India Ratings has downgraded Shankara Building Products, notching down the company's long-term rating from Ind A to Ind A-. India Ratings said that it was concerned about the interest cover the company had, and the decline in its operating margins. Shankara has been offering its customers discounts if they make faster and more regular payments, which has also impacted its overall profitability.
"The downgrade reflects deterioration in SBPL’s consolidated credit metrics with its gross interest cover (operating EBITDA/gross interest expense) reducing to 2.1x in FY19 (FY18: 3.8x) and rent adjusted interest coverage (operating EBITDAR/gross interest expense + rents) to 1.8x (3.2x)."
Shankara's net adjusted leverage increased to 2.3x in FY19 (FY18: 1.8x).
This was on account of lower operating EBITDA of INR1,194 million during FY19 (FY18: INR1,752 million). While the reduction in debt due to improvement in the working capital cycle (FY19: 49 days, FY18: 57 days) over 4QFY19-1QFY20 and the sale of its Chegunta manufacturing plant is likely to aid in some improvement in interest cover in FY20, Ind-Ra expects it to be lower than historical levels of FY18 and below the agency’s expectations for the rating level.
The gross interest cover was 2.6x and rent adjusted interest cover was 2.1x in 1QFY20 (excluding IND-AS 116 adjustment).
Operating margin falls
Consolidated operating EBITDA margin declined to 4.5% in FY19 (FY18: 6.9%) on account of lower profitability in the retail segment as well as lower processing margins. The processing margins were under pressure during FY19 on account of volatile commodity prices, which resulted in an inventory loss of around INR200 million and intense competition in the pipes segment.
Also, strategy to offer discounts to reduce the working capital cycle and transactional discounts on the new product category impacted the retail profitability. Consolidated revenue grew 4.1% in FY19 to INR26,541 million due to an increase in retail segment sales.
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