SNOWMAN LOGISTICS LTD : LOGISTICS THE DIFFERENT WAY !!!

Scrip Code: 538635 / SNOWMAN

CMP:  Rs.  85.75; Buy at current levels. Short Term Taget : Rs. 100.00;
Medium to Long Term Target: Rs. 125; STOP LOSS – Rs. 78.89; Market Cap: Rs. 1,427.30 Cr; 52 Week High/Low: Rs. 103.80 / Rs. 47.00.

Total Shares: 16,64,49,395 shares; Promoters : 6,72,54,119 shares – 40.41 %; Total Public holding : 9,91,95,276 shares – 59.59 %; Book Value: Rs. 17.83; Face Value: Rs. 10.00; EPS: Rs. 1.81; Dividend: 00.00 %; P/E: 47.37 times; Ind. P/E: 55.21; EV/EBITDA: 24.18.

Total Debt: Rs. 90.64 Cr; Enterprise Value: Rs. 1,534.03 Cr.

SNOWMAN LOGISTICS LIMITED: Snowman Logistics Limited was founded in 1993 and is based in Bengaluru, India. The company was formerly known as Snowman Frozen Foods Limited and changed its name to Snowman Logistics Limited in March 17, 2011. Snowman Logistics Limited is a subsidiary of Gateway Distriparks Limited. The company came out with an IPO on August 2014 offering 4.20 Cr equity shares of Rs. 10 each for Rs. 47 per share raising Rs. 197.40 Cr. The object of offer for sale was to set up a new temperature controlled and ambient warehouse, to provide long term working capital and for other general corporate purposes. The shares got listed on Indian bourses on September 12, 2014 with a staggering at Rs. 79.80. Snowman Logistics Limited is an integrated temperature controlled logistics service provider with 23 temperature controlled warehouses across 14 locations in India. It has a storage capacity of 58,543 warehousing pallets and 3,000 ambient pallets. The company also owns and leases reefer and ambient vehicles. As of March 31, 2014, it operated 370 reefer vehicles consisting of 307 leased and 63 owned vehicles. In addition, the company offers primary and secondary distribution services; consignment agency services; and value added services, such as kitting, labelling, sorting, stuffing, and de-stuffing of containers, repacking, and bulk breaking. It serves corporate customers in dairy, ice-creams, chocolates, and poultry and meat industry sectors. It also offers services to Confectioneries including chocolate and baked products; Fruits and vegetables; Healthcare and pharmaceutical products; and Industrial products such as x-ray, and photo-imaging, films. It operates in two segments, Temperature Controlled Services and Ambient Distribution. The company offers warehousing solutions that cover ambient, chilled, frozen, and blast freezing facilities. Snowman Logistics Limited is locally compared with Allcargo Logistics Ltd, Blue Dart Express Ltd, Container Corporation of India Ltd, Gati Ltd, Gateway Distriparks Ltd, Sical Logistics Ltd, Kesar Terminals & Infrastructure Ltd, North Eastern Carrying Corporation Ltd, Shreyas Shipping & Logistics Ltd, Patel Integrated Logistics Ltd, Global Vectra Helicorp Ltd globally compared with Kawanishi Warehouse Co, Ltd of Japan, Sugimura Warehouse Co Ltd of Japan, Royal Mail Plc of London, Postal Services mail Plc of London, Deutsche Post AG of Germany, PostNL N.V. of Netherlands, Hanjin Transportation Co., Ltd of South Korea, Pos Malaysia Berhad of Malaysia, Singapore Post Ltd of Singapore, Yusen Logistics Co Ltd, Hyundai Glovis Co Ltd of Korea, Atlas Air Worldwide Holdings of USA, Bpost NV-SA Brussels, Belgium, Kintetsu World Express Inc of Japan, UPS – United parcel Service Inc of USA, Fedex Corp of USA, Air transport Services Group of Ohio, Hub Group Inc of Illinois, Xpo Logistics Inc of USA, Echo Global Logistics Inc of Illinois, Uti Worldwide Inc of British Virgin Islands,  Chichibu Railway Co., Ltd of Japan, Kobe Electric Railway Co., Ltd of Japan, Keifuku Electric Railroad Co., Ltd.

Investment Rationale:

Snowman Logistics Ltd is the most preferred integrated temperature controlled warehouse and transport logistics company in the organized sector enjoying lion market share. The company has been also providing additional services like repacking of products for direct marketing in retail market to the manufacturers, exporters and adding value addition of services to its clients that include Hindustan Unilever, Cadbury, McCain, Baskin Robbins, Ferrero Rocher, Taj Hotels, etc. and has PAN India presence at 14 locations with 23 warehouses and fleet of 370. Currently 242 cities are covered and plans more cities to be added to the network each year. During FY14, Snowman Logistics Ltd.’s warehouses were running at 82 % utilization while the trucking business was running at 100 % utilization. Gateway Distriparks Limited is the promoter and the largest shareholder of the company. Snowman Logistics offers blast freezing facilities at its temperature controlled warehouses in Bengaluru, Mevalurkuppam, (near Chennai), Visakhapatnam, Serampore (near Kolkata), Taloja (near Mumbai), Ahmedabad, Palwal (near Delhi), and Mubarakpur (near Chandigarh). Its integrated ‘Source to Stores’ operations comprise warehousing, primary distribution and secondary distribution and value-added services including kitting, labeling, sorting and bulk breaking. India falls under the category of low cold chain adoption countries i.e. countries with less than 10 % of produce passing through a cold chain, reflecting a significant potential for growth in Cold Chains. Temperature Controlled Logistics (TCL) provider in India is largely fragmented and generally focuses on a single region or focuses on any one aspect of the logistics chain such as storage or transportation. Consequently, there are very few integrated temperature controlled logistics service providers who have the ability to service customers on a pan-India basis. It is estimated that the current market share of organized players is only around 6 % to 7 % in the temperature controlled warehousing segment and about 15 % to 20 % in the temperature controlled transportation. So, the potential for growth in organized services in this sector is immense. It is expected that the organized outsourced temperature controlled services to grow at around 20 % p.a as against an overall market growth of around 15 % and in terms of volume, the existing capacity is estimated to be around 30 million MT of temperature controlled warehousing and around 7,000 – 8,000 in Reefer Vehicles. From the existing cold warehousing capacity, 75 % is dedicated to potatoes while 23 % is classified as ‘Multipurpose’ i.e. catering to multiple commodities across dairy products, frozen foods, fruits and vegetables and the balance 2 % is used across meat and seafood. 

Temperature Controlled Logistics (TCL) is responsible for preserving the quality to enable their availability during an off – season or making them available at locations far from the production/ processing locations. The temperature sensitive products like dairy & perishable products is stored & preserved in a custom built temperature controlled warehouses. These temperature controlled warehouse generally consists of temperature zones which are capable of warehousing goods in the range of –25ºC to +20ºC. Similarly, temperature controlled distribution entails primary and secondary transportation of temperature sensitive products from source to stores using temperature controlled containerized trucks and cargo trains. Certain containerized trucks are also modified to enable installation of temperature controlled zones. Businesses which utilize cold chains in India include dairy, poultry and meat, seafood, ready – to eat, chocolates, healthcare and pharmaceuticals, industrial products and fruit and vegetables. India’s temperature controlled logistics industry is estimated to be around Rs. 12,000 Cr to Rs. 15,000 Cr and is expected to grow at 15 % to 20 %, year on year, for the next 3 to 4 years to Rs. 22,000 Cr to Rs. 25,000 Cr. The growth is expected to be driven by an increase in the consumption of temperature sensitive perishables; Greater use of temperature controlled logistics in categories such as pharmaceuticals and fruits and vegetables and from the increase in the consumption of a gamut of niche and high end products that need to be maintained in temperature controlled environment. Since FY12, Cold Storage business in India has been given the "Infrastructure status", which makes bank financing easier. Also, Snowman Logistics is eligible for 100 % deduction under section 35AD for all capex made till AY13. This investment deduction allowance rate has increased from 100 % to 150 % in AY14. The tax benefits given to warehousing income under section 80 (I) (B) along with subsidy schemes will also be helpful for the company to aggressively pursue capex and growth. Snowman Logistics has asset light business model, given that 83 % of its entire fleet is on lease. Similarly for Warehouse division, company usually leases out the land on a long term basis and constructs its own building used for storage purposes. Snowman Logistics owns, both land and building at 9 of these 23 temperature controlled warehouses. This asset light strategy has helped the company to quickly scale up its businesses, thereby generating quicker pay-back period for investment made and higher Return on Networth. Management has maintained that money raised from issue proceeds would be deployed for capacity expansion, thereby restricting any further RoNW expansion in FY15E.

Outlook and Valuation: 

Snowman Logistics Limited is an integrated temperature controlled logistics service provider, promoted by Gateway Distriparks Ltd which in itself is one of the largest players in the organized temperature controlled logistics. Gateway Distriparks holds 40.4 % (post issue) in Snowman Logistics Ltd. Gateway Distriparks’s expertise as a major logistics player in India augurs well for Snowman Logistics as it instils confidence among Snowman’s customers besides providing leverage in institutional and banking relationship for Snowman’s business operations. A strong promoter and sound investor base reinforces Snowman logistics as a major brand in a largely unorganised temperature controlled logistics industry. Snowman Logistics Ltd caters to numerous customers ranging from HUL to McCain foods and from Suguna Foods to Ferrero India Pvt Ltd to Hotel Taj. Many of Snowman’s customers are competitors in their respective industry and Snowman’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 in the past three years. Snowman’s top 20 clients contributed nearly 56.75 % in FY11, 49.92 % in FY12, 39.02 % in FY13 and 44.1 % in Fy14, respectively in terms of revenue. The company garnered Rs. 197.40 Cr through its IPO during the month of August 2014. The company intends to use the part of the net IPO proceeds to setup six temperature controlled warehouses and 2 ambient warehouses across six cities. The estimated cost of construction of these warehouses is around Rs. 140 Cr. This will increase the pallet capacity from 61,000 to 85,000 (1 pallet = 1 Tonne) by FY15. The company intends to use the IPO funds of Rs. 197.40 Cr to retire its bridge loan and will meet the remaining capex of Rs. 128.28 Cr. Long term working capital requirements of Rs. 8.41 Cr will also be met from the IPO proceeds. The left over amount will be utilised for general corporate purposes after meeting the issue related expenses. The demand for perishable products is expected to increase in the coming years thus creating the need for larger warehouses and bigger fleet size to carry the products to the end customer. With new capacity coming on stream, Snowman Logistics will be able to garner greater market share from the anticipated pickup in demand. On Financial side, the company enjoys robust EBIDTA margin of 25 % and is likely to post 42.2 % revenue and 45.3 % EBITDA CAGR over FY14-16E. The company has adopted an asset light business model which has helped to keep fixed assets low, resulting in improvement in return ratios. As of FY14, 13 of the 23 warehouse land and 307 out of 370 reefer vehicles are on lease. Return ratios like RoE/RoCE have improved from 8.5 %/3.8 % in FY10 to 13.3 %/8.4 % in FY14. Snowman Logistics has a healthy balance sheet as the business throws up positive operating cash flow. And once these warehouses is fully operational, maintenance capex and overhead expenses would be stable and will increase revenues. This can throw up significant cash flows and will help margin expansion. Snowman Logistics is the only player in the organized segment in India, thus should command a scarcity premium in terms of valuation. Snowman Logistics offers a robust business model with one of the highest temperature controlled warehousing capacity, largest fleet size, national presence and market dominant position. At the CMP of Rs. 85.75, the stock is trading at its all-time high P/E of 61.25 x FY14E, 50.44x FY15E and 35.72x FY16E. The Company can post EPS of Rs. 1.40 for FY15E & Rs. 17.0 of FY16E & for FY17E it can post an EPS of around Rs. 2.40. Given the attractive valuations with the pan India presence, robust growth prospects and with excellent client base, one can buy into this Stock with a target price of Rs. 100 for the short term and for the medium to long term it should be Rs. 125.00.

KEY FINANCIALS	FY14A	FY15E	FY16E	FY17E
SALES (₹ Crs)	153.40	193.80	254.50	331.20
NET PROFIT (₹ Cr)	22.50	22.60	27.40	40.00
EPS (₹)	1.40	1.40	1.70	2.40
PE (x)	34.70	34.50	28.50	19.50
P/BV (x)	3.50	1.80	1.70	1.60
EV/EBITDA (x)	23.60	15.80	12.30	9.50
ROE (%)	10.10	5.20	5.90	8.00
ROCE (%)	6.50	6.50	7.40	9.40

I would buy SNOWMAN LOGISTICS LTD for Medium to Long term for target of Rs. 125.00 and for the shorter term the target would be Rs. 100.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 78.89 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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