Snowman IPO: Frozen Logistics

Name1st Reco Date1st Reco priceTargetProspero RatingReport Date*
Snowman Logistics25Aug2014 Rs. 47Rs. 806 / 1026Aug2014

A) Company background:

Snowman Logistics Ltd. (SLL) provides warehousing, primary and secondary distribution & value added services in the cold chain industry to dairy, poultry, pharmaceutical, food product, quick service restaurants, agro and organized retail companies. It enjoys a 10% market share (by revenue) in the organized temperature controlled logistics market. The company is backed by a strong promoter (pre-issue 54% shareholder) – Gateway Distriparks Ltd. (GDL), one of India’s largest logistics services providers. The proceeds of the IPO will be used for setting up of new temperature controlled and ambient warehouses.

B) Investments arguments:

Under-penetrated cold chain services in India and high end-user industry growth to spur SLL’s growth

With sub 10% produce passing through cold chain, there is significant headroom for growth in this space. The total temperature controlled logistics services industry size is estimated to be Rs. 12,000 crores to Rs. 15,000 crores and is expected to grow at a CAGR of 15%-20% in the next 3-4 years. The end-users of cold storage services viz. quick service restaurants, dairy products, frozen foods, fruits, vegetables, agro, poultry, confectionary and organized retail are poised to grow at 15%+ for the next 3-4 years. In the past, SLL has demonstrated its ability to capitalize on this phenomenal growth and has clocked revenue CAGR of whopping 58% over FY10-FY14. With its large basket of services, it is well positioned to ride the growth wave in the cold chain services segment.    

Pan India presence across the logistics value chain – A key differentiator

SLL provides ‘Source-to-Store’ services across the logistics value chain – warehousing, primary and secondary distribution & value added services. As of FY14, its operations constitute 23 temperature controlled warehouses across 14 locations in India. It has a fleet of 370 Refeer vehicles for primary and secondary distribution covering pan India 242 towns and cities. It provides value added services like labeling, grading, packaging and inventory management to select customers. This has helped SLL to create its niche in an otherwise highly fragmented market.

Adoption of best-in-class technology for its gamut of services enables SLL to command a premium

SLL has adopted the best-in-class technology infrastructure and software systems – real time temperature monitoring systems in vehicles and warehouses, real time tracking of Refeer vehicles with GPS/ GPRS technology, efficient inventory management with adoption of ‘First Expiry First Out’ (FEFO) system. Hitherto, these practices have enabled SLL to command nearly a 25% premium vs. peers and pass on the cost increases to customers without sacrificing margins. In fact, over FY10-FY14, It’s EBITDA margins have grown from 16% to 25%. These services have also earned them loyal marquee customers – Hindustan Unilever Ltd., Baskin Robbins, Ferrero Rocher, McCain Foods, Graviss Foods to name a few.

Note on Valuations: At the IPO price Rs. 47, SLL will be valued at a market cap of Rs. 780 cr. Though the price to earnings ratio will look quite steep at a 35x FY14 diluted EPS of Rs. 1.35, the visibility of earnings growth compensates for it. The visibility comes from the inherent demand for frozen / cold chian services, pan India presence of Snowman, continuous investments in infrastructure and a clean balance sheet. We recommend a Buy / Subscribe in Snowman with a target of Rs 80. 

C) Key risks:

  • Delay in ramping up the utilization levels 
  • Increase in power costs
  • Delay in introduction of GST

D) Financials:

*Report Date may sometimes be different from Recommended Date.

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