Investing In Snowman Logistics May Not Be A Cold Idea

Over the last few years, organised retail and food service industries have emerged prominently on the back of changing consumption patterns. With the entry of fast moving consumer goods (FMCG) giants into retail, the supply chains including cold chains for food and beverages distribution is expected to be streamlined.

Development of the cold chain industry has an important role to play in reducing the wastage of perishable commodities and providing remunerative prices to growers. Cold chains are essentials for extending the shelf life, period of marketing, avoiding over capacity, reducing peak transportation bottlenecks and maintenance of produce quality.

India’s logistics sector grew at 8.2 per cent in 2014-15. In the whole logistic sector 10 per cent of total produce passes through cold chains. At present, India’s cold chain industry is valued approximately at Rs 15000 crores. It is estimated to grow at 15-20 per cent over next five years.

In Indian cold chain industry, cold storages are major revenue contributors and majorly used for storing organic produce. India falls under a category of low-cold chain adoption countries that is a country with less than 10 per cent of produce passing through a cold chain. Further cold chain service providers in India are largely fragmented and focus on a single region or one aspect of the chain, with few players focusing on a wider and integrated service offering, reflecting a significant potential for growth.

The growth is also expected to be driven by an increased consumption of perishable items that depend upon temperature-controlled logistics, deeper penetration of the use of temperature-controlled logistics in key categories as well as an increasing number of niche and high end products arriving to the market which that require cold chain services. This also presents a vast opportunity for the organised players in this segment to make the most of through increased investments, modernisation of facilities, and establishment of new ventures via private and government partnerships.

With growth in the organised retail and food service industry, initiatives taken by government, rising export demand for processed and frozen food are also some of the motivations for logistic industry to grow.

Government initiatives:

Government of India (GoI) recognises that development of a cold chain is an essential next step in upgrading India’s food processing industry offering incentives for growth. The government has made considerable inroads into ensuring a favourable business climate like schemes for capital investment subsidy from the National Horticulture Board, National Horticulture Mission and Ministry of Food Processing Industries for the agro-investors to set up cold chain infrastructure. In one such initiatives, the government has proposed to implement the Goods and Services Tax (GST), which promises to integrate India’s multi-layered indirect tax system into a single unified one, unshackling India from its bureaucratic web and improving the ease of doing business. The changes in the proposed indirect tax system could reduce transportation cycle times, enhance supply chain decision, lead to consolidation of warehouses which could help the logistics industry reach its potential in terms of service and growth.
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Goods and Service Tax (GST):

Apart from creating a unified market across India, GST will help make India’s manufacturing competitive by cutting high logistics and warehousing costs. The reforms proposed in the GST presents an opportunity to revisit, rationalize and re-engineer transportation and logistics networks, given the inherent inefficiencies with taxes based on the crossing of administrative boundaries or border checkpoints. Taxation at a national level, rather than by each state, will result in more efficient cross-state transportation, streamlining paperwork for road transporters and bringing down logistics costs.

Currently, each of India’s 29 states taxes goods that move across their borders at different rates. As a result, freight that moves across the country is taxed multiple times. Worse, there are long delays at inter-state checkpoints, as state authorities review and examine freight and apply the relevant taxes and other levies.

Truck delays average five-to-seven hours at inter-state checkpoints. This, combined with other delays, keep trucks from moving during 60 per cent of the entire transit time. As much as 65 per cent of India’s freight moves by road, a fact which leads logistics experts to see GST as critical for India. High variability and unpredictability in shipments add to logistics costs in the form of higher-than-optimal buffer stocks and lost sales, pushing logistics costs in India to two-to three times global benchmarks, according to the World Bank.

Simply halving the delays due to roadblocks, tolls and other stoppages could cut freight times by some 20-30 per cent and logistics costs by an even higher 30-40 per cent, according to World Bank estimates. This alone can go a long way in boosting the competitiveness of India’s key manufacturing sectors by 3-4 per cent of net sales.

The planned GST system seeks to replace around 15 state and federal taxes and tariffs for a single tax at the point of sale. The prevailing complicated tax structure in India meant that logistics decisions, including the choice of setting up inventory and distribution centres, are taken based on the tax regime such as central sales tax and state value-added tax (VAT) rates, rather than on operational efficiency. Tax optimisation and administration is often considered over the operational and logistics efficiency.

GST will unleash a new era of developing logistics infrastructure and take investments to the next level. Given that the inefficient and longer supply chains with warehouses in almost every state is fiscally preferred in the existing regime, it is now time to overhaul and compress the entire logistics set-up.

About the company:

Snowman Logistics (SLL) is a cold supply chain company which offers warehousing, distribution and transportation services. The company offers facilities for temperature controlled transportation/storage, handling and retail distribution of frozen/chilled foods and also other dry goods handling. Snowman’s clients are largely drawn from the following industries: meat & poultry, seafood, fruits & vegetables, ice cream, confectionery, dairy products, quick service restaurants, industrial products, ready-to-eat and healthcare and pharmaceuticals. Snowman provides end-to-end services (source to store) across a temperature range of -25°C to +20°C.

The company completed its initial public offering (IPO) in 2014 at Rs 47 crores. The issue was oversubscribed 60 times. In high net worth segment it was oversubscribed 200 times. The market capitalisation on the day of listing was Rs 1328 crores.

The business:

The Indian temperature controlled logistics business is highly fragmented and is largely catered to by regional service providers with only 6-7 per cent in warehousing and 15-20 per cent in transportation catered to by organised operators. With nearly 10 per cent market share of the organised temperature controlled logistic (TCL) market in terms of revenue, SLL is a major player in the segment providing complete logistical support.

Further there are very few, if any, organised operators apart from Snowman who have a comprehensive pan-India presence. With its pan-India presence and domain expertise in the high-end TCL industry, SLL is in a sweet spot to cater to wide range of customers. Its ability to cater to a wide range of customers along with its latest technology and ability to attract competing brands in the competitive FMCG segment makes SLL a critical player in the supply chain.

Asset lightness:

In a business where the cost of land and warehouses can be potentially significant, Snowman has invested in an asset-light business model, where warehouses have been commissioned on leased land and most of its on-road vehicles are leased, moderating capital expenditure and the company’s balance sheet. This explains why the company reported an attractive return on equity, even while it is still in an aggressive expansion stage.

While average capacity utilisation during FY 2014-15 was 77 per cent, the March 2015 utilisation stood at 92 per cent. This endorses the company’s strategy of planned capacity building leading to increased revenue, enhanced profitability and high occupancies as and when these capacities mature.

SLL’s ability to provide ‘source to stores’ integrated temperature controlled solution in a largely unorganised industry aids in forming a loyal customer base. As it catered to numerous customers 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.

All key segments, the company is involved with, such as ice-cream, dairy products, seafood, meat and poultry, processed foods and quick service restaurants continue to clock impressive growth. While food and related services will continue to be the mainstay of the company’s business, opportunities await to be exploited in areas like fruit and vegetable processing, pharmaceuticals and e-commerce.

Demand from pharmaceutical sector:

The Indian pharmaceutical market is poised to grow to Rs. 3,300 billion by 2020 from the 2009 levels of Rs. 756 billion. The ever-growing pharmaceutical industry is acutely temperature-and-time-sensitive. Cold supply chains act as a backbone for the pharma industry. It is a big responsibility to have regulatory supervision and maintain drug efficacy throughout the supply chain and comply with statutory requirements.

Financials:

Financially, SLL has been facing positive headwinds with revenue increasing by compounded annual growth rate (CAGR) of 34.26 per cent over the period of five years. During the same period company’s EBITDA (earnings before interest, depreciation and amortization) CAGR increased by 35 per cent. CAGR of operating and direct expenses saw hike of 37.86 per cent in last 5 years. CAGR of Profit after Tax (PAT) too saw a jump of 31.23 per cent in the last five years.

The company’s total revenue from operations for FY15 increased by 32.28 per cent and reached to Rs 203 crore from Rs 153 crores in the previous fiscal. The earnings before interest, tax, depreciation and amortisation (EBITDA) also increased to Rs 52 crore from Rs 40 crore, representing a growth of 29.72 per cent year on year (YoY). The EBITDA margin stood at 24.90 per cent for FY15 compared to 25.67 per cent same period last year. The company’s other expenses increased by 115 per cent YoY in FY15 and reached to Rs 21 crores compared to Rs 10 crores in FY14. The other expenses consist of 10 per cent of total revenue.

The net profit of the company stood at Rs 25 crores compared to Rs 23 crores in FY14 an increase of 6.54 per cent from the previous year. The net profit margin stood at 12 per cent in FY15 compared to 15 per cent same period last year. The slow increase in net profit is on back of slow increase in EBITDA and increase in company’s depreciation and interest expenses. The depreciation expenses increased by 63.73 per cent YoY in FY15 and reached to Rs 25 crores compared to Rs 15 crores same period last year. The interest expenses surged by 11.18 per cent YoY and reached to Rs 12 crores compared to Rs 11 crores same period last year. The debt of company in FY15 stood at 71 crores compared to Rs 131 crores in FY14 a decrease of 45.54 per cent YoY. The total debt was 13 per cent of total assets in FY15 compared to 33.65 per cent same period last year.   

Segment-wise for FY15 99 per cent of revenue comes from Temperature controlled services which grew by 32.50 per cent YoY. Ambient services contribute to 0.85 per cent and it is increased by 11.59 per cent YoY. Operationally the pallets capacity increased by 23800 pallets in FY15 and reached to 85500 pallets by the end of FY15. A substantial increase of 39 per cent YoY.

On quarterly basis the company’s net revenue from operations reached Rs 63 crores in Q3FY16 compared to Rs 51 crores in Q3FY15 an increase of 22.87 per cent. The EBITDA stood at Rs 12 crores this quarter compared to Rs 13 crores in Q3FY15, a decrease of 13.51 per cent YoY. The EBITDA margin stood at 18.48 per cent compared to 26.26 per cent. The decrease in EBITDA is on back of increase expenses of traded good purchase. It stood at 6.5 crores this quarter compared to no cost same period last year. The net profit for the quarter stood at 4.54 crores compared to Rs 5.84 crores same period last year, a decrease of 22.26 per cent YoY. The net profit margin stood at 7.20 per cent this quarter compared to 11.38 per cent in Q3FY15.

On valuation basis the stock of company is trading at trailing twelve month (TTM) P/E of 34.85 compared to industry P/E of 34.56. The EPS for FY15 stood at Rs 1.67 compared to Rs 1.96 same period last year.

Conclusion:

The cold chain industry is emerging as a fast-growing sector in India, with developments in the food processing sector, organised retail and government initiatives.

The outlook for the company is promising. As organised industry poised to grow at 20 per cent CAGR over the next three to four years, revenue growth and, by virtue of operating leverage, earnings growth is expected to be highly pronounced. There is a tremendous demand for cold chain in India and only a very small part of this market is currently being catered by the organised players. With increase awareness of food safety and hygiene, customers have been moving to organised players. On basis of this we recommend a BUY.