Retail Equity ResearchSteaming up for the cold zone - PDF document

August 25, 2014 IPO Review Retail Equity ResearchSteaming up for the cold zone… Snowman Logistics Ltd (SLL) with 23 temperature controlled warehouses across 14 locations and 370 reefer vehicles is a pioneer in operating temperature controlled and ambient warehouses in India. With majority of Key Financials | CroreFY10FY11FY12FY13FY14FY15EFY16EFY17ENet Sales34.645.261.4113.7153.4193.8254.5331.2 Source: RHP, ICICIdirect.com Research Snowman Logistics LtdPrice band | 44 - 47 Rating matrixRating : Issue Details Issue Opens26-Aug-14Issue Closes 28-Aug-14Issue Size (| Crore)|185-|197 crorePrice Band (|)|44-|47No of Shares on Offer (Crore)4.275Non-Institutional (%)15Retail (%)10Minimum lot size300 shares and in multipleof thereof Objects of the Issue (| Crore) Capital expenditure for setting up of new temperature controlled and ambient warehouse128.8 Shareholding Pattern Pre-IssuePost-IssuePromoter & promoter group54.0%40.4%Institutional & Non- Institutional46.0%34.4%Public & Others0.0%25.2% Financial Summary | CroreFY10FY11FY12FY13FY14FY15EFY16EFY17ENet Sales34.645.261.4113.7153.4193.8254.5331.2EBITDA5.49.012.925.538.049.666.286.9EBITDA Margin (%)719.921.022.424.825.626.026.3PAT4.16.45.520.422.522.627.440.0EPS0.20.40.31.21.41.41.72.4 Analyst’s nameBharat Chhoda bharat.chhoda@icicisecurities.com Soumojeet Kr Banerjeesoumojeetr.banerjee@icicisecurities.com Page 2 Retail Equity Research Company Background Snowman Logistics (SLL), erstwhile Snowman Frozen Food Ltd, was originally promoted by Amalgam Food Ltd (AFL) in 1993. However, in 1997, Hindustan Unilever (HUL) acquired a 23% stake in SLL, followed by Mitsubishi Corporation’s acquisition of majority stake in 2001. Subsequently, in 2006 Gateway Distriparks (GDL) acquired a majority stake in SLL by acquiring 6861000 shares from AFL and subscribing to fresh issues to hold a 33.34% stake in the company. SLL began its operations in cold chain warehouses in 1998 at four locations. As of March 31, 2014, it had grown to 23 warehouses across 14 locations pan-India. In terms of pallet capacity, it has nearly 61,000 pallets (1 pallet=1 tonne) besides having a strong fleet of 370 temperature controlled reefer vehicles (63 owned and 307 leased). The company provides integrated temperature controlled logistics (TCL) from source to stores including warehousing and distribution of frozen and chilled products. Timeline 1997-98 2001-0420062008-092010-1220132014HUL acquires 23% stake. Operations commence in 10 temperature controlled warehouse in India Mitsubishi Corporation and Mitsubishi Logistics jointly acquire majority stake. GDL acquired majority stake (33.34%) from Amalgam Foods Ltd by acquiring 6861000 shares Warehouses become ISO 22000 certified. Implementation of enterprise resource planning system IFC acquires 20% stake. Expansion to major cities like Mumbai,Chennai & Bangalore NVP acquired 14.28% stake. GDL acquires 5142500 shares from IFC. Expansion in cities like Vizag, Pune etc GDL acquires 7400000 shares from Nichirei Logistics group Source: Company, ICICIdirect.com Research With Gateway Distriparks (GDL) having a majority stake of 40.4% (post issue) the promoter and investor base for SLL remains quite strong. GDL’s expertise as a major logistics player in India augurs well for SLL as it instils confidence among SLL customers besides providing leverage in institutional and banking relationship for SLL’s business operations. A strong promoter and sound investor base reinforces SLL as a major brand in a largely unorganised temperature controlled logistics industry. Page 3 Retail Equity ResearchNascent, under-penetrated and unorganised industry provides huge scope The temperature controlled logistics (TCL) industry in India is estimated at nearly | 12000-15000 crore and expected to grow at 15-20% in the next three to four years to | 22000-25000 crore. Further, the industry remains largely fragmented and unorganised as a mere 6-7% of the industry comes in the organised segment. In terms of volume, the total existing capacity is estimated at around 30 million tonnes (MT) of temperature controlled warehousing and 7000-8000 reefer vehicles. Currently, nearly 75% of the total capacity is dedicated to potato warehousing with 23% to “multipurpose” commodity i.e. dairy, frozen food, fruits, etc while the remaining 2% is for meat and seafood. Further, in terms of distribution, nearly 64% of the total warehouses are located in two states i.e. Uttar Pradesh and West Bengal followed by Punjab, Bihar and Gujarat. Going ahead, as there is a structural change in Indian retail as well as food processing industry we expect significant growth in the TCL segment. The retail industry is at US$520 billion and is expected to grow at ~10.6% to nearly US$750-800 billion by 2015-16. Almost 60% of the retail industry is constituted by the “food & grocery” segment with a meagre 8% organised players, which has a very low penetration compared to other economies such as China (20% penetration). Further, the food processing industry is at a very nascent stage with less than 10% of total quantity being processed. According to ICAR, the food processing industry is expected to grow from US$121 billion to US$194 billion by 2015-16, thereby providing humungous scope for players such as SLL who form a critical part in the whole supply chain of temperature controlled industry. Besides, the niche segment pharmaceuticals and food services are expected to grow at 23% and 30%, respectively, over the next three to four years providing significant opportunity for logistics players like SLL. Market break-up and expected growth in TCL industry 140002200011005000100001500020000250003000020122017| Crore Un-organised Organised Source: RHP, ICICIdirect.com Research Shift from unorganised to organised retail in India FY12FY16FY20 Un-organised Organised Source: RHP, ICICIdirect.com Research Exhibit 5: Major segments in food processing industry SegmentSize (million tonnes)Key ProductsExpected Growth (%)Dairy Products121Value added Milk, Butter, Cheese8Fruits & veg233Raw F&V,pulp, canned food7Meat & Poultry11Poultry, Beef18Seafood8.4Sea food products7%Packaged Products|8000 croreRTE &RTC8% Source: RHP, ICICIdirect.com Research Page 4 Retail Equity ResearchPan-India presence with integrated temperature controlled logistics solution SLL with its 23 warehouses across 14 locations and fleet of 370 reefer vehicles provides a wide range of temperature zones for its customers ranging from ambient to +20 C to -25 C. SLL caters to a wide range of segments from dairy and poultry to high-end segments such as photo-imaging and pharmaceuticals industry, thereby providing itself various combinations of commodity mix, which leads to improved operating margins. Within a short span of time, SLL’s pallet capacity increased from 18,000 pallets in FY12 to 61,000 pallets in FY14. Going ahead, the pallet capacity addition is expected to be strong. Consequently, revenues for SLL also posted a strong CAGR of 45% over FY10-14. Going ahead, as pallet capacity addition remains robust, we anticipate revenue CAGR of Revenues growth for SLL 33125519415311410015020025030035034.6FY11FY12FY13FY14FY15EFY16EFY17E| Crore Revenue Source: RHP, ICICIdirect.com Research As SLL operates in the premium segment, EBITDA also posted a growth of ~63% over FY10-14. Going ahead, over FY14-17E it is expected to grow strong with 32% CAGR EBITDA growth. Also, as SLL has a wide temperature spectrum, suitable product mix aided EBITDA margin FY14. Further, we expect margin to stabilise in the near term though capex and operating leverage provide scope for expansion in future. EBITDA growth and EBITDA margin expansion 26.025.622.4FY10FY11FY12FY13FY14FY15EFY16EFY17E| Crore EBITDA EBITDA Margin (%) Source: RHP, ICICIdirect.com Research Page 5 Retail Equity Research PAT expected to grow at CAGR of 21% over FY14-17E FY10FY11FY12FY13FY14FY15EFY16EFY17E| Crore PAT Source: RHP, ICICIdirect.com Research Patronage of premium clientele base from competing brands SLL’s ability to provide “source to stores” integrated temperature controlled solution in a largely unorganised industry aids in forming a loyal customer base. SLL catered to numerous customers ranging from HUL to McCain foods and from Suguna Foods to Ferrero India Pvt Ltd. Many of SLL’s customers are competitors in their respective industry and SLL’s ability to cater to each one of them in an unbiased and professional manner is a testament to the fact that contributions from its top clients have remained largely unchanged in the past three years. In FY11, FY12, FY13 and FY14 top 20 clients contributed nearly 56.75%, 49.92%, 39.02% Domain expertise together with technology and IT initiatives SLL with prior expertise in setting up temperature controlled warehouses across various locations in the country has moved ahead significantly in the learning curve. Hence, its ability to offer multiple cold zones in its warehouses and expertise to maintain the same provides an edge to SLL. Besides domain knowledge, SLL has taken several strides in improving the technology and inventory management systems, which has become SLL’s USP. With systems such as warehouse management and enterprise resource planning, SLL has been able to manage its warehouses with high efficiency by adopting methods such as first-expiry-first-out (FEFO) and first-in-first-out (FIFO). Further, its reefer fleet is equipped with GPRS and GPS together with advanced geo-fencing devices, which provides real time information about its location. With such pioneering IT initiatives, SLL maintains seamless traceability of consignment throughout the supply chain and provides real-time information to its customers. Maintain and gain market share through augmenting in Tier II and III cities SLL is one of the foremost players in the 15000 crore TCL industry in India. With the growth in the retail and food processing industry, together with government focus on setting up of mega food parks (MFPS) to accelerate the food processing industry, temperat warehousing is only going to become more critical in the supply chain. Further, with higher disposable income in Tier II & III cities demand for quick service restaurants (QSRs) is expected to be strong at ~30% per annum for the next three to four years. Expanding to cities such as Baramati, Surat, Bhubaneswar, etc. will increase the client base and strengthen its growth trajectory. Page 6 Retail Equity ResearchTransportation and distribution hold key to growth SLL, with a fleet of 370 reefer vehicles operating at ~100% utilisation and covering approximately 10,000 km/month, forms the spine of SLL’s distribution reach and connectivity. SLL’s two tier distribution, namely, the primary distribution and the secondary distribution form part of the core theme of “source to stores”. The primary distribution service is carried out through 226 vehicles and is mainly to cover the long haul inter-city transport of products including door to door service, customised milk runs and cargo consolidation. In contrast, the secondary distribution is largely within city i.e. the last mile connectivity for QSRs, retail outlets, dedicated fleet of 144 vehicles. Value added and consignment services to drive next growth phase To improve the customer proposition, SLL has introduced various value added services such as knitting, labelling, sorting, packing and re-packing of goods. Such services add significantly to SLL both in term of value to clients as well as bottomline. Further, consignment services such as indenting, order booking, invoicing, etc. for select customers improves SLL’s USP. Page 7 Retail Equity ResearchSensitivity to power cost Cost of electricity forms nearly 12.5% of temperature controlled warehouses. Any chronic interruption or adverse hike in electric charges by various state electricity boards may hinder profit growth. Risk on transport business due to reliance on third parties The transport and distribution network form nearly 50% of revenue while almost 83% of the fleet is outsourced from third parties. Further, ~97% of the outsourced fleet is from two contractors. Inability to renew contracts with them timely may hamper business. Conditions and restrictions by lenders may impact business Lenders with certain rights on determining how to operate SLL’s business have restrictive covenants and conditions above a certain threshold debt level. This may hamper business as it restricts the ability to raise further debt or undertake capex activities. Several risks in setting up warehouses, delays in equipment impact business Delays in construction of warehouses, cost overruns, labour unrest, delay in renewal of leases and contracts, delay in ordering of equipment or delivery, etc. may adversely impact business. Page 8 Retail Equity ResearchValuations At the IPO price band of | 44-47, SLL is trading at 33-35x FY14 diluted EPS of | 1.35. Revenue growth for SLL over FY10-14 was registered at CAGR of 58% whereas EBITDA and PAT grew at a CAGR of ~63% and 53%, respectively. Besides capex growth (in terms of pallets) has been robust over FY12-14 at a CAGR of ~84%. Also, as the TCL industry size is expected to grow at 10-15% over the next three to four years, we expect revenue and earnings to grow at a CAGR of 29% and 21% over the next Return ratios have posted steady growth over FY10-14 with RoCE expanding from 2% to 6.5% over the time period whereas RoE remained fairly volatile due to the changing equity structure. As the industry is capex driven, return ratios are expected to remain subdued. However, going ahead, with stabilisation in the business model and rationalisation of capex, we expect return ratios to be fairly steady in the range of 8% to Another aspect of significant attention is the debt-equity level that the company maintains and the stable asset turnover ratio that the company achieves. As the company is in heavy capex mode the leverage is at 0.7x. However, going ahead, we believe prudent capital structure management will lead to moderation of leverage to 0.3x levels. Also, as SLL acquires new clients’, capacity utilisation at installed facilities will go up, thereby improving the asset turnover ratio. Finally, given the expertise that SLL has developed over the years and integrated superior facilities and network that has been set up to cater the customers together with the tutelage of industry major Gateway Distriparks, significant earnings growth can be achieved, thereby making valuations attractive. We recommend SUBSCRIBE Return ratios to stabilise, going ahead 15.77.46.510.14.25.06.5FY10FY11FY12FY13FY14FY15EFY16EFY17E ROE (%) ROCE (%) Source: Company, ICICIdirect.com Research Debt equity ratio and interest coverage to improve 0.62.13.50.00.10.20.30.40.50.60.70.8FY13FY14FY15EFY16EFY17EDebt to EquityInterest Coverage Debt to Equity Interest Coverage Source: Company, ICICIdirect.com Research Page 9 Retail Equity Research Profit & Loss Account [ (| Crore)(Year-end March)FY14FY15EFY16EFY17ERevenue153.4193.8254.5331.2Growth (%)34.926.331.330.1Operating Cost90.2113.9148.9190.4Employee Cost15.219.024.233.1Other Expenditure10.011.315.320.7Total Expenditure115.4144.2188.3244.338.049.666.286.9Growth (%)49.130.533.431.4Depreciation15.016.120.423.623.033.545.863.3Interest11.26.813.214.51.82.02.12.4PBT 13.728.734.751.2Growth (%)-7.2-4.126.633.4-8.86.07.311.3Reported PAT 22.522.627.440.0Growth (%)10.20.721.145.7 Source: Company, ICICIdirect.com Research Cash flow statement (| Crore)(Year-end March)FY14FY15EFY16EFY17EProfit after Tax22.522.627.440.0Add: Depreciation15.016.120.423.6Cash Profit37.538.847.863.6Increase/(Decrease) in CL52.9-0.619.021.6(Increase)/Decrease in CA-75.7-12.5-18.9-23.5CF from Operating Activities 14.725.647.961.8Purchase of Fixed Assets-107.6-120.8-79.2-81.5(Inc)/Dec in Investments-5.20.00.00.0Others-2.3-40.20.00.0CF from Investing Activities -115.2-161.0-79.2-81.5Inc/(Dec) in Loan Funds39.8-50.375.015.0Inc/(Dec) in Sh. Cap. & Res.69.5189.60.00.0CF from financing activities 109.3196.775.321.6Net cash/cashflow8.861.344.01.8Cl. Cash and cash Eq. 16.177.4121.4123.2 [ Source: Company, ICICIdirect.com Research [ Balance sheet (| Crore)(Year-end March)FY14FY15EFY16EFY17ESource of FundsEquity Capital124.1166.1166.1166.1Reserves & Surplus97.7268.0295.4335.4Shareholder's Fund221.8434.1461.5501.5Long Term Borrowing Funds90.450.4120.4130.4Long Term Provisions80.6125.769.669.6Current Liabilities76.575.994.8116.4Short Term Borrowing40.330.035.040.0Trade Payables4.55.87.38.2Other current liabilities31.539.852.368.1Short term provisions0.20.20.20.2Source of Funds388.9560.6677.0748.6Application of FundsNet Block250.0349.8405.0458.7Capital WIP42.440.037.428.7Total Fixed Assets292.4389.8442.4487.4Non-current investments16.516.516.516.5Current Assets63.6137.9201.7228.3Inventories0.00.00.00.0Trade Recievables39.550.266.286.2Cash & Bank Balances 16.177.4121.4123.2Short Term Loans & Advances6.78.511.314.8Other Current Assets 1.41.92.84.1Application of Funds388.9560.6677.0748.6 Source: Company, ICICIdirect.com Research Ratio Analysis [ (Year-end March)FY14FY15EFY16EFY17EPer share data (|)Book Value13.426.127.830.2Cash per share1.04.77.37.4EPS1.41.41.72.40.20.20.30.4Profitability & Operating RatiosEBITDA Margin (%)24.825.626.026.3PAT Margin (%)14.711.710.812.1Fixed Asset Turnover (x)0.50.50.50.6Inventory Turnover (Days)NANANANADebtor (Days)93.994.595.095.0Creditor (Days)10.811.010.59.0Return Ratios (%)10.15.25.98.06.56.57.49.4 V aluation Ratios (x) @ |47PE34.734.528.519.5Price to Book Value3.51.81.71.6EV/EBITDA23.615.812.39.5EV/Sales5.84.03.22.5Leverage & Solvency RatiosDebt to equity (x)0.60.20.30.3Interest Coverage (x)2.14.93.54.4Debt to EBITDA (x)3.41.62.32.0Current Ratio0.81.82.12.0 Source: Company, ICICIdirect.com Research Page 10 Retail Equity Research Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, Road No 7, MIDC Andheri (East) Mumbai – 400 093 research@icicidirect.com Disclaimer The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities Ltd (I-Sec). 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