Snowman Logistics Ltd.

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1 Recommendation SUBSCRIBE with a Long Term View BACKGROUND Price Band Rs 44-Rs 47 Snowman Logistics (SLL), a leading player in a predominantly unorganized cold chain industry in India is engaged in cold chain Bidding Date 26 th Aug-28 th Aug 2014 warehousing and transport and value-added services for perishable Book Running Lead HDFC Bank goods. The company s cold chain business currently has 23 warehouses Manager across 14 locations in India with a capacity of approx pallets and Registrar Link Intime India Pvt. Ltd. a fleet of 370 reefer vehicles (reefers). Sector Logistics Minimum Retail Application- Detail At Cut off Price Number of Shares 300 Application Money Amount Payable Discount to retail Consolidated Financials (Rs in Cr) FY13 FY14 Total Income EBITDA PAT Valuations Lower Band Upper Band Market Cap (Rs in cr) EPS* BV/share* P/E ratio* P/BV* *calculated on diluted equity, FY14 Post Issue Shareholding Pattern NIL Promoters 40% Institutions 9.3% Bodies Corporates & Public 50.7% Offer structure for different categories QIB (Including Mutual Fund) 75% Non-Institutional 15% Retail 10% Post Issue Equity (Rs. in cr) Issue Size (Rs in cr) Rs Rs Face Value (Rs) 10 Prabhat Anantharaman Research Associate ( ) prabhat.anantharaman@nirmalbang.com CRISIL has assigned a Grade 4/5 to the Snowman Logistics IPO which indicates that the fundamentals of the issue are above average relative to other listed securities in India. Objects of the Issue The issue consists of fresh issue by Snowman Logistics and the net proceeds from the fresh issue (Rs cr) would be utilized for (a) Capital expenditure for setting up new temperature controlled and ambient warehouses (b) Meet Long term working capital (c) General corporate purpose. Valuation and Recommendation Being a subsidiary of the logistics behemoth Gateway Distripakcs Snowman Logistics with its strong business model could be a good proxy play on the consumption led India growth story. It is a complete sourceto-stores pan India cold chain services provider catering to diverse endproduct industries, enjoying a well diversified and loyal clientele and commanding a clear superior edge over the unorganized players in its industry. However, despite its vast business prowess, the valuations constrain our recommendation on this IPO. Though there is no direct listed peer company, we compared SLL to Gati and Concor as they have cold storage logistics businesses which form part of their main businesses. At the given price band of Rs 44-Rs 47, SLL, commanding a PE of 32.6x 34.8x its post issue diluted FY14 EPS of Rs 1.39/sh and EV/EBIDTA of x looks expensive, leaving very little on the table for retail investors. However, the company s aggressive expansion plans coupled with strong presence in niche segments and healthy management bandwidth provides long term growth prospects. We recommend subscribing the issue with a long term view as it may have limited listing gains. Financial Snapshot FY10 FY11 FY12 FY13 FY14 Revenues %growth 31% 36% 85% 35% EBIDTA % margins 16% 20% 21% 22% 25% PAT % margins 12% 14% 10% 17% 15% Rs P/E Rs Rs P a g e

2 Business Snowman Logistics Ltd (SLL), incorporated in 1993 by Amalgam Foods, is a leading integrated player in a predominantly unorganized cold chain industry in India. Its largest shareholder is Gateway Distripakcs (GDL), which owns 48.33% stake in the company. The other key shareholders are Mitsubishi Logistics Corporation (2.93%), Mitsubishi Corporation (12.63%), International Finance Corporation (IFC) (12.46%) and Norwest Venture Partners VII-A Mauritius (13.84%). SLL s primary businesses comprise cold chain warehousing and transport and value-added services for perishable goods. The company s cold chain business currently has 23 temperature controlled warehouses across 14 locations in India with a capacity of approx pallets. The company boasts of operating 370 reefer vehicles (reefers) consisting of 307 leased and 63 owned vehicles. It s ambient (requiring room temperature controlled environment) warehousing business has a capacity of 3,000 pallets, wherein 11 of the 21 temperature controlled warehouses are on leased land. In its transport business, the company offers services through primary and secondary transportation. Primary transportation is an intercity service while secondary transportation is an intra-city service. Herein the company has 175 leased reefers and 63 owned reefers. Finally, the value-added services business also known as the consignment agency involves activities such as labeling, grading, packaging and inventory management to some of its clients. Revenue Distribution FY14 Source: Company data, Nirmal Bang Securities Though perishable food products account for a lion s share, the company provides services to various industries such as seafood, poultry, fruits and vegetables, dairy, ice-cream, food processing, pharmaceuticals and some other niche segments. Product Mix FY14 Source: Company data, Nirmal Bang Securities 2 P a g e

3 Investment Rationale Exhibiting strong past performance Within a short span of time, SLL has seen its revenues and PAT grow at CAGR of 58% and 53% respectively between FY At the same time its pallet capacity increased from pallets in FY10 to pallets in FY14. Operating primarily in the premium segment with a suitable product mix enabled EBITDA to grow at a CAGR of 63% over FY10-14 and EBITDA margins expand from 16% in FY10 to 25% in FY14. Going forward, the pallet capacity addition is expected to be strong as SLL plans to increase its pallet capacity to by FY15 and further to by FY16. Consequently, with the industry slated to grow at 15-20% pa over the next 5 years, we expect the company to continue its robust performance with margins remaining stable at current levels. Reduced dependence on any particular segment by catering to diverse end user industries Serving diverse end user industries such as seafood, poultry products, fruits, vegetables, dairy products, ice-cream, retail, pharmaceuticals and other niche segments, enables SLL in countering demand volatility as most of the end products that require cold storage are perishable in nature and have seasonal demand. The diverse product mix also helps company to gain from the growth prospects in the end-product industry it serves. Enjoying a well diversified and loyal clientele Augmenting its diverse product portfolio, SLL boasts of a well diversified and loyal clientele hailing across industries such as FMCG, QSRs, poultry, seafood, dairy, food processing, confectionaries and pharma. This strong and diversified customer base helps the company in running at high utilization throughout the year. Its key clients include Hindustan Unilever (HUL), Al-Karim Exports Pvt. Ltd, McCain Foods India Pvt. Ltd (McCain), Novozyme South Asia Pvt. Ltd (Novozyme), Ferrero India Pvt. Ltd (Ferrero), Graviss Foods Private Ltd etc. With its top 20 clients accounting for approx. 40% of total revenues, the company has relatively low client concentration. Gaining market share by penetrating Tier II & Tier III markets Currently SLL caters to pan-india customers with a presence in the prominent metropolitan cities like Mumbai, Chennai, Bengaluru and Kolkata. However, with the temperature controlled logistics industry expected to grow at around 15-20% per annum over the next 5 years, demand for quality food products is slated to increase with consumer spending from the tier-ii and III cities showing a steadily rise. Also with expectations of organized market players growing at the higher-end estimates for the overall industry, SLL aims to grab a large share of the regional and unorganized markets, which together currently hold 90% of warehousing and 80% of distribution. Increasing revenue share from Value added services Apart from expanding its reach into new markets, SLL also plans to enhance its range of services offered by introducing various value added services such as knitting, labeling, sorting, packing and re-packing of goods. This would enable it to not only boost topline performance but also fuel bottom line growth. In FY14, this segment contributed approx. 1% and 5% to its revenues and profits respectively. 3 P a g e

4 Industry Prospects The temperature controlled logistics industry in India has strong growth prospects driven by expansion in end-user industries and organized retail. Changing lifestyles and resultant consumer preferences for processed foods, off-season and exotic high end fruits and vegetables and increased preference of eating out at quick service restaurants is expected to drive the use of temperature controlled logistics. The key growth drivers include:- An increase in the consumption of temperature sensitive perishables Greater use of temperature controlled logistics in categories such as pharma, fruits and vegetables An increase in the consumption of a gamut of niche and high end products that need to be maintained in temperature controlled environment. Accordingly, the industry which is estimated at around Rs crore is expected to register a healthy growth of 15-20% over the next 3 to 4 years to Rs crore. Within it, warehousing services is expected to grow at by of 15-17% to approx Rs crore by FY16. The QSR (Quick Service Restaurant) industry is projected to grow at a healthy CAGR of 30% over FY13-16 driven by factors such as favorable demographics, rise in disposable incomes and increase in urbanization. Going forward, although organized retail penetration in the temperature controlled warehousing industry remains a mere 6-7% and the same in transportation lags at 15-20%, the potential for growth is immense as the perishable nature of food and grocery products such as ice cream, butter and cheese pose the biggest challenge to the under-developed unorganized cold chain operators. The overconcentration of 44% of India s cold storage units in the state of Uttar Pradesh (UP) also creates opportunities for the organized cold chain operators to foray into areas with low density of warehousing capacities. Growth in export markets also present ample opportunities with the fisheries export industry estimated to grow to USD 5 billion in FY16 at a 3-year CAGR of 14% driven by increasing demand from key importing countries such as the US, EU, Japan, China and the Middle East. Despite being one of the largest producers of seafood in the world, India faces severe challenges because approx % of annual seafood produce is wasted owing to its short shelf life. The cold chain industry could help play a crucial role as it could assure continuous supply during the non-catch season and prevent spoilage of seafood. Finally, favorable government policies such as viable gap funding (VGF), tax cuts, and liberal FDI norms etc. could encourage the cold chain operators to invest heavily infrastructure and equipments. In FY12, the Government s decision to award infra status to the cold chain industry in India to curb post-harvest losses, increase realizations for farmers and lower price fluctuations in perishable commodities was a move aimed in the right direction. 4 P a g e

5 Valuation and Recommendation Between FY10-14 SLL s revenues grew at CAGR of 58% while EBIDTA grew at a CAGR of 63%, as pallet capacity increased from pallets in FY10 to pallets in FY14. Going forward, we expect the company to continue exhibiting this high growth trend until the company reaches a reasonable mature stage of business cycle. Moreover, the high growth in the industry coupled with shift from unorganized to organized player will also fuel and support growth for company. As the temperature controlled industry size grows at 15-20% over the next 3 years, we expect SLL to post numbers in line with industry estimates. Given the capital intensive nature of the industry and high growth, the return ratios are expected to remain low. The debt-equity ratio of 0.5x its post issue equity looks well under control. On the valuation front, at the given price band of Rs 44-Rs 47, SLL is commanding at PE of 32.6x 34.8x its post issue diluted FY14 EPS of Rs 1.39/sh and EV/EBIDTA of x. Though there are no direct listed peers to compare with, we have compared it to Gati and Concor as they have cold storage logistics businesses which form part of their main businesses. Consequently, while valuations for Gati at 34x its consolidated trailing EPS and 17.x its EV/EBIDTA is broadly at par with SLL, Concor a much entity commanding a superior market capitalization of Rs crore (33x SLL post issue market cap) trades at 20x its consolidated trailing EPS and 11x EV/EBIDTA, making the valuations of SLL look expensive. Gateway Distripakcs (GDL) the parent company is also commanding lower valuations at 19.5x its trailing consolidated EPS and 13.2x EV/EBIDTA. However, the company s aggressive expansion plans for increasing its pellet capacity to 85,000 pellets by FY2015 and further to pellets by FY2016 is likely to boost the operating performance. Further, the company s presence in a niche segments with a strong management expertise also improves its growth prospects. We recommend subscribing the issue with a long term view. Key Risks and concerns Due to the steep rise in diesel prices over the past couple of years the company s fuel cost has ballooned from around 10% of sales in FY12 to 21.5% in FY14. Any future increase in diesel prices may hinder profit growth. SLL is aggressively expanding its capacities over the next couple of years. In case the company is unable to generate sufficient business, its utilization rates could come under pressure, subsequently putting pressure on profitability and growth. Cost overruns and delay in building the new warehouses may hamper growth and put pressure on the financials. The transport business form nearly 50% of revenues with almost 83% of the reefer fleet being is outsourced from third parties. Moreover, with approx. 97% of the outsourced fleet from two contractors any inability to renew contracts with them in a timely manner may hamper business. 5 P a g e

6 FINANCIALS Income statement Profit & Loss A/C FY10 FY11 FY12 FY13 FY14 Net Sales growth % 30.7% 35.9% 85.2% 79.9% Operating Expenses Purchase of Stock-in-trade Stock Adjustments Employee Cost Other Expenses Total Expenditure EBIDTA margins % 15.7% 19.9% 21.0% 22.4% 24.8% Interest Depreciation Other Income Profit Before Tax Tax Deferred Tax PAT margins % 12.0% 14.3% 10.4% 16.7% 14.7% EPS Rs. (Post Issue) B.V Per share Debt/Equity (x) EV/Sales EV/EBIDTA ROCE % 4.3% 7.1% 8.7% 7.7% 8.0% ROE % 4.3% 6.2% 5.9% 14.8% 10.2% Source: Company data, Nirmal Bang Research 6 P a g e

7 Balance Sheet Balance sheet FY10 FY11 FY12 FY13 FY14 Equity & Liabilities Share Capital Reserves Total Total Shareholders Funds Long term borrowing Deferred Tax Liabilities Long term provisions Total Non-current Liabilities Short term borrowings Trade Payables Other Current Liabilities Short term provisions Total Current Liabilities Total Equity & Liabilities Assets Fixed Assets Long term L&A Other Non-current assets Deferred Tax Asset Tota Non-current Assets Inventories Trade Receivables Cash & Bank Balance Short term L&A Other Current Assets Total Current Assets Total Assets Source: Company data, Nirmal Bang Research 7 P a g e

8 Disclaimer: This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt. Ltd). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai Board No. : /8001 Fax. : P a g e