For an investor who can stomach high risk, the initial public offer (IPO) of Snowman Logistics presents a good opportunity. The cold storage logistics business of Gateway Distriparks, Snowman has 23 temperature-controlled warehouses located across the country and a fleet of 370 vehicles for transportation of products.
Snowman does not have direct listed peers; logistics companies such as Gati and Concor have cold storage logistics businesses, but these form part of the main business. In the price band of ₹44-47 a share, Snowman plans to raise ₹185-197 crore.
Conservatively, assuming that the company’s earnings grow in line with the 17 per cent growth in the preceding fiscal, the IPO’s valuation is at about 27-29 times 2014-15 earnings on an expanded equity base.
Why buy
Expansion to aid growth
Healthy profitability
Good industry growth potential
No direct peers
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Gati trades at 34 times consolidated trailing earnings, while being larger. Concor trades at 20 times trailing earnings. Post-listing, the market cap (at the upper end of the price band) is likely to be about ₹800 crore, giving the stock a small-cap status. Snowman’s valuation seems to be on the higher side.
Boost to revenues and thus earnings by way of capacity additions, will kick in from 2015-16. The cold storage business holds promise.
The gradual shift in consumer food preferences — dining out more, demand for processed foods or frozen vegetables, increase in export demand for seafood, and so on — can propel growth. Cold storage is accorded infrastructure status too.
Strong growth
Snowman’s revenues and earnings galloped 50 and 54 per cent annually over the past three years, partly due to a low-base. Trebling of warehouse storage capacity, added services such as ambient warehousing (which do not require temperature control), and increase in vehicle fleet size helped growth.
Snowman’s revenues and earnings galloped 50 and 54 per cent annually over the past three years, partly due to a low-base. Trebling of warehouse storage capacity, added services such as ambient warehousing (which do not require temperature control), and increase in vehicle fleet size helped growth.
In a fragmented business, Snowman is among the few national-level players. The company’s reach is reasonably wide. It also provides both storage and transportation, thus being present across the value chain.
Though perishable foods account for the majority of demand, Snowman’s segments are quite varied — meat, dairy products, ice-creams, pharmaceuticals, quick service restaurants, and so on — reducing dependence on a particular segment.
The company’s client-base includes the likes of Baskin Robbins, McCain Foods, Hindustan Unilever, Fererro India and Novozymes South Asia. The client base is also not concentrated, with the top 20 customers making up less than half the revenues.
Power for controlling temperature and fuel for running the fleet are the main expenses.
Due to the steep rise in diesel cost over the past couple of years, along with an expansion in fleet size from 127 vehicles to 370, the company’s fuel cost jumped from around 10 per cent of sales in 2011-12 to 21.5 per cent by 2013-14. But with diesel prices now stabilising, fuel costs may not pinch as much.
Operating profit margin has moved between 23 per cent and 25 per cent in the past three years, with controls over maintenance and staff costs compensating for higher running expenses.
Depreciation accounts for over 10 per cent of sales. With rapid expansion on the cards, depreciation is set to remain high.
Expansion plans
The cold storage business is capital-intensive, requiring investments in expanding reach, storage capacity, and maintenance. Of the issue proceeds, ₹128 crore will go towards adding six new temperature-controlled warehouses and two ambient warehouses.
The cold storage business is capital-intensive, requiring investments in expanding reach, storage capacity, and maintenance. Of the issue proceeds, ₹128 crore will go towards adding six new temperature-controlled warehouses and two ambient warehouses.
Snowman already has a head-start on this expansion via bridge loans (which will be repaid through the issue proceeds). The company aims at bringing these on stream by the end of the current fiscal.
With work already underway, this target does not appear overly ambitious. The boost to revenues from the expansion are likely to flow in from 2015-16. Further expansion can be done through loans, with Snowman comfortably positioned on the funding side; its debt-equity ratio on expanded equity will be just about 0.3 times.
About ₹8 crore will fund its long-term working capital, with the rest going towards general corporate purposes, which includes other capital expenditure. The issue is open from August 26 to 28. HDFC Bank is the lead manager. High-risk investors with a one- to two-year horizon can invest in the IPO.
Did you know?
Three-quarters of Indian cold storage capacity is used for preserving potatoes
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