Future Supply Chain: IPO Analysis

IPO Rating – 48*

About the issue
Future Supply Chain (FSC), a company promoted by Future Enterprises, is tapping the capital market with its initial public offer (IPO) of 9,784,570 equity shares of Rs 10 each. The entire IPO is offer for sale (OFS) and the proceeds from the IPO will be received by the selling shareholders and the company will not receive any proceeds from the IPO. The price band has been fixed at Rs 660 - 664. The company plans to raise Rs 645.78 crore at the lower limit of the price band and Rs 649.70 crore at the upper limit of the price band. The issue will constitute 24. 43 per cent of the fully diluted post-issue paid-up equity capital of the company. The minimum lot size for subscription is 22 shares. The issue remains open from December 6 to December 8. The company will get listed on both NSE and BSE.

About the company
Future Supply Chain (FSC), promoted by Future Enterprises, is one of India’s largest organised third-party logistics service operators. It offers automated and IT-enabled warehousing, distribution and other logistics solutions to a wide range of customers. The company’s service offerings are warehousing infrastructure, pan-India distribution network, “hub-and-spoke” transportation model. The company’s customers operate in various sectors across India, including retail, fashion and apparel, automotive and engineering, food and beverage, etc. 
The company offers customer service in three areas:
Contract Logistics: Warehousing, distribution and other value-added services;
Express Logistics: Point-to-point, less-than truck-load, time-definite transportation services; and
Temperature-Controlled Logistics: Cold-chain warehousing, transportation solutions and distribution of perishable products.
 
Financials
FSC posted revenue CAGR of 17.3% for the three-year period ending FY17. It posted revenue of Rs 561.83 crore for the financial year ending FY17. For the first half of FY18, the company posted revenue of Rs 357.4 crore, which if annualised, results in a growth of 27.3% on a yearly basis. This is better than what we have observed in the last three fiscals. In terms of segmental performance, revenue earned from contract logistics, express logistics and temperature-controlled logistics represented 69.8%, 21.7% and 6.2% of total revenue from operations in fiscal 2017. The contribution of these segments for the first half of FY18, is 70.7%, 19.8% and 4.0%, respectively.
The promoter group company is FSC's primary customer and the revenue generated from the promoter company was Rs 249 crore and Rs 350.5 crore for the six months ended September 30, 2017 and fiscal 2017 respectively, which accounted for 69.7% and of total revenue from operations for respective periods.
In terms of profit, FSC posted a profit of Rs 45.7 crore showing a CAGR of 32.6% for the three-year period ending FY17. In the first half of FY18, the company posted a net profit of Rs 33.33 crore. If we annualise this, the growth comes to 45.8% on a yearly basis. This again is better than the CAGR of the last three years. The profit margin of the company is showing constant growth since FY16 and stood at 9.3% for H1FY18. One of the reasons for the rise in margin is due to company’s focus on optimising customer base to focus on providing high-margin services. The contract logistics segment has the highest gross profit margin for the company and stood at 37.9% for H1F18. The gross profit margin of Express Logistics stood at 25.1% during the same period. 
Looking at the financial performance of Future Retail, the promoter of company and major customer, which is growing at spectacular rate, we believe FSC too will continue to exhibit better growth.

Valuations
At the upper price band, FSC will command market cap of Rs 2660 crore, and hence market cap-to-sales comes to around 3.72x (after annualising H1FY18 sales), which looks a little bit on the higher side. For H1FY18, the company posted EPS of Rs 8.52, and annualising this, we get EPS of Rs 17.04. At the upper price band, the PE of the company works out at 39x. Even at FY17 EPS of Rs 11.24 at the upper price band, the PE comes to around 59x. This is, however, in line with PE of another listed player.   
Looking at a fair valuation and good growth prospect, we advise our readers to subscribe to this IPO. 

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment

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