margin had been modest in the past, as is the case with any retail business. Further margin are susceptible to volatility in steel prices which has resulted in drop in margin to 5.1% in the first nine months of fiscal 2019 as compared to 6.9% in fiscal 2018. Owing to higher proportion of steel products in the inventory holding of group, any sharp variation in steel prices may affect profitability and will, therefore, be a rating sensitivity factor.
Liquidity

Adequate liquidity marked by healthy expected accruals of over Rs 58 crore vis-''' -vis minor term debt obligations of Rs 1 crore for fiscal 2019. Bank limit utilization is moderate at around 88 percent on average drawing power of Rs.411 crore for 9 months ended December 2018 (total sanctioned working capital limits are Rs. 612 Cr).  

Outlook: Negative

CRISIL believes the Shankara Buildpro group will continue to benefit from its established presence in the building material retailing and distribution business; also, financial risk profile will remain robust over the medium term. The rating may be 'downgraded' if there is further drop in operating margin or due to more-than-anticipated delay in achieving improvement in the working capital cycle. Cyclicality in business or change in debt-funded capital expenditure plans adversely affecting the financial risk profile and liquidity position of the group may also lead to a downgrade in its rating. The outlook may be revised to 'Stable' if there is a sustained growth in revenue with stability in operating profit margin along with prudent working capital management, thereby reducing debt.

About the Group

Incorporated in 1995 as Shankara Pipes India Pvt Ltd, the company's name was changed to Shankara Infrastructure Materials Ltd in 2011 and thereafter to the present one in 2016. Promoted by Mr Sukumar Srinivas, Shankara operates 132 retail showrooms in southern and western India, where it sells building and home improvement products for many renowned brands. The company also owns 0.69 million sq ft of warehouse space spread across 10 states. Furthermore, the group operates 14 pipe and colour-coated roofing sheet processing facilities through its wholly owned subsidiaries: Taurus, Vishal, and Centurywells.

Key Financial Indicators*
Particulars Unit 2018 2017
Revenue Rs crore 2548.8 2310.2
Profit After Tax (PAT) Rs crore 73.8 58.78
PAT margin % 2.9 2.5
Adjusted debt/adjusted networth Times 1.00 0.90
Interest coverage Times 3.9 3.1
*Consolidated financials

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)
Maturity Date Issue
Size
(Rs.Cr)
Rating Assigned  with Outlook
NA Bill Discounting NA NA NA 45 CRISIL A1
NA Cash Credit & Working Capital
demand loan*
NA NA NA 315 CRISIL A/Negative
NA Non-Fund Based Limit NA NA NA 24 CRISIL A1
NA Commercial Paper NA NA 7 to 365 days 60 CRISIL A1
*Interchangeable with letter of credit of Rs.30 crore and bank guarantee of Rs.30 crore
*Interchangeable with letter of credit of Rs.40 crore
*Interchangeable with letter of credit of Rs.30 crore
*Interchangeable with letter of credit of Rs.20 crore
 
Annexure - List of entities Consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Shankara Building Products Ltd Full Common management and strong operational and financial link
Taurus Value Steel & Pipes Pvt Ltd Full Common management and strong operational and financial link
Vishal Precision Steel Tubes & Strips Pvt Ltd Full Common management and strong operational and financial link
Centurywells Roofing India Pvt Ltd Full Common management and strong operational and financial link
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  60.00  CRISIL A1      17-09-18  CRISIL A1  31-07-17  CRISIL A2+    --  -- 
            05-09-18  CRISIL A1           
Fund-based Bank Facilities  LT/ST  360.00  CRISIL A/Negative/ CRISIL A1      17-09-18  CRISIL A/Stable/ CRISIL A1  31-07-17  CRISIL A-/Stable/ CRISIL A2+    --  -- 
            05-09-18  CRISIL A/Stable/ CRISIL A1  14-07-17  CRISIL A-/Stable/ CRISIL A2+       
                20-06-17  CRISIL A-/Stable       
Non Fund-based Bank Facilities  LT/ST  24.00  CRISIL A1    --    --  20-06-17  CRISIL A2+    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bill Discounting 45 CRISIL A1 Bill Discounting 45 CRISIL A1
Cash Credit & Working Capital demand loan* 315 CRISIL A/Negative Cash Credit 10 CRISIL A/Stable
Non-Fund Based Limit 24 CRISIL A1 Cash Credit & Working Capital demand loan** 255 CRISIL A/Stable
-- 0 -- Term Loan 4 CRISIL A/Stable
-- 0 -- Working Capital Demand Loan^ 70 CRISIL A/Stable
Total 384 -- Total 384 --
*Interchangeable with letter of credit of Rs.30 crore and bank guarantee of Rs.30 crore
*Interchangeable with letter of credit of Rs.40 crore
*Interchangeable with letter of credit of Rs.30 crore
*Interchangeable with letter of credit of Rs.20 crore
**Interchangeable with letter of credit of Rs.20 crore
**Interchangeable with letter of credit of Rs.40 crore
**Interchangeable with letter of credit of Rs.30 crore
**Interchangeable with letter of credit of Rs.10 crore
^Interchangeable with letter of credit of Rs.30 crore and bank guarantee of Rs.30 crore
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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