Shankara Building Products Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS I. Overview

Shankara Building Products Limited (hereinafter referred as "Shankara", "SBPL" or "We") is an organized seller of home improvement and building products (such as construction material, steel pipes and sanitary wares etc.) in India, operating under brand name "Shankara Buildpro". We run 125 fulfillment centers out of which 91 are stores and 21 warehouses and 13 processing units spread across Karnataka, Kerala, Andhra Pradesh, Telangana, Tamil Nadu, Maharashtra, Gujarat, Odisha, Madhya Pradesh, and Pondicherry. Our products are also available on our online website www.buildpro.store. Your Company sells over 1,00,000+ SKUs across the entire home construction and renovation lifecycle through the retail stores. The products are spread across categories of Steel Pipes and Tubes, Structural Steel Products, Infrastructure Materials, PVC Products, Aluminum and Metal Products, Fabrications and hardware accessories, Tiles, Plumbing, Sanitary ware, Electricals Products, Interior-Exterior finishing through multiple sales channel. It has tied up with leading brands across categories. The customers include homeowners as well as professional customers like architects, interior designers, contractors, developers, plumbers, electricians, tile layers, masons, carpenters, painters, etc. as well as small enterprises spread across Tier 1, 2 and 3 locations. We also have industrial customers in addition to retailers and wholesalers.

Your Company has strategically introduced a private label, Fotia Ceramica, catering to a diverse range of customers in the tile segment. After a successful launch in Kerala, Fotia is expanding its footprint in Karnataka, Tamil Nadu, Maharashtra & other Southern regions.

Key announcements in FY 24

Demerger

Your Company has proposed a demerger of its core business which is retail and trading of building material into its wholly owned subsidiary Shankara Buildpro Limited. Consequent to the approval by the Board of Directors of Shankara, the Company has filed the scheme of arrangement with the stock exchanges. Your Company felt the need for the demerger to focus better on its many diverse businesses and thereby unlock greater value for the stakeholders.

Shankara today is engaged in multiple activities like manufacturing of steel tubes and cold rolled strips, manufacturing color coated profiles for roofing and other sections for general engineering applications. These activities are housed in multiple subsidiaries. The core business of Shankara is organized retailing and distribution of steel products and numerous building materials. Therefore, the Management proposes a demerger of its core business into a separate entity. The demerger will result in two entities. Shankara Building Products limited which will be the legacy company housing the three subsidiaries which are manufacturing entities. The second entity will be Shankara Buildpro Limited ("Buildpro") which will carry out the current core business of retailing and distribution of steel and other building materials.

1. Both the entities will have clear, well-defined goals and objectives. The individual Management and Operation teams will be able to allocate resources optimally.

2. The enhanced focus will improve the performance of the SBPL and could result in better use of its assets.

3. Financial performance will definitely improve for both entities. Both the companies can streamline cost, have clearer financial reporting and optimize their capital structure potentially leading to better financial results.

4. Both the businesses are free to pursue their individual goals, which will lead to greater flexibility in future strategies.

5. There will be a better alignment with industry trends and this will enhance our competitive ability.

6. There will be a simplification of the organization structure which will improve our decision-making and overall improve the efficiency of both the entities.

As per the scheme of arrangement it is proposed that the existing shareholders of SBPL will be allotted 1:1 shares in the resultant entity.

Addition of Luxury brands

The Company have store-in-store with Nippon Paints, modular kitchens and wardrobes with Panasonic, German engineered wooden doors with Wesmarc and added appliances with Faber, Carysil, Siemens and Hafele.

II. Industry Structure and Developments

The building material industry is well diversified and organized in India. We produce excellent quality steel, cement, plastic products, paints, bathroom related products, electricals and myriad other related items for the building and construction industry. We have world-class companies, both Indian and Multinational, in this industry. The structure of the industry is well defined in most of the building materials. The supply chain generally consists of manufacturers warehouses at multi locations, distributors and retailers to cater to the needs of the end consumer. This industry keeps pace with new developments and is quick to adopt the changes and introduce new products on a continuous basis.

India emerged as the fifth largest economy worldwide and maintained its reputation as the fastest growing economy. Our GDP grew by about 6.8% in the last financial year 2023-24. And is expected to maintain this momentum in the coming year ending March 2025.

The governments economic policy focused on Indias growth potential by getting the financial sector back on track, facilitating economic activity by easing conditions for business, and massively augmenting physical and digital infrastructure to enhance Indias connectivity and, thus, the competitiveness of its manufacturing and service sector. The government has undertaken diverse economic reforms to prepare the economy to grow at its potential by creating a business-friendly environment, improving quality of life, and strengthening the governance systems and processes.

The focus on infrastructure creation and demand for housing is driving construction activity, as reflected in increased steel consumption and cement production. The governments massive push for capex not only reduced logistics costs but also bolstered the construction industry. This, coupled with the measures to increase domestic steel production and the focus on affordable housing, has helped India achieve a growth of around 12 per cent per annum in the construction industry in the last year. The advancements in the real estate sector, along with government initiatives on housing and infrastructure are expected to provide an additional boost to the industry.

The government is implementing the following projects for the coming fiscal: i. Three major railway corridor programmes under PM Gati Shakti-to improve logistics efficiency and reduce cost. ii. Expansion of existing airports and comprehensive development of new airports under UDAN scheme. iii. Promotion of urban transformation via Metro rail and NaMo Bharat iv. Rooftop solar program for over one crore households v. Pradhan Mantri Awas Yojana (Grameen) to provide additional two crore houses over the next five years. The demand for private housing and improvement in standard of living augurs well for our industry. All these schemes are beneficial to the construction and building material industry.

III. Opportunities and Threats

Shankara sees good opportunity for growth as the construction and infrastructure boom continues unabated. The Company has substantial presence in various parts of India and is well positioned to cater to the increasing demand.

The building material industry is seeing continuous developments over the last few years. Customer preferences change with the introduction of new materials, greater exposure to new thoughts and design through digital media. Enhanced competition also leads to newer products and design. Uncertainties always exist in any economy. Our financial performance depends significantly on the stability of the housing, residential construction and home improvements market.

Uncertainty about these markets, or the economy could adversely impact our customers confidence or financial condition thereby postponing purchase decisions. Every business environment has significant competition inbuilt in it. We believe that this industry is a very operations intensive business with low margins. However, Shankara is a well-poised to withstand competition. The Company has built a lot of insight in this industry in its 50 years journey, which will stand us in good stead. Shankara has adopted a market place approach.

iV. Segment wise or Product wise performance

Our business is structured across three key revenue streams – retail, enterprise and channel. Retail contributes ~53% of the total revenues of the Company and grew at 14% in FY 24.

I. Retail segment

Our retail revenue was 2556 crores in FY24 which was 53% of our total sales. Our segment EBITDA margins stood at 5.7% in FY 24. Our retail footprint spans ~4. 64 lakhs sq.ft. Our average store size is ~5,097 sq.ft.

II. Enterprise segment

In this segment, we cater to the requirements of large end users, contractors and OEMs. Our sales in this segment was 1,000crores in FY 2024.

The enterprise business contributes ~21% of the total revenues and the channel business contributes to ~26% of the total revenues. The Company is moving towards a market place model. We have 125 fulfillment centers which includes 91 stores, 21 warehouses and 13 processing units. As the market place model grows it makes more sense to classify our business segments as (i) Steel Products and (ii) Non-Steel Products. Steel products includes pipes, HR, CR,GP sheets (flat products), construction steel and angles, channels, beams (long products), roofing material etc. Non-Steel includes sanitary ware, tiles, Pvc pipes and fittings, electricals, paints and building accessories.

Enterprise customers are more demanding in terms of quality parameters and specifications. This can be partly catered to with our integrated processing facilities.

III. Channel segment

In this segment we cater to dealers and other retailers through our branch network. The Channel segment continues to be a strategic business for us. It builds understanding of the markets and the emerging trends. The channel business recorded revenues of 1,272crores for FY 24.

IV. When we look at our business through the segments of Steel and Non-Steel, the revenue would be as follows:

	Product	FY 24	FY23	Growth
i.	Steel Products	4,357	3,667	19%
ii.	Non-Steel Products	471	362	30%
	Total Revenue	4,828	4,029	20%

The Company feels the above classification of business segment would be more relevant in the future as the margin profile of non-steel products is better than steel products. This necessitates the Company to focus more on these products and ensure rapid growth of the same.

Processing

We have 13 functional processing units. Most of these units are engaged in the profiling of roofing sheets, accessories etc. Two units are engaged in the manufacture of precision steel tubes.

Supply chain management

Supply chain is an integral part of our business. We have a warehousing network spread over ~5 lakhs sq.ft across our area of operations. Warehousing is very critical in ensuring storage of the required range of material and timely delivery to our customers. The Company owns most of our warehousing space. We also own a fleet of trucks, primarily catering to short distance deliveries.

V. Outlook

The Indian economy is poised to grow at 6% for the year 2024-25. The Annual Budget presented by the Union Government emphasized considerably on infrastructure and the housing sector. The Budget has allotted considerable resources for the same. ( in crores)

Ministry of Defense :	6.2
Ministry of Road Transport
and Highways :	2.78
Ministry of Railways :	2.55
Ministry of Rural Development :	1.77

Considering the above Shankara hopes to see a favorable environment. The real estate and building industry is also witnessing substantial demand in residential and in the commercial sector. This augurs well for the Company.

VI. Risks and Concerns

As our investor, you already understand that risks are part of any business. It is not possible to detail every risk to the business. For our business, we have identified key risks: Business Risks: A significant portion of our business is generated from a large number of customers. Our business operations may fluctuate due to a variety of factors such as loss of key customers, fluctuation in demand and sales volume, timing and size of customer capital spends, inventory management practices. Market Risks: The fragmented unorganized market and owner driven competition at a fairly large scale affects the environment. The intensity of competition has moved beyond metros. Financial Risks: We have a very diversified customer base. A lot of our sales is credit based. Therefore, in case the customer reneges on payments, this could lead to bad debts and affect profitability. Interest rates have been increasing in the recent past. Further increase of interest rates could affect the profit margins accruing to the Company.

VII. Internal control systems and their adequacy

In accordance with the provision of Section 134(5) (e) of the Companies Act, 2013, and as per the provisions of the SEBI (LODR), Regulations, 2015, the Company has an Internal Control System. Shankara management assessed the effectiveness of the companys internal control over financial reporting (as defined in Regulation 17 of SEBI LODR Regulations 2015) as of March 31, 2024. Sundaram & Srinivasan, the statutory auditors of Shankara have audited the financial statements.

The internal control forms an integral part of the Companys corporate governance and plays a critical role in managing operational risks. The Company has a defined Risk Management policy applicable to all businesses of the company. This helps in identifying, assessing and mitigating the risk that could impact the Companys performance and achievement of its business objectives. The Company has Risk Management Committee consisting of Independent and Executive Directors. On a quarterly basis, the Risk Management Committee independently reviews all identified major risks & new risks, if any, and assess the status of mitigation measures/plan. The Company has adopted accounting policies which are in line with Indian Accounting Standards ("Ind AS"). Pursuant to the provisions of the Section 134(5) (f) of the Act, the Company during the year devised proper systems and continued to ensure compliance with the provisions of all applicable laws. Any matter that required attention was immediately dealt with. The compliance system was largely found to be adequate and operating effectively. The Directors have in the Directors Responsibility Statement under paragraph (f) confirmed the same to this effect. The Internal Auditors monitor and evaluate the effectiveness and adequacy of internal control system in the Company, its compliance with operating systems, accounting procedures and policies at all locations of the Company and its subsidiaries.

VIII. Discussion on financial performance with respect to operational performance.

Financial Highlights/ Year Ending 31st March	2023 -24		2022-23
	Consolidated	Standalone	Consolidated	Standalone
Revenue from operations	4,828.44	4,862.73	4,029.72	4,036.22
Total Income	4,833.68	4,869.41	4,037.42	4,043.53
Earnings Before Interest, Exceptional Items & Taxes (EBIT)	156.35	134.04	108.62	97.79
Profit/(Loss) before Exceptional items & tax	108.10	92.92	84.37	76.25
Exceptional Items	-	-	-	-
Profit/(Loss) before tax	108.10	92.92	84.37	76.25
Tax expenses	26.97	23.06	21.32	19.23
Profit/ (Loss) after tax	81.13	69.86	63.05	57.02
Other comprehensive income	0.31	0.27	0.12	0.10
Equity dividend %
Share Capital	24.25	24.25	22.85	22.85
Other Equity	773.32	576.96	620.24	435.19
Net worth	797.57	601.21	643.09	458.04

Share Capital

During the year under review, there was an increase in paid-up equity share capital, in view of the Company issuing and allotting equity shares as follows: Preferential allotment of 14,00,000 equity shares with a face value of 10/- per equity share at a issue price of 750/- (including premium of

740/- per equity share) to APL Apollo Mart Limited , on November 9, 2023 consequent to the rights of conversion attached to Share Warrants. As a result of the above, the paid-up equity share capital stands at 24,24,93,260/- comprising of 2,42,49,326 equity shares of 10/- per share fully paid up, as on March 31, 2024.

Reserve & Surplus

On standalone and consolidated basis, the balance of security premium as at March 31, 2024 amounted to 214.88 crores.

Goodwill

On a consolidated basis, carrying value of goodwill as at March 31, 2024 stood at 14.04 crores.

Trade Receivables

On a consolidated basis trade receivable amounted to 686.11 crores (previous year 511.06 crores) net of provision for doubtful debts of 7.39 crores (previous year 3.82 crores).

Loans and Advances

It represents employee advances. On a consolidated basis loans and advances amounting to 0.83 crores.

Borrowings

On a consolidated basis, borrowing current as at March 31, 2024 is 69.01 crores and non-current borrowing 14.40 crores.

Other Income

Please refer note no. 32 in consolidated financials.

Expenditure

The employee benefits expenses increased to

54.97 crores compared to previous year at

48.24 crores on consolidated basis.

Profit before Tax

Our profit before tax increased by 23.73 crores from a profit before tax of 84.37 crores for FY 2023.

Tax Expense

For the year ended March 31, 2024, there was a tax expense of 22.62 crores (Previous year: tax expense of 16.92 crores) on a standalone basis. On a consolidated basis, tax expense was 26.86 crores (previous year 19.32 crores).

Net Profit

On consolidated basis, the net profit of the Company amounted to 81.13 crores as against a

63.05 crores during the previous year. Total Comprehensive profit for the year is 0.31 crores as compared to 0.12 crores during previous year. On standalone basis, the net profit of the Company amounted to 69.86 crores as against a

57.02 crores during the previous year. Total Comprehensive profit for the year is 0.27 crores as compared to 0.10 crores during previous year.

Earnings per Share

Basic Earnings per share computed based on number of common stock outstanding, as on the Balance Sheet date is 34.67 per share (Previous year: 27.59 per share) on a consolidated basis and 29.85 per share (Previous year: 24.95 per share) on a standalone basis.

IX. Material developments in Human Resources/Industrial Relations front, including number of people employed

In a business environment and marketplace that is continuously changing, the major competitive advantage for a leading organization hinges upon knowledge, skills, and experience of its employees. HR practices with business needs, total commitment to the highest standards of corporate governance, business ethics and social responsibility has lead our organization to create a work environment that nurtures empowerment, transparency and ownership.

The Companys strong foundation of policies and processes ensures health, safety and welfare of its employees. Throughout the year, the Company has organized several medical camps and cultural activities for employees and their families. The Company has established harmonious industrial relations, proactive and inclusive practices with all employee bodies.

X. Key financial ratios:

The comparison of key financial ratios for FY 24 and FY 23 is detailed below:

Particulars	2023-24	2022- 23
	Consolidated
Debtor Turnover in Days	44	39
(on gross sales)
Inventory Turnover in Days	37	39
Interest Coverage Ratio	4.34	4.41
Current Ratio	1.67	1.63
Debt Equity Ratio	0.06	0.11
Operating Profit Margin (%)	3.24	3.11
Net Profit Margin (%)	1.68	1.56
Return on Net Worth	18	15

Annexure-VIII to the Directors Report

ENERGY CONSERVATION, TECHNOLOGY ABSORPTION, R&D CELL AND FOREIGN EXCHANGE EARNINGS AND OUTGO

(Pursuant to Section 134 (3) (m) of the Companies Act, 2013, read with Rule 8 of the Companies (Accounts) Rules, 2014)

Subsidiary Companies:

Taurus Value Steel & Pipes Pvt. Ltd	Units	Amount in	Rate/Unit
Total Energy purchased	2,96,142	44,73,956	15.11
Vishal Precision Steel Tubes & Strips Pvt. Ltd	Units	Amount in	Rate/Unit
Total Energy purchased	33,15,794	3,51,08,390	10.59
Centurywells Roofing India Pvt. Ltd	Units	Amount in	Rate/Unit
Total Energy purchased	1,67,685	21,35,335	12.73

 

	For Shankara Building Products Limited
Place: Bengaluru	Sd/
Date: May 20, 2024	Sukumar Srinivas
	Managing Director
	DIN: 01668064