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Acquires minority stake in Shankara Building Products

APAT announced a minority equity investment of INR1,805m by Apollo Mart, a wholly-owned subsidiary, in Shankara Building Products through a purchase of secondary promoter shares and proposed preferential allotment of convertible warrants valuing the investment at 0.8x TTM EV/sales of Shankara.

Investment highlights

* APAT, through its wholly-owned subsidiary APL Apollo Mart (Apollo Mart), acquired 4.38% stake in Shankara in the secondary market on 21st Mar’22.

* It purchased 10,00,000 shares at INR755/share, amounting to INR755m from the company’s promoter.

* It also offered to subscribe to the preferential issue of 14,00,000 share warrants, convertible into equity shares (which is 5.77% of its fully diluted capital upon conversion) at an offer price of INR750 per warrant amounting to INR1,050m.

* Total holding of Apollo Mart in Shankara after the issue of warrants will be 9.9% on a fully diluted basis.

* Of the total investment, APAT will immediately invest INR1,018m (secondary market purchase + 25% warrant subscription money) and invest INR787m within 18 months (75% on warrant conversion).

* APAT will fund this entire investment through internal accruals.

Rationale behind the acquisition of minority stake in Shankara

* The investment in Shankara is in line with APAT’s growth plan to become India's largest market platform for steel building materials by expanding its distribution reach in untapped markets.

* APAT and Shankara have a business association of over 15 years, with the latter being one of the key distributors of APAT’s products. This investment will further strengthen their long-standing association, ensuring consistency in sales through Shankara’s retail and wholesale network and create synergies for APAT.

* Shankara will be a launch platform for APAT’s new products and help the latter focus on expanding in the structural steel tubes market. The investment will provide APAT an opportunity to sell other steel building material products through Shankara (Apollo Mart’s business model).

* The investment is expected to drive margin and earnings growth and be EPS and RoCE accretive from the first-year onwards.

About Shankara

* Shankara Building Products is one of India's leading organized retailers/wholesalers of home improvement and building products.

* Revenue stands at INR22.8b (TTM), with Steel tubes/products constituting majority of its sales.

* The company is present in 10 states, with a cumulative store base of 90 covering 0.45m sq. ft.

* It sells over 30,000 SKUs across the entire home construction and renovation lifecycle.

Valuation and view

* APAT’s strategic investment in Shankara is in line with its growth plans as both companies have a business association of over 15 years and the latter is one of the key distributors of APAT’s products. The investment is expected to result in higher sales growth from Shankara’s stores.

* It will also ensure consistency in sales through Shankara’s retail and wholesale network and create synergies for APAT.

* The total deal amounts to INR1,805m and is valued at 0.8x of Shankara's TTM EV/sales.

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