Rating Rationale
March 23, 2020 | Mumbai
Shankara Building Products Limited
Ratings downgraded to 'CRISIL BBB+/Stable/CRISIL A2'
 
Rating Action
Total Bank Loan Facilities Rated Rs.384 Crore
Long Term Rating CRISIL BBB+/Stable (Downgraded from 'CRISIL A-/Negative')
Short Term Rating CRISIL A2 (Downgraded from 'CRISIL A2+')
 
Rs.60 Crore Commercial Paper CRISIL A2 (Downgraded from 'CRISIL A2+')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on bank facilities and commercial paper of Shankara Building Products Limited (Shankara; a part of the Shankara Buildpro group) to 'CRISIL BBB+/Stable/CRISIL A2' from 'CRISIL A-/Negative/CRISIL A2+'.
 
The downgrade reflects the moderation in the group's overall business risk profile marked by continued supressed return on capital employed (RoCE) levels and working capital intensity. Erstwhile levels of 6 plus percentage operating margins is not expected to materialise over the medium term on account of commodity nature of business and intense competition. It has remained at around 4-4.5% levels. Working capital intensity remains high with gross current asset (GCAs) at over 110 days. Subsequently the RoCE has remained subdued at 12% or thereabouts. The downgrade also takes into account the lack of moderation in overall leverage inspite monetisation of assets. Combination of debt and reliance on creditors has meant  total outside liabilities to tangible net worth (TOL/TNW) ratio to remain aggressive at over 1.3 times, as against earlier expectations of close to 1 time.
 
The ratings continue to factor in the group's established market position and extensive experience of the promoter in the building material distribution and retailing businesses, the diversified product offerings, longstanding association with vendors, and average financial risk profile. These strengths are partially offset by susceptibility to economic cycles and sharp variation in raw material prices.

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 - Details of Consolidation, 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, retail space spread over 0.54 million square feet (sq. ft.), 123 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 longstanding association with vendors
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 a competitive edge.
 
* Average financial risk profile
Networth is strong at Rs 477 crore and TOL/TNW moderately high at 1.30 times expected as on March 31, 2020. However financial risk profile is constrained by average debt protection metrics with interest coverage of 2.4 times and net cash accruals to adjusted debt ratio of 0.15 times expected for fiscal 2020.
 
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 had led to a drop in margin to 4.5% in fiscal 2019, from 6.9% in fiscal 2018. Given the higher proportion of steel products in the inventory, any sharp variation in steel prices could affect profitability going ahead, and hence, remain a rating sensitivity factor.
Liquidity Adequate

Liquidity remains adequate, characterized by sufficient cushion between cash accrual and maturing debt, and cash balance of around Rs 22 crore as on December 31, 2019. Expected annual cash accrual of Rs 44-55 crore, over next two fiscals, should comfortably cover maturing debt of around Rs 2 crore. Capex requirements are modular and likely to be funded via internal accruals. Bank limit utilization is moderate at around 69 percent on average drawing power of Rs 330 crore for 9 months ended December 2019 (total sanctioned working capital limits are Rs 475 Cr). The available cushion in bank limit should be adequate to meet the incremental working capital needs over the next one year.

Outlook: Stable

CRISIL believes the Shankara Buildpro group will continue to benefit from its established presence in the building material retailing and distribution business.
 
Rating sensitivity factor
Upward factors:
* Improvement in net cash accruals to over Rs 70 crore
* Significant and sustained improvement in working capital cycle marked by GCA days of less than 90 days
 
Downward factors:
* Decline in net cash accruals to below Rs 40 crore for fiscal 2021
* Increase in working capital requirement, larger-than-expected, debt-funded capex or acquisition, or more-than-expected dividend pay-out, weakening the financial risk profile, particularly liquidity

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 in 2016. Promoted by Mr Sukumar Srinivas, Shankara operates 123 retail showrooms in southern and western India, where it sells building and home improvement products for many renowned brands.. 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 280 CRISIL BBB+/Stable
NA Proposed Non Fund based limits NA NA NA 59 CRISIL A2
NA Commercial paper NA NA 7 to 365 days 60 CRISIL A2
 
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 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  60.00  CRISIL A2      22-07-19  CRISIL A2+  17-09-18  CRISIL A1  31-07-17  CRISIL A2+  -- 
            23-04-19  CRISIL A1/Watch Developing  05-09-18  CRISIL A1       
            15-02-19  CRISIL A1           
Fund-based Bank Facilities  LT/ST  325.00  CRISIL BBB+/Stable/ CRISIL A2      22-07-19  CRISIL A-/Negative/ CRISIL A2+  17-09-18  CRISIL A/Stable/ CRISIL A1  31-07-17  CRISIL A-/Stable/ CRISIL A2+  -- 
            23-04-19  CRISIL A/Watch Developing/ CRISIL A1/Watch Developing  05-09-18  CRISIL A/Stable/ CRISIL A1  14-07-17  CRISIL A-/Stable/ CRISIL A2+   
            15-02-19  CRISIL A/Negative/ CRISIL A1      20-06-17  CRISIL A-/Stable   
Non Fund-based Bank Facilities  LT/ST  59.00  CRISIL A2      22-07-19  CRISIL A2+      20-06-17  CRISIL A2+  -- 
            23-04-19  CRISIL A1/Watch Developing           
            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 A2+
Cash Credit & Working Capital demand loan 280 CRISIL BBB+/Stable Cash Credit & Working Capital demand loan* 315 CRISIL A-/Negative
Proposed Non Fund based limits 59 CRISIL A2 Proposed Non Fund based limits 24 CRISIL A2+
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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