Rating Rationale
September 03, 2020 | Mumbai
Shankara Building Products Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.300 Crore (Reduced from Rs.384 Crore)
Long Term Rating CRISIL BBB+/Stable (Reaffirmed)
Short Term Rating CRISIL A2 (Reaffirmed)
 
Rs.60 Crore Commercial Paper CRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on bank facilities and commercial paper of Shankara Building Products Limited (Shankara; a part of the Shankara Buildpro group) at 'CRISIL BBB+/Stable/CRISIL A2'.

CRISIL has also withdrawn its ratings on Rs 35 crore of cash credit & working capital demand loan facilities and Rs 49 crore of proposed non fund based limits on withdrawal request from client and no dues certificate from the bank. The withdrawal is in line with CRISIL's policy on withdrawal of bank loan ratings.

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 moderate financial risk profile. These strengths are partially offset by susceptibility to economic cycles and sharp variation in raw material prices.
 
The lockdown and other measures taken by various central and state governments towards containment of COVID-19 are expected to have a moderate impact the business risk profile of Shankara group in fiscal 2021. The group's factories and retail units were operating at sub-optimal capacities and there had also been disruptions in distribution network due closure of establishments of dealers, distributors and retailers. Accordingly, revenue declined to Rs 347 crore in Q1FY21 as compared with Rs 639 crore in Q1FY20. Group incurred operating losses in Q1FY21 on account of sharp reduction in gross margin due to lower realisations and under absorption of fixed cost. Scale of operation is expected to gradually improve over the coming quarters with pick up in construction activity especially after monsoon resulting in better demand coupled with cost rationalization measures which should support profit margins. However, revenue and profitability may remain lower than previous expectations.

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, retail space spread over 0.52 million square feet (sq. ft.), 115 retail outlets and the in-house pipe and color-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 AA-/Stable/CRISIL A1+') enables the group to offer a diverse range of building materials, and provides a competitive edge.

* Moderate financial risk profile
Networth is strong at Rs 491 crore and total outside liabilities to tangible net worth ratio is moderately high at 1.36 times as on March 31, 2020. However financial risk profile is constrained by average debt protection metrics with interest coverage of 2.83 times and net cash accruals to adjusted debt ratio of 0.16 times 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 supported by a wide geographical presence and product profile. Further, 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. Margin remain stable in fiscal 2020 at 4.45%. 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 13.5 crore as on March 31, 2020. Cash accrual are expected to decline to Rs 6 to 6.5 crores in fiscal 2021; however expected to recover to Rs 40 to 45 crores in fiscal 2022. Cash accrual should comfortably cover maturing debt of around Rs 1.5 crore for fiscal 2021. There is no major capex planned for fiscal 2021. Bank limit utilization is moderate at around 69 percent on average drawing power of Rs 336 crore for 12 months ended June 2020 (total sanctioned working capital limits are Rs 382.5 Cr). The available cushion in bank limit should be adequate to meet the incremental working capital needs over the medium term.

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 factors
Upward factors:
* Improvement in net cash accruals to over Rs 70 crore
* Significant and sustained improvement in working capital cycle marked by GCA of less than 90 days resulting in improvement in capital structure and debt protection metrics

 Downward factors:
* Decline in revenues by more than 35% or operating margin below 2% for fiscal 2021
* Continued EBITDA losses for Q2FY21
* 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 115 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*
As on / for the period ended March 31   2020 2019
Operating income Rs crore 2639.7 2656.1
Reported profit after tax Rs crore 39.88 32.74
PAT margins % 1.51 1.23
Adjusted Debt/Adjusted Net worth Times 0.73 0.84
Interest coverage Times 2.83 2.12
*Consolidated

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
date		 Issue Size
(Rs.Cr)		 Complexity level Rating Assigned
with Outlook
NA Cash Credit & Working
Capital demand loan		 NA NA NA 242.5  
NA		 CRISIL BBB+/Stable
NA Cash Credit & Working
Capital demand loan		 NA NA NA 35  
NA		 Withdrawn
NA Letter of Credit
Bill Discounting		 NA NA NA 25 NA CRISIL A2
NA Proposed Non Fund
based limits		 NA NA NA 49 NA Withdrawn
NA Proposed Non Fund
based limits		 NA NA NA 32.5 NA CRISIL A2
NA Commercial Paper NA NA 7 to 365 days 60 Simple 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  23-03-20  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  267.50  CRISIL BBB+/Stable/ CRISIL A2  23-03-20  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  32.50  CRISIL A2  23-03-20  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
Cash Credit & Working Capital demand loan 242.5 CRISIL BBB+/Stable Bill Discounting 45 CRISIL A2
Cash Credit & Working Capital demand loan 35 Withdrawn Cash Credit & Working Capital demand loan 280 CRISIL BBB+/Stable
Letter of Credit Bill Discounting 25 CRISIL A2 Proposed Non Fund based limits 59 CRISIL A2
Proposed Non Fund based limits 49 Withdrawn -- 0 --
Proposed Non Fund based limits 32.5 CRISIL A2 -- 0 --
Total 384 -- Total 384 --
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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