Snowman Logistic

By Geetanjali Kedia

Snowman Logistics is entering the primary market on Tuesday, 26^th August 2014, through a fresh issue of 4.20 crore equity shares of Rs.10 each, priced in the band of Rs. 44 to Rs. 47 per share. The issue represents 25.23% of the post issue paid-up capital and will raise Rs. 185 crore and Rs. 197 crore at the lower and upper price band, respectively. To be listed on NSE and BSE, the issue closes on Wednesday 28^th August.

Since the IPO is under Regulation 26(2) of ICDR, as company’s average pre-tax profits in 3 of the 5 preceding years was less than Rs 15 crore,  retail portion of the issue is very low, at just 10%, against the regular 35% portion size (QIB portion is higher at 75%). So, at the upper band, company is seeking to raise Rs 197 crore, and 10% of which is less than Rs 20 crore, or 1,000 retail applications of Rs 2 lakh each, is all that is needed for the retail book to sail through. Thus, retail portion being small, may see good participation, with probability of good over-subscription.

54.04% subsidiary of the listed logistics major Gateway Distriparks, Snowman Logistics is amongst the largest integrated pan-India cold chain warehousing and temperature-controlled transportation company, with warehousing capacity of 61,543 pallets across 14 locations, as of 31^st March 2014. It operated 370 reefer vehicles (307 leased and 63 owned) and with workforce of 1,490, of which, 383 are permanent and 1,107 contract labour.

It plans to set up 8 new warehouses, for which Rs. 128 crore has been estimated as capex. While it has already started expansion through a bridge loan facility of Rs 80 crore (which will be re-paid from IPO proceeds), Rs 52.60 crore of IPO money will be further deployed to augment capacity. Rs. 8.40 crore will be allocated towards long term working capital needs, and balance for general corporate purposes.

Snowman clocked revenue from operations of Rs. 153 crore in FY14, up 37% YoY, and earned EBITDA of Rs. 40 crore, up 54% YoY, leading to an EBITDA margin of 25.9%, on back of rising warehousing capacity. Operating profit stood at Rs. 23.1 crore, up 40% YoY, with operating margins strengthening to 15.0% in FY14, from 14.4% in FY13. 

However, FY14 profit before tax declined to Rs. 13.7 crore, from Rs. 14.4 crore in FY13, as most of the expansion came in through expensive bridge loans (temporary short term financing till IPO proceeds are realized). Interest burden ballooned from Rs. 2.4 crore in FY13 to Rs. 11.2 crore in FY14! Company’s debt, as of 31^st March 2014, stood at Rs. 130 crore, of which, Rs. 40 crore from bridge loan. This bridge loan rose to Rs. 80 crore, as of 31^st July 2014, which will be re-paid entirely from proceeds of the IPO, thus easing interest expense from H2FY15 onwards.

FY14 net profit stood at Rs. 22.5 crore, up from Rs. 19 crore in FY13, mainly due to adjustment for deferred tax asset, due to accelerated tax benefits under Section 35 AD of the Income Tax Act, resulting in FY14 EPS of Rs. 1.90, on equity of Rs. 124 crore. On networth of Rs. 221 crore, book value per share is at Rs. 18, as of 31^st March 2014.

Current shareholding pattern indicated promoter holding of Gateway Distriparks at 54.04%, which will decline to 40.41%, post IPO. It counts marquee investors as shareholders such as Japan’s Mitsubishi Group (15.49% stake), International Finance Corp (IFC) with 12.40% and PE investor Norwest Partners with 13.78% stake.

Company’s Q1FY15 performance, as extracted from consolidated segmental results of parent Gateway Distriparks, is as under:

While the revenue and operating profit have been steadily increasing, operating margins are shrinking. But, H2 is seasonally a stronger second-half than H1, which is also explained by pick-up in margins for whole of FY14. Going by this trend and newly added capacities improving utilization, company will be able to post operating profits of close to Rs. 35 crore for FY15 and net profit of Rs. 32 crore, resulting in an EPS of close to Rs. 2.20.  

At the lower and upper band of Rs. 44 and Rs. 47, shares are being issued at PE multiple of 20 times and 21 times, based on expected current year earnings, respectively. Norwest Partners, about a year back in July 2013, picked up ~14% stake at Rs 35 per share. Hence, asking price is now up by 34% (at Rs 47 per share), in proportion to increase in topline, margins and capacity. However, Norwest entered the company at PE multiple of 21 times, on historic basis (FY13), while now the issue price is 21 times based on current year expected earnings (FY15). Hence, it would be an investor friendly move, if the IPO had left some money on the table, especially for retail investors.

Nevertheless, Snowman is an attractive offering, given the investor pedigree, planned expansion, growth rates and a unique play. At Rs. 47, company’s market cap will be Rs. 782 crore and enterprise value is close to Rs.872 crore, for approximately 85,000 pallets capacity pan India. 

One can apply in the issue. Would be better had the company left some money on the table, especially for retail investors!