Snowman Logistics: On the move

The company should benefit from business restructuring and implementation of GST

From August 2016, the stock of Snowman Logistics (Snowman) that offers temperature variant cold supply-chain warehousing and transportation solutions, has shed nearly a third of its value. It currently trades at ₹60, nearly 50 per cent down from its peak towards the end of 2014.

Over the two quarters ending December 2016, Snowman’s strategic decision to exit the low-margin pure transport business and make one-time provisions towards asset refurbishment resulted in losses at the net level. This process of restructuring is expected to improve the margins over the next few quarters.

With earnings depressed, the stock price discounts its trailing 12-month adjusted earnings per share by 73 times. As earnings improve, the PE ratio should moderate. The average valuation between April 2015 and March 2016 was about 49 times.

Also, with the Goods and Services Tax (GST) Bill expected to get operational in July, players such as Snowman with an established pan-India presence could see an uptick in performance. The company has presence across more than 400 towns and cities. Over the next few years, the company’s increased investments in warehouses should help boost revenue.

Investors with high risk appetite and long-term perspective can buy the stock.

Changing business model

According to a study by the National Horticulture Board at the end of 2014, the all-India gap for cold storage capacity is close to 8.25 million tonnes (nearly a third of the then existing capacity). With GST having materialised and the Centre’s intention to double farmer’s income over the next five years, cold supply chains should get a boost. Besides, Snowman can tap into networks and supply chains created by its parent company, Gateway Distriparks, for long-term benefits.

About 50-60 per cent of revenue comes from seafood, agriculture, meat, poultry and dairy products. The rest is contributed by confectionaries, ice-cream, industrial products, health care and pharma products.

During the quarter ended September 2016,, the management decided to make a one-time provision to prune its old transport fleet and refurbish a few old warehouses. Also, stock losses increased expenses.

The company has exited its pure transportation business and beganfocusing on higher-margin warehousing business.

About 63 per cent of the revenue for the nine months ended December 2016 came from the warehouse business and the rest from the transportation segment.

The company has decreased its fleet size to 293 from 501 vehicles a year back. It currently has a pallet (portable platform for handling heavy loads in warehouses) capacity of 98,500 across 16 locations and an additional capacity of close to 13,000 pallets coming up across three more locations.

Snowman’s revenue grew at an annualised rate of 40 per cent (between 2011-12 and 2015-16). However, during the nine months ending December 2016, the revenue dropped nearly 16 per cent y-o-y. As new warehouses gain volume , the occupancy rates and pallet utilisation should improve, thus reviving revenue lost from pure transportation business.

Improving margins

The strategic shift has started to pay off. The operating margin, before extraordinary expenses on write-offs, were higher during the three quarters to December 2016 compared with the corresponding previous period.

The operating margin for the nine months ended December 2016 is 27 per cent compared with 20 per cent a year earlier. The reduction in fleet size should help moderate depreciation expenditure.

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