Snowman Logistics

Skimming a large premium

Capitalising on dominant leadership position in a high growth industry, the company has set a stiff price for its IPO

CM RATING

49/100

Promoted by Gateway Distriparks (GDL), Snowman Logistics is an integrated temperature controlled logistic service provider serving customers on a pan India basis. The company's integrated source-to-store operations comprises warehousing, primary distribution and secondary distribution and value-added services including labeling, sorting, kitting, packaging and bulk breaking.

As on March 2014, the company operated 61,000 pallets and 23 warehouses located across 14 locations in India, with a fleet size of 370 vehicles.

Major shareholders other than GDL are Mitsubishi Corporation, Mitsubishi Logistics Corporation, IFC and Norwest Venture Partners Mauritius. Among the major shareholders, Norwest Venture Partners Mauritius has invested in the company at Rs 35 per share in July'13.

Objects of the Issue

The company is coming out with an IPO for setting up new temperature controlled and ambient warehouses, which would require about Rs 128 crore, and for long-term working capital requirements and for other general purpose. The company also aims to repay bridge loan of about Rs 75.70 crore from the IPO proceeds to reduce the debt. The initial public offering comprises 4.20 crore of equity shares of Rs 10 each in a price band of Rs 44-47. At the lower price band, about Rs 184.80 crore will be raised, and at the higher price band, about Rs 197.40 crore.

About 85% of the IPO is offered to QIP investors and retail investors can participate only up to 10% of total offering of the IPO.

Strengths

The pioneer in the industry comes with a strong track record.

The company caters to product segments, which include dairy products, ice cream, poultry, meat and sea food, ready-to-eat food products, confectioneries including chocolates and baked products, fruits and vegetables, healthcare and pharmaceuticals and industrial products such as x-ray and photo-imaging, and films. Changing lifestyles, emergence of nuclear families, and shift in consumer preference for processed foods are driving the consumption boom in India. Demand for ready-to-eat and confectioneries in super markets is rising. As food consumption habits are changing, restaurants, the food segment in organized retail and quick-serve restaurants are growing in double digits. Improvement in standard of living and a focus on health require enhanced preservations of vaccines and, thus, higher demand of biopharma in pharmaceutical industry. Thus, with strong expected growth in user industry, the prospects of the company are strong.

None of the existing shareholders wants to offer a single share in the IPO. The existing shareholders are very confident of the future of the business.

End-to-end solutions include inventory management solutions. The company is the only organized player in India and has an early-entry advantage in an industry growing at CAGR of more than 20%.

The company plans to reach capacity of about 85,000 pallets by March 2015, whereas the No 2 player in the industry has reached only about 4,000. The company claims that it charges about 25% premium and still commands loyalty from its user industries. Blended realization per pallet stands around Rs 1700.

The company operates at blended Ebidta margin of around 24% with warehousing having Ebidta margin of around 40% and transportation about 12%. There is a further scope of operating leverage and higher yield, which will result in higher Ebidta going forward. Also, the company has dedicated space and aims to increase the contribution from value-added services like packaging, re packaging, sorting, and labeling, which will further help margin.

The business model is a asset-light. More than 80% of the existing fleet is on a lease of 3-5 years and no capex is planned. Typically, a 10,000-pallet warehouse would require capex of about Rs 50 crore. At capacity utilization of around 80%, this can generate a top line of about Rs 20 crore from the warehousing business and about Rs 20 crore from distribution, i.e., last-mile connectivity.

The company does not carry any product risk as everything is insured. Also, increase in fuel and power costs beyond a threshold limit is passed on to customers as per the contract.

The company enjoys tax benefit of Section 35AD of the Income Tax Act, 1961, and, hence, there is deferred tax credit on investments in FY 2013 and in FY 2014, which is expected to continue.

Weaknesses

The working capital cycle is stretched at about 80 days. Even if one excludes the consignment agency business, where only agency commission is booked, the working capital of the company is around 70 days.

While the Ebidta margin is increasing because of higher volumes, blended realisation has fallen because of change in product-mix. Chilled products now form about 25% of total revenue, where the margin is lower compared to other frozen products. Volumes and sales need to consistently grow to protect the margin.

Top 20 customers contributed about 44% of total revenue in FY 2014. Any failure to retain customers will have adversely affect sales and, thus, profit.

The industry has a low entry barrier. High margin and high growth will invite competition. In future, the company may not be able to command the premium and pricing that it currently commands.

Valuation

Net sales were Rs 153.41 crore and PAT Rs 22.48 crore (boosted by deferred tax credit of Rs 11.72 crore) in FY 2014. On fully diluted post-IPO equity share capital of Rs 166.44 crore, EPS for FY 2014 was Rs 1.4. At the lower price band of Rs 44 and higher price band of Rs 47, the offer price discounts FY 2014 earning 32.6 times and 34.8 times, respectively. There is no listed comparable company. Till any new major player enters this field, institutional investors are likely to pay scarcity premium to the scrip for investing in a high-growth industry.