Snowman Logistics IPO opens: Should you subscribe?

The largest cold chain solutions provider aims to raise Rs 197 crore (at higher end of price band) through this issue, which will be used for setting up new temperature controlled and ambient warehouses, and long term working capital.

The company, which operates 23 temperature-controlled warehouses across 14 locations in India (including Kolkata, Mumbai, Delhi, Chennai and Bengaluru), proposes to set up another such 6 and 2 ambient warehouses at 6 cities at the cost of around Rs 140 crore.

It has a pan-India presence with warehousing capacity of 58,543 pallets and 3,000 ambient pallets, which is expected to increase to 85,000 pellets in current financial year (FY15) and further to 1 lakh pellets by FY16, said the company in its prospectus.

Brokerages believe its big expansion plan (of raising capacity to 1 lakh pallets by next financial year) is expected to boost the operating performance of the company over the next two years.

They advise subscribing the issue at current issue price level, citing strong domestic as well as foreign investors’ support, robust revenue growth in last four years, strong operational income, balance sheet and client base, and tax benefits.

"With the strong growth prospects of cold chain industry and company being a leading integrated cold chain player in India with presence across the value chain of the industry, the issue looks attractive destination to deploy the funds," said Hem Securities.

Promoter and largest shareholder Gateway Distriparks (GDL) currently holds 54.04 percent equity stake in the company, which will be reduced to 40.4 percent after the issue. GDL is one of the largest Indian logistic service providers with operations in container freight stations at major Indian ports and an inland container terminal.

“Its experience and expertise in the logistic sector has instilled confidence in SLL’s customers, who prefer dependable and established service providers. Further, SLL leverages corporate, institutional and banking relationships of GDL for its business operations,” said Sharekhan.

Other major shareholders include Mitsubishi Corporation (12.57 percent stake), Mitsubishi Logistics Corporation (2.92 percent), International Finance Corporation (12.40 percent) and Norwest Venture Partners VII-A Mauritius (13.78 percent).

Rating agency Crisil has assigned a grade 4/5 to the proposed initial public offer of Snowman Logistics, which reflects company's strong position as a leading domestic integrated cold chain company and good long-term prospects for the cold chain industry.

The brokerages believe SLL, being the largest cold chain solutions provider, has huge potential for growth in the organised services sector.

“India’s temperature-controlled logistics industry is estimated at Rs 12,000-15,000 crore and is expected to grow at 15-20 percent year-on-year for the next three to five years. The current market share of the organised players in the industry is estimated at 6-7 percent in the temperature-controlled warehousing segment and at 15-20 percent in the temperature controlled transportation segment. Hence, the potential for growth in the organised services is immense,” Sharekhan explained.

It added that SLL is set to reap the benefits of this growth as it is the largest player with a capacity of 63,000 pellets (way ahead of the competition with the second largest player having a capacity of around 5,000 pellets).

Revenue and profit growth of the company in last four years was very strong, up 40-50 percent on compounded annual growth rate (CAGR basis. Total income from operations and reported profit after tax in FY14 grew by 35 percent to Rs 153.41 crore and 18 percent to Rs 22.48 crore while operating profit margin expanded to 24.7 percent from 22.4 percent year-on-year.

Sharekhan said the increasing share of value-added services will boost margins of the company. “SLL proposes to increase its revenues from the existing value added services (VAS), such as kitting, labeling and sorting. During FY14, VAS contributed 1 percent and 5 percent to its revenues and profit respectively. The object of the IPO is to set up new temperature-controlled warehouses, which are expected to increase the availability of floor space (a critical factor to provide VAS) significantly, thereby increasing the margins,” it explained.

Tax benefits available to SLL under section 35 AD too will help the company, said Ajcon Global. The amount of deduction under Section AD is 150 percent of capital expenditure other than investment in land incurred wholly and exclusively for the purpose of specified business carried on by it in the year in which the expenditure is incurred.

The client base of the company is also strong, which include various industry sectors such as dairy products, ice creams, chocolates, pharma, seafood, fruits and vegetables, and poultry and meat.

Top 20 customers contributed 44 percent of total revenues in the year ended March 2014. Some of the prominent clients are Hindustan Unilever, Novozymes South Asia, McGain Foods India, Karnataka Co-operative Milk Producers’ Federation, Graviss Foods, Saguna Food, West Coast Fine Foods India etc.

Though the company is strong in all aspects and brokerages believe in strong potential of the company and industry, there are some concerns that investors need to look at, which are failure to retain one of the large clients, delay in setting up of new warehouses and heavily dependent on third party services providers.

Company’s temperature-controlled distribution business is its second largest source of revenue and constituted 34.99 percent and 47.71 percent of its total revenue from operations for FY13 and FY14, respectively. It operated 370 Reefer vehicles of which 307 were leased, which constituted 82.97 percent of company’s total operational cost in FY14.

SLL operate these leased vehicles pursuant to contracts, generally valid for a period of 18 months to 6 years, with third party service providers. “If the company is unable to timely renew the lease on vehicles, it will be required to identify new services providers which, amongst others, will be time consuming,” said Hem Securities.

Posted by Sunil Shankar Matkar