Rating Rationale
July 22, 2019 | Mumbai
Shankara Building Products Limited
Ratings downgraded to 'CRISIL A-/Negative/CRISIL A2+', removed from 'Watch Developing'
 
Rating Action
Total Bank Loan Facilities Rated Rs.384 Crore
Long Term Rating CRISIL A-/Negative (Downgraded from 'CRISIL A'; Removed from 'Rating Watch with Developing Implications')
Short Term Rating CRISIL A2+ (Downgraded from 'CRISIL A1'; Removed from 'Rating Watch with Developing Implications')
 
Rs.60 Crore Commercial Paper CRISIL A2+ (Downgraded from 'CRISIL A1'; Removed from 'Rating Watch with Developing Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its ratings on bank facilities of Shankara Building Products Limited (Shankara; a part of the Shankara Buildpro group) from 'Rating Watch with Developing Implications' and downgraded the ratings to 'CRISIL A-/CRISIL A2+' from 'CRISIL A/CRISIL A1' and assigned a 'Negative' outlook.

CRISIL also has removed its rating on the commercial paper from 'Rating Watch with Developing Implications' and downgraded the rating to 'CRISIL A2+' from 'CRISIL A1'.

CRISIL had earlier placed its ratings of the Shankara Buildpro group on 'Watch with Developing Implications' in April 2019, after the group announced the sale of its 200,000 MTPA tube manufacturing facility at Chegunta, near Hyderabad (Telangana), to APL Apollo Tubes Ltd (rated 'CRISIL AA-/Stable/CRISIL A1+'), for a consideration of Rs 70 crore. The facility was housed under the group's wholly-owned subsidiary, Taurus Value Steel & Pipes Pvt Ltd (Taurus). The 'Watch' has been resolved, following completion of the sale transaction and clarity on the financial performance for fiscal 2019.

The downgrade reflects the pressure on the Shankara Buildpro group's business risk profile, particularly its operating margins that remain subdued as against expectations of improvement. A combination of extended discounts to reduce working capital cycle, exposure to volatile commodity prices, and inventory write-offs to the tune of about Rs.20 crore, exerted pressure on operating margins at 4.5% for fiscal 2019 as against expectations of well over 6%. Resultantly, interest service coverage ratio dropped to 2.1 times in fiscal 2019, from 3.9 times in fiscal 2018.

Operating margin, management of working capital and debt levels would remain key monitorables over the medium term.

The ratings continue to factor in the group's established presence in the building material distribution and retailing businesses, the diversified product offerings, geographical diversity, extensive experience of the promoter, longstanding association with vendors, and the comfortable capital structure. These strengths are partially offset by susceptibility to economic cycles and sharp variation in raw material prices, and the group's average debt protection metrics.

Analytical Approach

For arriving at the ratings, CRISIL has combined the financial and business risk profiles of Shankara Building Products Ltd (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 framework to factor in the support available to the subsidiaries from its parent Shankara.

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 and extensive experience of the promoter
The group's longstanding presence of over three decades in the building materials industry, its wide network of dealers, warehouse space spread over 0.69 million square feet (sq. ft.), 129 retail outlets and the in-house pipe and colour-coated roofing sheet processing capacity, will continue to support the business risk profile. The promoter has around three decades of experience in the building materials industry, and is assisted by a competent second line of management.

* Diversified product offering and wide geographical presence
Healthy relationships with suppliers such as JSW Steel Ltd, TATA Steel Ltd, Sintex Industries Ltd, Uttam Galva Steels Ltd, APL Apollo Tubes Ltd (rated 'CRISIL AA-/Stable/CRISIL A1+'), Kajaria Ceramics Ltd, and Cera Sanitaryware Ltd (rated 'CRISIL A1+') enables the group to offer a diverse range of building materials, and provides it a competitive edge.

* Comfortable capital structure
Networth was robust at Rs 458 crore and total outside liabilities to tangible networth ratio (TOL/TNW) comfortable at 1.38 times as on March 31, 2019. Strategies implemented by the group helped reduce gross current asset days to 104 days as on March 31, 2019, from 128 days as on March 31, 2018. This, coupled with sale proceeds of Rs 70 crore from asset sale, lowered debt levels to around Rs 320-330 crore as on June 30, 2019, from around Rs 430 crore as on March 31, 2018.

Weaknesses
* Susceptibility of demand to economic cycles
The group remains exposed to fluctuation in demand for real estate and home improvement. However it is expected to maintain steady growth in revenue and profitability, backed by a wide geographical presence and product profile. However, as many of the retail showrooms have a limited track record, sustained growth in scale and profitability remains a key monitorable. 

* Exposure to fluctuations in input prices
As with any retail business, operating margin remains modest. Further, exposure to volatility in steel prices led to a drop in margin to 4.5% in fiscal 2019, from 6.9% in fiscal 2018. These has led to quarter on quarter drop in processing margin from 4.9% in Q1FY19 to 2.5% in Q4FY19 and also in retail margin from 10.3% in Q1FY19 to 8.8% in Q4FY19. Given the higher proportion of steel products in the inventory, any sharp variation in steel prices could further affect profitability, and hence, remain a rating sensitivity factor.

* Average debt protection metrics
Debt protection metrics have moderated in fiscal 2019, with interest coverage of 2.1 times as against CRISIL's expectation of 3.9 times; however with reduction in debt, it is likely to improve to over 3 times over the medium term.
Liquidity

Liquidity remains adequate, characterized by sufficient cushion between cash accrual and maturing debt, and moderate cash balance of around Rs 9 crore as on March 31, 2019. Expected annual cash accrual of Rs 46-60 crore, over next two fiscals, should comfortably cover maturing debt of Rs 2-2.5 crore. Capex requirements are modular and likely to be funded via internal accruals. Bank limit utilization is moderate at around 86 percent on average drawing power of Rs 393 crore for 12 months ended April 2019 (total sanctioned working capital limits are Rs 612 Cr). The available cushion in bank limit should be adequate to meet the incremental working capital needs over the next one year.

Outlook: Negative

CRISIL believes the Shankara Buildpro group's business risk profile could be under pressure with subdued operating profitability. The ratings may be 'downgraded' if there is further drop in operating margin or due to more-than-anticipated delay in achieving reduction in debt levels thereby further deteriorating debt protection metrics. The outlook may be revised to 'Stable' if there is a sustained growth in revenue with stability in operating profit margin along with reduced working capital cycle.

About the Group

Incorporated in 1995 as Shankara Pipes India Pvt Ltd, the company was renamed as Shankara Infrastructure Materials Ltd in 2011, and thereafter, as SBPL n 2016. Promoted by Mr Sukumar Srinivas, Shankara operates 129 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. Further, the group operates in-house pipe and colour-coated roofing sheet processing facilities through wholly-owned subsidiaries: Taurus, Vishal, and Centurywells.

Key Financial Indicators*
Particulars Unit 2019 2018
Revenue Rs crore 2656.1 2548.8
Profit after tax (PAT) Rs crore 32.7 73.8
PAT margin % 1.2 2.9
Adjusted debt/adjusted networth Times 0.84 1.00
Interest coverage Times 2.1 3.9
*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 crore)		 Rating assigned  with outlook
NA Bill discounting NA NA NA 45 CRISIL A2+
NA Cash credit & working capital demand loan* NA NA NA 315 CRISIL A-/Negative
NA Proposed Non Fund based limits NA NA NA 24 CRISIL A2+
NA Commercial paper NA NA 7 to 365 days 60 CRISIL A2+
*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 A2+  23-04-19  CRISIL A1/Watch Developing  17-09-18  CRISIL A1  31-07-17  CRISIL A2+    --  -- 
        15-02-19  CRISIL A1  05-09-18  CRISIL A1           
Fund-based Bank Facilities  LT/ST  360.00  CRISIL A-/Negative/ CRISIL A2+  23-04-19  CRISIL A/Watch Developing/ CRISIL A1/Watch Developing  17-09-18  CRISIL A/Stable/ CRISIL A1  31-07-17  CRISIL A-/Stable/ CRISIL A2+    --  -- 
        15-02-19  CRISIL A/Negative/ CRISIL A1  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 A2+  23-04-19  CRISIL A1/Watch Developing      20-06-17  CRISIL A2+    --  -- 
        15-02-19  CRISIL A1               
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 A2+ Bill Discounting 45 CRISIL A1/Watch Developing 
Cash Credit & Working Capital demand loan* 315 CRISIL A-/Negative Cash Credit & Working Capital demand loan* 315 CRISIL A/Watch Developing
Proposed Non Fund based limits 24 CRISIL A2+ Non-Fund Based Limit 24 CRISIL A1/Watch Developing 
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
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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