SNOWMAN LOGISTICS LIMITED
Issue opens: Tuesday, August 26, 2014
Issue closes: Thursday, August 28, 2014
Issue Size Allocation No. of Shares
QIB 75% – 31,500,000
NIB 15% – 6,300,000
Retail 10% – 4,200,000
Total 100% – 42,000,000
Face Value – Rs.10
Price Band – Rs.44 to Rs.47
Bid Lot – 300 Equity shares and in multiples thereon.
Valuation and Investment Rationale
The Initial Public Offer is having a price band of Rs.44 on the lower side and Rs.47 on the higher side. At an earnings per share of Rs.1.9 for FY 2013-14 the Price to Earnings ratio lies in the range of 23 to 25. Therefore the IPO is priced at 23x its earnings per share on the lower side of the price band at Rs.44 per share and 25x its earnings per share on the higher side of the price band at Rs.47 per share.
Given the growth expected in the business of the company in terms of revenues as well as profitability one can expect marginal listing gains for this IPO
Considering the current market scenario the IPO is priced at expensive valuations but if we take into account the growth that is possible in the business of the company in the next 3 to 5 years the valuations appear to be reasonable. On a conservative basis if the earnings of the company are expected to increase at 20% CAGR in the next 5 years the investment would yield a high return in the long term.
The cold storage business is capital-intensive, requiring investments in expanding reach, storage capacity, and maintenance. Of the issue proceeds, Rs.1280 million will go towards adding six new temperature-controlled warehouses and two ambient warehouses.
The issue size is Rs.420 million with a face value of Rs.10 with Rs.1848 million on the lower price of the price band and Rs.1974 million on the higher price of the price band. The retail segment has been allocated not more than Rs.184.8 million on the lower price of the price band and Rs.197.4 million on the higher price of the price band for the issue. The issue size is relatively small and allotment would happen on a random basis if the issue is oversubscribed.
The Issue has been graded by CRISIL Limited as 4/5, indicating that the fundamentals of the Issue are above average in relation to other listed equity securities in India.
Company Business Overview
Snowman is engaged in cold chain warehousing and transport and value-added services for perishable goods. 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. 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.
Snowman Logistics Ltd (Snowman), founded in 1993, is a leading integrated player in a predominantly unorganised cold chain industry in India. The largest shareholder in the company is Gateway Distriparks Ltd. (GDL) that holds 48.33% stake in the company. The other key shareholders in the company are Mitsubishi Logistics Corporation (2.93%), Mitsubishi Corporation (12.63%), International Finance Corporation or IFC (12.46%) and Norwest Venture Partners VII-A Mauritius (13.84%).
Snowman was incorporated by Amalgam Foods Ltd in 1993 as Snowman Frozen Foods Ltd. In 1997, erstwhile Brook Bond India, (now part of Hindustan Unilever Ltd) acquired 23% stake in the company. In 2001, Mitsubishi Corporation and Mitsubishi Logistic Corporation jointly bought a majority stake in Snowman. Until then, the company was incurring losses. In 2006, GDL became the largest shareholder in the company by acquiring 33.34% stake and revamped Snowman’s management structure. In 2010, IFC acquired 20% stake. In 2011, to reflect the change in positioning of the company, the name of the company was changed to Snowman Logistics Ltd. In 2013, private equity firm NVP bought 14.28% stake in Snowman.
Risks Relating to the Business
There is a criminal proceeding pending against one of the Directors which if determined against him could have an adverse impact on the business and financial results of the Company.
There are various litigations involving the Company, the Directors, the Promoter and the Group Companies. An adverse finding by the Court may have a detrimental impact on the business.
A select group of customers contribute significantly to the revenues and failure to retain one or more of them would have an adverse effect on the financial performance and results of operations of the company.
The company faces several risks associated with the setting up of new warehouses that may hamper the growth and consequently the business and its financial condition.
The Total Consolidated Revenue has grown at a CAGR of 35% from Rs.348 million in FY 2008-09 to Rs.1552 million in FY 2013-14. The EBITDA has grown at a CAGR of 82% from Rs.19 million in FY 2008-09 to Rs.380 million in FY 2013-14. The Net Profit has grown at a CAGR of 72% from Rs.15 million in FY 2008-09 to Rs.225 million in FY 2013-14.
The EBITDA margin stands at 24.48% and the Net Profit Margin is reported to be 14.49% in FY 2013-14.
The company had a debt of Rs.904 million at the end of FY 2013-14. The Net Debt to Equity ratio for the company stands at 0.72 at the end of FY 2013-14.
Cash flow Statement
The Cash flow statement indicates heavy investment activity in fixed assets considering the available opportunity in the specialised transportation industry. The net cash flow is marginally positive in the FY 2013-14 period but may become negative as more investment in infrastructure is required for the company in the immediate future.
Temperature Controlled Logistics (TCL) Industry Overview
India falls under the category of low cold chain adoption countries i.e. countries with less than 10% of produce passing through a cold chain, reflecting a significant potential for growth.
Further, TCL providers in India are largely fragmented and generally focus on a single region or one aspect of the logistics chain such as storage or transportation. Consequently, there are very few integrated temperature controlled logistics service providers, and in particular, integrated service providers with the ability to service customers on a pan-India basis. It is generally estimated that the current share of organized players is only around 6% -7% in the temperature controlled warehousing segment and 15 – 20% in the temperature controlled transportation; consequently, the potential for growth in organized services is immense. As against an overall market growth of around 15%, organized outsourced temperature controlled services are expected to grow at around 20% p.a. In terms of volume, the existing capacity is estimated to be around 30 million MT of temperature controlled warehousing and around 7,000 – 8,000 Reefer Vehicles.
Of the existing cold warehousing capacity, 75% is dedicated to potatoes while 23% is classified as ‘Multipurpose’ i.e. catering to multiple commodities across dairy products, frozen foods, fruits and vegetables and the balance 2% is used across meat and seafood. Temperature Controlled Logistics (TCL) refers to the series of links in the logistics chain of perishable products. TCL is responsible for preserving the quality to enable their availability during an off – season or making them available at locations far from the production/ processing locations.
TCL comprises: –
Warehousing: Warehousing temperature sensitive products in custom built temperature controlled warehouses. The temperature controlled warehouse generally consists of several temperature zones capable of warehousing goods in the range of – 25ºC to +20ºC.
Distribution: Distribution entails primary and secondary transportation of temperature sensitive products from source to stores using temperature controlled containerized trucks and cargo trains.
Certain containerized trucks are also modified to enable installation of temperature controlled zones.
Businesses which utilize cold chains in India include dairy, poultry and meat, seafood, ready – to eat, chocolates, healthcare and pharmaceuticals, industrial products and fruit and vegetables.
India’s temperature controlled logistics industry is estimated at Rs.120,000 – Rs.150,000 million and is poised to grow at 15% to 20%, year on year, for the next 3 to 5 years. The growth is expected to be driven by:
- An increase in the consumption of temperature sensitive perishables
- Greater use of temperature controlled logistics in categories such as pharmaceuticals and 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.