Snowman Logistics Ltd

India Infoline Research Team | Mumbai | August 26, 2014 12:18 IST

SLL’s revenue and EBITDA CAGR over FY10-14 was 45% and 63% respectively coupled with robust EBITDA margins.

Snowman Logistics Ltd (SLL), promoted by Gateway Distriparks Ltd., is one of the largest players in the organized temperature controlled logistics. It has 23 operational warehouses which are currently running at 82% capacity. The company is likely to post 42.2% revenue and 45.3% EBITDA CAGR over FY14-16E. Company plans to raise money for setting up 8 warehouses across 6 locations at a total cost of Rs1.2bn. At the upper end of Rs44-47 price range, our FY16E EBITDA forecast of ~Rs802mn translates in to EV/EBITDA of 9.7x which is inline with FY16E 6x-11x range for global peers like Mitsubishi Logistics, Swift Transportation, Sumitomo Warehouse etc. SLL is the only player in the organized segment in India, thus should command a scarcity premium in terms of valuation. SLL offers a robust business model with one of the highest temperature controlled warehousing capacity, largest fleet size, national presence and market dominant position. Recommend investors to subscribe at the upper end of IPO range.
 
The issue: Company plans to raise Rs1.8-1.9bn at the above price range via a fresh issue of 42mn shares (25.4% of post IPO equity) which values the company at ~Rs7.3-7.8bn.
 
Business highlights: The Company’s business can be classified into two segments: Temperature controlled services and ambient distribution services. From FY14 the company has commenced ambient warehousing services as well.
 
Growth, valuation & risks: SLL’s revenue and EBTIDA CAGR over FY10-14 was 45% and 63% respectively coupled with robust EBIDTA margins. We project FY16E revenues of ~Rs3.1mn and EBITDA of ~Rs803m which implies EV/EBITDA of 9.7x at the upper end of price range. Key risks include rising costs of fuel and power and over dependence on major clients.
 
Financial summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Revenues 1,137 1,534 2,504 3,101
yoy growth (%) 85.2 34.9 63.2 23.8
Operating profit 255 380 631 803
OPM (%) 22.4 24.8 25.2 25.9
Reported PAT 190 225 243 357
yoy growth (%) 198.9 18.3 7.9 47.0
EPS (Rs) 1.8 1.8 1.5 2.1
P/E (x) 25.5 25.9 32.2 21.9
P/BV (x) 3.8 2.6 1.8 1.7
EV/EBITDA (x) 22.9 19.2 12.4 9.7
Debt/Equity (x) 0.7 0.6 0.2 0.2
RoE (%) 16.0 12.9 7.4 7.9
RoCE (%) 10.3 9.0 10.2 10.5
Source: RHP, India Infoline Research
Note: per share ratios based on diluted equity, price assumed at Rs47 for EV calculations

Best play on consumption recovery
Indian economy is pegged to grow at 5.5% this fiscal as per RBI compared to 4.8% last year. Industries such as dairy and dairy products, poultry and meat, seafood, ready-to-eat, confectioneries, healthcare and pharmaceuticals, industrial products and fruit and vegetables are major users of cold chain facilities. Business prospects of these industries are dependent on spending ability of the end consumer. Consumer spending remained subdued last year but as the economic growth accelerates and market conditions stabilize, consumer confidence will improve and the consumption cycle will pick up. Key drivers for the growth in consumer spending are expected to be:
-  The burgeoning Indian middle class, rising income levels
-  Increased standard of living and swift lifestyle changes
-  Aspirational goals and high spending ability of young consumers
-  Availability and acceptance of newer products
-  Greater awareness due to greater media reach and penetration
-  Nuclear families with both the partners earning.

Thus we believe SLL is the best play on consumption recovery.
 
India’s nascent temperature controlled logistics industry offers large opportunity for growth
Temperature controlled logistics (TCL) refers to transportation of perishable products. India’s TCL industry is at a nascent stage compared to its global counterparts: only 10% of produce use cold chain logistics which is much lower than 30-40% globally. Currently the TCL industry is estimated at Rs120-150bn and is expected to grow at the rate of 15-20% for next 3-5 years. Indian TCL industry is largely fragmented with unorganized players controlling ~85-90% of the market. Unorganized players are mainly localized in their reach with smaller warehousing capacity and lower fleet size. SLL with its pan India presences has the one of the largest warehousing capacity and fleet size which gives it a dominant position and is best placed to capture the huge opportunity in TCL industry.

Upcoming warehousing facility to strengthen market share
The upcoming warehousing facilities at 6 locations will add a combined 14000 pallets taking the total pallet capacity of SLL to 85000 by the end of FY15. One pallet is equivalent to one tonne. The demand for perishable products is expected to increase in the coming years thus creating the need for larger warehouses and bigger fleet size to carry the products to the end customer. With new capacity coming on stream, we believe SLL will be able to garner greater market share from the anticipated pickup in demand.
 
Capex of individual projects
Sr No Location Total Estimated Cost
(Rs Mn)
Temperature Controlled Warehouse
1. Mumbai-I Taloja (near Mumbai) 320.0
2. Cuttack (near Bhubaneshwar) 179.4
3. Pune 220.5
4. Chennai-I, Mevalurkuppam, (near Chennai) 123.3
5. Chennai-II, Mevalurkuppam, (near Chennai) 285.3
6. Visakhapatnam 206.3
Ambient Warehouse
1. Pune 37.7
2. Surat 120.7
Total 1403.5
Source: RHP, India Infoline Research
 
IPO proceeds to fund new warehouses, pay back loan
At the upper end of the price range of Rs44-47, the company would garner gross proceeds of ~Rs1.9bn. The company plans to use the IPO proceeds to setup six temperature controlled warehouses and 2 ambient warehouses across six cities. The estimated cost of construction of these warehouses is around Rs1.4bn. This will increase the pallet capacity from 61000 to 85000. Rs120.65mn has already been met using internal accruals and Rs756.59mn was met from bridge loan which was taken in Dec’13. The company will use the IPO funds to retire the bridge loan and meet the remaining capex of Rs1282.81mn. Long term working capital requirements of Rs84.17mn will also be met from the IPO proceeds. Amount left over will be utilised for general corporate purposes after meeting the issue related expenses.
 
Utilisation of the Gross Proceeds
Use of proceeds Rs mn
Capital expenditure for setting up new temperature controlled and ambient warehouses 1,282.81
Long term working capital 84.17
General corporate purposes, Issue related expenses 607.02
Total Gross Proceeds 1,974.00
Source: RHP, India Infoline Research
 
Robust margins; Asset light model
SLL’s business enjoys robust EBIDTA margin of 25%. EBITDA margins have a scope of further expansion once operations at newly commissioned warehouses stabilize. Even as revenues grow due to higher realizations, cost of operating warehouses remains fairly stable with minimum overheads. Thus margin can expand by ~100 bps within two years when the new warehouses start running at optimum capacity. The company has adopted an asset light business model which has helped to keep fixed assets low, resulting in improvement in return ratios. As of FY14, 13 of the 23 warehouse land and 307 out of 370 reefer vehicles are on lease. Return ratios like RoE/RoCE have improved from 8.5%/3.8% in FY10 to 13.3%/8.4% in FY14.

Attractive valuations combined with robust growth: Subscribe  
SLL is likely to post FY16E revenues and EBITDA of ~Rs3.1bn and Rs803mn respectively. Further we forecast 42.2% and 45.3% revenue/EBITDA CAGR over FY14-16E driven by improving economic activity and better product mix. We expect EBIDTA margins to improve as realizations improve and warehouses start running at full capacity. SLL has a healthy balance sheet as the business throws up positive operating cash flow.
 
Based on post IPO diluted equity, we expect FY15/16 EBITDA of Rs565/790mn which implies EV/EBITDA of 12.4x/9.7x at the upper end of the price range. Hence on a EV/EBITDA basis, at the upper end of price band the IPO is fairly priced given that larger global peers like Mitsubishi Logistics (Japan), Swift Transportation (USA), Sumitomo Warehouse (Japan) trade between ~6x-11x on FY16E basis. We also note that once a warehouse is fully operational, maintenance capex and overhead expenses are generally stable even as revenues are increasing.  This can throw up significant cash flows and aid margin expansion. Given the attractive valuations, pan India presence, robust growth prospects and excellent client base, we recommend investors to subscribe to the IPO at the upper end of the price band.
 
Valuation comparison
Company Mcap
(US $mn)
EV/EBITDA (FY16E) OP Margins (%) PAT Margins (%) RoE
(%)
Snowman Logistics 126 9.7 24.8 15.1 12.9
Mitsubishi Logistics 2640 11.4 7.7 5.7 4.1
Knight Transportation 1960 7.7 12.6 7.9 14.3
Swift Transportation 2990 6.5 7.2 3.1 39.2
Sumitomo Warehouse 1080 8.5 6.9 5.1 3.5
Source: Bloomberg, India Infoline Research.  Note: All ratios based on FY14
 
Key risks
-  High fuel and power costs: Fuel and power are the two biggest expenses for the company. Steady power supply is essential for maintaining the temperature. Frequent power cuts in many parts of the country have led to investment in power backup systems resulting in increased capital investment costs. Inability to pass on the costs will result in lower profitability for the company.
 
-  Discretionary nature: Most of the products transported through temperature controlled logistics such as ice creams, confectioneries, exotic fruits etc. would form a part of discretionary spend for a consumer. During an economic down cycle the demand would fall which could impact the revenue growth of the company.
 
-  Over-dependence on major clients: Top 20 clients contribute 44% of the total revenues. Inability to retain existing clients or add new clients will adversely impact the company’s financial performance. Also any down turn in their businesses may lead to slower than expected growth in SLL’s business.

Company background 
Snowman Logistics Ltd is a pan India operator of temperature controlled logistics services. The company provides integrated ‘Source to stores’ operations comprising of warehousing, primary distribution, secondary distribution, and value added services. SLL operates 23 temperature controlled warehouses across 14 locations with a combined capacity of 61000 pallets. The warehouses can be customized to run at temperature ranges from -25 degree centigrade to +25 degree centigrade. Primary distribution involves inter-city transportation of goods. It includes door to door services, customized milk runs and part cargo consolidation. Secondary distribution is essentially the last mile distribution which involves supplying to QSRs, retail outlets, restaurants etc. within a city. SLL runs 370 highly modern reefer vehicles out of which 307 are leased and 63 are owned. Currently 242 cities are covered and more cities are being added to the network each year. During FY14, SLL’s warehouses were running at 82% utilization while the trucking business was running at 100% utilization. The company also provides value added services such as kitting, packaging, repacking, labeling, sorting, bulk breaking etc. Some of the marquee clients include HUL, McCain, Baskin Robbins, Ferrero Rocher, Taj Hotels, etc.
 
About promoter
Gateway Distriparks Limited (GDL) is the promoter of the company. It is a public limited company listed on BSE and NSE. GDL is one of the leading players in the logistics sector. It currently operates four container freight stations having a total capacity of 620,000 TEUs per year and offer transportation & storage, general and bonded warehousing, empty handling and several value added services. It has four rail terminals currently handling 500,000 TEU but having a potential to handle 1mn TEUs. It owns and operates a fleet of 21 rakes with a carrying capacity of 210,000 TEUs per year and 270 road trailers at its rail linked terminals. For the year ended Mar’14 GDL posted revenue of Rs101.3bn and PAT of Rs.1.4bn. The company has posted 18% revenue and 14% PAT CAGR during FY10-14.
 
Public shareholders holding more than 1% of the pre-Issue paid up capital
Sr No. Name of the Shareholder No of shares held (Pre issue) % of shares held
(Pre issue)
1. Norwest Venture Partners VII-A Mauritius 17,142,857 13.8%
2. Mitsubishi Corporation 15,641,000 12.6%
3. International Finance Corporation 15,427,500 12.4%
4. Mitsubishi Logistics Corporation 3,632,000 2.9%
5. Laguna International Pte Ltd 1,952,381 1.6%
Source: RHP, India Infoline Research
 

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