By Prakash P

India Ratings and Research (Ind-Ra) has upgraded Shankara Building Products Limited’s (SBPL, formerly Shankara Infrastructure Materials Limited) Long-Term Issuer Rating to ‘IND A’ from ‘IND BBB+’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Long-term loans

-

-

June 2019

INR82.4 (increased from INR18.9)

IND A/Stable

Upgraded

Fund-based working capital limits

-

-

-

INR2,600 (reduced from INR2,700)

IND A/Stable/IND A1

Upgraded

Non-fund-based working capital limits

-

-

-

INR20 (reduced from INR50)

IND A1

Upgraded

Ind-Ra continues to take a consolidated view of SBPL and its subsidiaries: Vishal Precision Steel Tubes & Strips Private Limited, Taurus Value Steel & Pipes Private Limited and Centurywells Roofing India (Pvt) Ltd. SBPL has extended unconditional and irrevocable corporate guarantees for all the bank facilities, amounting to INR2,032.6 million, under its subsidiaries.

KEY RATING DRIVERS

Refinancing of Hybrid Investment following Successful IPO: The upgrade reflects the refinancing of equity investment made by a private equity (PE) investor through a successful initial public offering (IPO) in March 2017. The PE investor had invested INR800 million in SBPL during FY12. This investment carried a put option which if had been exercised would have led to an increase in debt and had therefore constrained the ratings. Apart from providing an exit to the PE investor through an offer for sale, the company had raised INR450 million through the issue of fresh equity shares, which had been primarily used towards repayment of high-cost debt.

Improvement in Operating Performance: Consolidated operating EBITDA margin continued to improve in FY17 to 6.7% (FY16: 5.9%; FY15: 4.5%), primarily aided by a higher volume of products manufactured in-house and higher revenue per store. Ind-Ra expects SBPL along with its subsidiaries to continue to demonstrate a strong operating performance over the medium term, aided by an increasing contribution from the high margin retail segment. Consolidated revenue was INR23,101.4 million in FY17 (FY16: INR20,359.2 million), of which 42.5% was from the retail segment (39.7%).

Improvement in Credit Metrics: Consolidated net adjusted debt declined to INR2,213.4 million in FY17 (FY16: INR2,711.9 million), following the successful IPO and consistent generation of positive free cash flow aided by a stable working capital cycle (FY17: 55 days; FY16: 57 days). This reduction in net debt coupled with the improvement in operating margin resulted in an improvement in credit metrics with net adjusted leverage at 1.4x in FY17 (FY16: 2.1x) and gross interest coverage at 3.0x (2.6x). Ind-Ra expects its credit profile to remain steady over the medium term as the company uses it operational cash flows to increase its retail presence.

Established Market Position: SBPL has a strong market position in south India, with a network of almost 2,000 dealers, over 56 warehouses and 106 retail outlets in FY17. The company is an authorised channel partner for leading manufacturers such as Tata Steel Limited (pipes division) (‘IND AA’/RWE), APL Apollo Tubes Limited, Steel Authority of India Limited (‘IND AA-’/Negative), JSW Steel Limited (‘IND AA-’/Negative), Essar Steel Limited, Astral Poly Technik Limited, etc.

Concentration Risk:
The company offers a diverse range of building materials in its retail stores, but remains predominantly a steel products company (over 50% of the overall consolidated sales). SBPL is exposed to demand cyclicality, with its primary exposure to the real estate industry. Increasing the profitability by increasing same store revenue while continuing to expand its retail outlets would be the important challenge for the company in the coming years.



RATING SENSITIVITIES

Positive: A significant improvement in the retail revenue, along with larger product and geographical diversification resulting in an improvement in the operating profitability and credit metrics at the consolidated level could lead to a positive rating action.

Negative: A decline in the profitability margin or an elongation of the working capital cycle, resulting in the net adjusted leverage above 2.0x on a sustained basis at the consolidated level could lead to a negative rating action.


COMPANY PROFILE

SBPL is a retailer of a wide range of building and home improvement products with 116 retail showrooms till date across southern and western parts of India. The company is also in the distribution of steel-based products such as structural steel, TMT bars, pipes and tubes and other allied steel products. The group’s manufacturing capacity was 324,400MTPA at FYE17 and this is housed in its subsidiaries.

FINANCIAL SUMMARY

Particulars (consolidated)

FY17

FY16

Revenue (INR million)

23,101.4

20,359.2

EBITDA (INR million)

1,543.8

1,195.7

EBITDA margin (%)

6.7

5.9

EBITDAR (INR million)

1,635.1

1,268.4

EBITDAR margin (%)

7.1

6.2

Interest coverage (x)

3.0

2.6

Net adjusted leverage (x)

1.4

2.1

Source: SBPL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating/Outlook

27 May 2016

29 May 2015

24 September 2013

Issuer rating

Long term

-

IND A/Stable

IND BBB+/Positive

IND BBB+/Stable

IND BBB+/Stable

Term loan

Long term

INR82.4

IND A/Stable

IND BBB+/Positive

IND BBB+/Stable

IND BBB+

Fund-based working capital limits

Long term /Short term

INR2,600

IND A/Stable/IND A1

IND BBB+/Positive/IND A2

IND BBB+/Stable/IND A2

IND BBB+ /IND A2

Non-fund-based working capital limits

Short term

INR20

IND A1

IND A2

IND A2

IND A2


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has six branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

Ind-Ra is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Prakash P

    Senior Analyst
    India Ratings and Research Pvt Ltd 4th Floor, D South, TIDEL Park No 4, Rajiv Gandhi Salai, Taramani Chennai 600 113
    044 43401700

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121