August 2014 – OneMint

Snowman Logistics IPO Review

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Gateway Distriparks’ 54.04% owned subsidiary, Snowman Logistics Limited, is coming out with its initial public offer (IPO) from tomorrow i.e. August 26. The company has floated the issue with a price band between Rs. 44-47 per share and is offering 4.20 crore shares during the offer period. The offer will remain open for three days to close on August 28.

At Rs. 47 per share, the company plans to raise Rs. 197.40 crore in the IPO. The face value of its shares is Rs. 10 and thus, the issue commands a premium of Rs. 34-37 to its face value. As the company’s average pre-tax profits in 3 of the preceding 5 years was less than Rs. 15 crore, only 10% of the issue size is reserved for the retail individual investors.

About Snowman and its Operations

Gateway Distriparks owns majority of Snowman Logistics outstanding shares as its shareholding stands at 54.04%. Snowman’s other large shareholders include Norwest Venture Partners VII-A Mauritius (13.78%), Mitsubishi Corporation (12.57%), International Finance Corporation (12.40%), Mitsubishi Logistics Corporation (2.92%) and Laguna International Pte. Ltd. (1.57%).

Snowman is engaged in offering integrated temperature controlled logistics (TCL) services including warehousing and distribution of frozen and chilled products like dairy products including butter and cheese, ice-cream, poultry and meat, seafood, ready-to-eat/ready-to-cook food products, confectioneries including chocolates and baked products, fruits and vegetables, healthcare and pharmaceutical products and industrial products such as x-ray and photo imaging films.

As of March 31, 2014, Snowman carried out its operations having 23 temperature controlled warehouses across 14 locations in India including Serampore (near Kolkata), Taloja (near Mumbai), Palwal (near Delhi), Mevalurkuppam, (near Chennai) and Bengaluru capable of warehousing 58,543 pallets and 3,000 ambient pallets. Further, it had 370 Reefer vehicles consisting of 307 leased and 63 owned vehicles with a total workforce of 1,490 including 383 permanent employees and 1,107 on a contract labour basis.

Snowman has a diversified customer base with top 20 customers contributing approximately 44.10% of its total revenues during FY 2013-14. Its top 20 customers include Hindustan Unilever Limited (HUL), Al-Karim Exports Private Limited, McCain Foods India Pvt. Ltd., Novozyme South Asia Pvt. Ltd., Ferrero India Pvt. Ltd. and Graviss Foods Private Limited.

Objectives of the Issue – Out of Rs. 197.40 crore it targets to raise in this issue, Snowman plans to use approximately Rs. 128.28 crore to set up 6 temperature controlled warehouses and 2 ambient warehouses in various cities including Taloja (near Mumbai), Cuttack, Pune, Mevalurkuppam (near Chennai), Visakhapatnam, Pune and Surat.

IPO Grading – The issue has been graded by CRISIL as 4 out of 5, indicating that the issue is fundamentally above average relative to other listed equity securities. However, this grading is neither a recommendation to subscribe or not to subscribe to the issue nor an opinion of CRISIL whether the issue price is appropriate in relation to the fundamentals of the company.

Minimum/Maximum Subscription – Market lot of the issue is 300 shares and thus the investors would be required to bid for at least 300 equity shares in the IPO i.e. a minimum investment of Rs. 14,100. Retail investors would be able to apply for a maximum of 4,200 shares at the ‘Cut-Off’ price.

Listing – The company will get its shares listed for trading on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) within 12 working days from the closing date of the issue.

Risks

* The company is yet to obtain certain approvals/licenses for warehouses for which the funds are being raised through the issue.

* Profitability of the company is quite sensitive to power and fuel costs. Any significant increase in these costs or any continuous or chronic interruption in power supply to the warehousing facilities will have a material adverse impact on its operations.

* The company operates 307 of its 370 reefer vehicles and 13 of its 23 temperature controlled warehouses on lease. For these operations to run smoothly, the company is dependent on third party service providers. Any disruption in operations due to any unforeseen reason might result in below par operating performance.

Financials of the Company

(Figures are in Rs. Crore, except per share data & percentage figures)

Anchor Investment – Three Anchor Investors, IDFC, ICICI Prudential and Faering Capital, have been allotted 94.50 lakh shares of the company today at Rs. 47 i.e. the upper end of the price band. IDFC has been allotted approximately 26.6 lakh shares for IDFC Sterling Equity Fund and 3.19 lakh shares for IDFC Infrastructure Fund, whereas ICICI Prudential has been allotted 21.28 lakh shares for ICICI Prudential Growth Fund – Series 2 and 8.51 lakh shares for ICICI Prudential Value Fund – Series 4.

Valuations

Snowman reported a growth of 16.85% in its profit after tax during the last financial year. Assuming a similar growth this financial year as well, the price band of Rs. 44-47 values the company at around 27 times to 29 times on an expanded equity base post-IPO. Considering a short to medium term operating history, these valuations seem to be on a higher side to me.

But, at the same time, considering the cold storage to be a sunrise industry with infrastructure status tag, there is an immense potential of growth and thus, the issue looks attractive with a little risk involved. Though the issue looks attractive from the listing gains perspective, I think the investors should invest in this issue from a long-term perspective. If things pan out well, I expect the issue to generate good returns for the investors over a period of 2-3 years.

Investors would do well to keep a close eye on the company’s operating performance on a regular basis. Any significant deviation from its expected operating performance should be analysed thoroughly.

Weekend Links 22 August 2014

Let’s start this week with an interesting article about rich Chinese citizens leaving the country for cleaner air and better lives. Next up, a very good article on when you should worry about the market getting too high.

NYT has a great article on a 7 minute workout.

An interesting explanation of why the world smells different after rain.

Very good blog post about how learning takes place and what can be done to sharpen yourself.

How Watson changed IBM.

And finally, how does the white blood cell know where the bacteria is?

Weekend Links August 9 2014

Let’s star this week with an interesting article about IBM creating a brain like microchip has 1 million electronic neurons and more than 256 million artificial synapses connecting. The human brain has approximately 100 billion neurons, with roughly one quadrillion (one million billion) connections between them!

Equally interesting, an article about NASA’s impossible engine.

Slightly related, National Geographic has an interview which reveals some things about going to Mars.

When you have a car connected to the internet, you need to worry about hackers too.

A good article on when entertainment passes for investment advice.

Dough Roller asks if you are a millionaire in the making?

Finally, some very moving images from Gaza.

No battle was ever won according to plan

One of the most interesting and lively discussions during financial planning is to agree upon estimated future rate of returns on different asset classes, as well as inflation rates over long periods of time.

On every other aspect of the plan, one party or the other has a greater say, and they can back them with numbers or experience. For example, if you take current assets, the financial planner has a greater say in which assets are good or bad based on his experience and knowledge of the market, and there is usually no room for debate on that.

On the other hand, expenses is the domain of the person whose plan is being made, and they have a larger say in determining whether their current expenses should be taken as Rs. 50,000 per month or Rs. 1 lakh.

But whether you take a 6% inflation rate for the next 25 years, or a 7.5% inflation rate is largely a subjective matter, and has to be decided upon in agreement with both parties. One or two percentage points make a world of difference because of the compounding effect, and the portfolio number at the time of retirement can change drastically based on what number you take.

Add to this the fact that you may say that equities will return 12% for the next decade but in reality the market is never smooth, it will be down one year, up another, and the link I shared last week shows the great difference in end portfolio numbers that happens because of this.

In light of all this, how do you ensure that the plan is not wrong or useless?

I feel that there are two ways of doing this.

The first and the simpler one is to be conservative, and ensure that all your assumptions are in line with each other. Take your expenses at the higher end, and ensure that you don’t take a conservative inflation rate and an optimistic equity rate of return.

The second and perhaps more difficult thing to do is to understand that this plan is going to change, and then adjust your plan according to changes in your life or market conditions two or three years down the line.

People who work on project plans in their professional lives can easily identify with this, and how the best laid plans change as soon as you start implementation, and if you don’t change the plan according to reality then it becomes pretty much useless.

I found an excellent quote about this recently which goes as follows:

No battle was ever won according to plan, but no battle was ever won without one. Dwight D. Eisenhower

Another version, which is probably the original goes as follows:

In preparing for battle I have always found that plans are useless, but planning is indispensable. Dwight D. Eisenhower

I think this is a great way to look at any planning process, be it financial or software management. Thinking through what needs to be done to achieve your goals two or three decades from now, what habits you should instill now, where you should invest your money, what are your priorities are far more important than the absolute rate of return that will accrue in those years.

Don’t worry too much about whether inflation will be 7% or 10% in the next decade, focus more on controlling your expenses, ensuring that your asset allocation is right based on your profile and that your money is not stuck in dud investments. These are things under your control, and these are the things where you can make a difference.

Weekend Links 31st July 2014

If you’ve been watching the news, you’ve probably asked yourself at least once why are so many children dying in Gaza? Here is the answer.

You might also be wondering why Israel with all its strength isn’t able to overcome Hamas? An answer.

I have read and heard about wealth gap several times, but never in the context of Indonesia. A good article about the inequity in Indonesia.

I was fascinated to read that scientists are able to track polar bears using images taken from satellites. If you look at the images in this article, they are just tiny dots, but apparently, that’s enough, at least in summer.

Flipkart amazed everyone this week by raising a staggering Rs. 6,013 crores.

An interesting article on how China’s growing audience is changing Hollywood’s movies.

The NYT with some powerful pictures.

Enjoy your weekend!