IPO Snapshot:

Future Supply Chain is entering the primary market on Wednesday 6^th December 2017 with an offer for sale (OFS) of upto 98 lakh equity shares of Rs. 10 each, by PE investor Griffin Partners and promoter Future Enterprises, in the price band of Rs.660 to Rs. 664 per share. Representing 24.43% of the post issue paid-up share capital, issue will raise Rs. 650 crore at the upper end and will close on Friday 8^th December. Listing is expected on 18^th December.

Company Overview:

Future Supply Chain, 56.10% subsidiary of Kishore Biyani’s Future Enterprises Limited, provides 3^rd party logistics (3PL) solutions such as contract logistics (warehousing, distribution) express logistics (point-to-point, less than truck load) and temperature controlled logistics (cold chain, transportation of perishables), accounting for 70%, 22% and 6% respectively of company’s FY17 revenue of Rs. 561 crore. It operates 42 distribution centres aggregating 3.84 million sq. ft. warehouse space including 0.37 million sq ft highly automated center at international hub airport, Nagpur. While the company caters to businesses outside the Future Group as well, share of the latter in total revenues has increased from 50% in FY16 to 70% in H1FY18, partly due to Future Group itself growing (both organically and inorganically), and partly due to reduced exposure from third parties, in run-up to GST implementation.

Company follows an asset-light business model, as only 144 temperature controlled reefer vehicles are owned by it, of total 687 containerized vehicles, besides machinery at few distribution centers. Recently in July 2017, a world-class high speed cross belt sorting system worth Rs. 82 crore was capitalized at the Nagpur distribution unit, increasing capitalized fixed assets to Rs. 207 crore (30-9-17), from Rs. 129 crore (31-3-17).

Based on success of initial few quarters, this addition is expected to yield good returns, both operationally and financially. While contract logistics vertical is performing well, company had to discontinued e-commerce last mile delivery on viability issues while temperature controlled logistics also reported negative gross profit in FY17. Revenue for express logistics too has been on a decline since FY15.

Financials:

Despite hiccups in the express logistics and temperature controlled logistics verticals, company’s historical growth rates have been very healthy, especially at operating and net profit levels. While total revenue grew at 21% CAGR between FY15-H1FY17, EBITDA showed 24% CAGR and PAT clocked 37% CAGR during this 30 month period. FY17 revenue grew 8% YoY to Rs. 561 crore, with EBITDA rose 15% YoY to Rs.90 crore, as operating leverage kicked in, translating into EBITDA margin of 15.6%. Net profit for FY17 stood at Rs. 46 crore, up 55% YoY leading to net margin of 8.2%.

H1FY18 continued with the robust financial show with revenue at Rs. 357 crore, and EBITDA growing to Rs. 64 crore, expanding EBITDA margin to 17.5%. Due to asset light nature of business, company is able to prosper despite annual depreciation charge being constant at Rs. 20 crore, right from FY15, FY16 and H1FY17. Lower borrowing cost also helped augment bottomline to Rs. 33 crore in H1FY18, leading to net margins of 9.3%, which is probably the highest in the contract logistics space, and may be even the logistics industry as a whole, barring container freight stations. EPS for H1FY18 was Rs. 8.32 as against Rs. 11.24 for FY17 and Rs. 7.34 for FY16. Thus current half year’s profits have already surpassed full year profits two years ago, which indicates superb profitable growth.

As of 30-9-17, networth stood at Rs. 326 crore, translating into BVPS of Rs. 83. Company’s aggregate debt is Rs. 80 crore while cash and equivalents are Rs. 64 crore, indicating negligible leverage (on net basis). RoNW of 15.60% was reported for FY17, which rose at 10.2% (not annualized) for H1FY18. Thus financial position and earnings growth rates have been strong and encouraging.   

Shareholding:

Post listing, Future Enterprises’ stake in the company will drop to 51.22%, from 56.10% while overall promoter holding shall contract to 52.47%, from 57.35% currently. PE investor Griffin’s stake will reduce to 14.64%, from 34.18% at present. Griffin Partners will be part exiting its 18 month investment at an eye-popping IRR of 62% while earlier strategic investor SKC1 had also made 23% IRR in June 2016, on its 4 year investment in the company. Thus, empirical data indicates that investors have been rewarded.

Company’s other shareholders include 2 funds of Edelweiss (who is also the lead banker) holding a combined 4.90% (pre-offer), acquired from Griffin Partners at Rs. 636.60 per share on 17-11-7, PE fund GTI Capital’s 2.29% holding and balance 1.28% held by former CEO.

Valuation:

At Rs. 664 per share, company’s market cap will be Rs. 2,660 crore, which implies PE multiple of 58x and 37x based on FY17 and FY18E earnings, since its profits are growing at a scorching pace. On EV/EBITDA basis, multiples are 30x and 19x for FY17 and FY18E respectively, which appear reasonable considering healthy growth and expanding margins, which provides comfort on the earnings to come.

Below is the comparison with other listed logistics firms, where net margins have been collated, to nullify for effect of asset ownership for most peers, except Mahindra Logistics:

While Allcargo, Gati and TCI are ruling at PE multiples of sub-30x, VRL Logistics, with RoNW of 13% and net margin of 7% operates on owned asset business model, is trading at PE of 33x. 75% subsidiary of DHL, Blue Dart Express, is ruling at premium multiples due to MNC tag and liquidity premium, in addition to strong Q2FY18 financial performance. Recently listed Mahindra Logistics, despite much larger topline of ~Rs. 3,400 crore, earns very low margins of 3.3% at EBITDA level and 1.7% at PAT level, and is trading at much steeper valuations on both PE and EV/EBITDA basis - 54x and 27x on H1FY18annualised basis respectively. While its RoNW is couple of percentage points lower than Future Supply, its market cap is 18% higher, which makes pricing of Future Supply Chain IPO reasonable. Also, profit margin for Future Supply Chain is the strongest in the above peer set, besides its low leverage and high growth rates, supporting its IPO valuations.  

Conclusion:

Future Supply Chain has demonstrated stellar growth in the recent past, which coupled with cheaper valuation vis-à-vis direct peer Mahindra Logistics makes this IPO attractive and hence a subscribe. One can expect both listing gains and double digit percentage returns from the stock, over the medium term.

Disclosure: No interest.