Snowman Logistics: SELL. Snowman Logistics: Thawing growth rates

The IPO of cold storage warehousing company Snowman Logistics (Snowman) in September 2014 was over-subscribed by a whopping 41 times.

And investors who bought the stock saw a 68 per cent gain on listing day.

As a result of the early gains, the stock’s valuation zoomed. This has made it pricey.

At the current price of ₹93, the stock discounts its trailing 12-month earnings 55 times. This is much higher than the multiple of about 30 times the IPO was priced at last September.

It is also at a premium to larger peers, such as Concor — which also operates cold storage warehouses — that trades at 27 times trailing earnings.

Investors can book profit as the stock’s upside may be limited, given the high valuation and lack of earnings growth triggers to justify the premium.

Snowman’s revenue growth has been slowing. From the average growth of 50 per cent clocked in the past three years, revenue increase was 32 per cent in 2014-15 and 19 per cent in the September quarter Y-o-Y.

The company earns over half its revenue from its 23 temperature-controlled warehouse units located across the country. While the segment reported a nearly 30 per cent Y-o-Y revenue increase in the September quarter, aided by increase in capacity and better utilisation, revenue was flat sequentially.

Also, its distribution business, which accounts for nearly one-half of its revenue, is under pressure. The company operates a fleet of temperature-controlled vehicles for transportation, but this segment reported static revenue growth Y-o-Y in the September quarter. Sequentially, there was a 13 per cent dip in revenue, likely due to discounts being offered to improve utilisation.

The other concern is the slowdown in earnings growth. Operating profit growth slowed to 23 per cent in 2014-15 compared to a 50 per cent increase in 2013-14. Operating profit margin has been around 23-25 per cent, but slipped to 23 per cent due to lower utilisation in 2014-15.

In the September quarter, margins slipped to 19 per cent, due to losses in the distribution segment. Growth in net profit was only 6 per cent Y-o-Y in 2014-15, compared to a 17 per cent growth in 2013-14. The slowdown was due to higher depreciation costs and interest payments. Depreciation, which accounted for 11-12 per cent of sales, currently stands at over 15 per cent.

Depreciation may remain high, as the business is asset-intensive. Interest costs increased 11 per cent Y-o-Y in 2014-15, compared with last year. But thanks to softening of rates, interest outgo reduced 8 per cent sequentially.

Also, as a result of a 34 per cent dilution in equity base, earnings per share dropped 20 per cent in 2014-15, compared with a year ago.

The cold storage business is capital-intensive, requiring investments to expand reach, storage capacity, and maintenance. Debt stands at 0.3 times equity currently and is likely to remain at these levels in the near term.