Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A/Stable’ rating to the long-term bank facilities of Snowman Logistics Ltd (Snowman).

 

The rating reflects Snowman’s established market position in the temperature-controlled logistics segment, benefits from continued parentage due to operational and strategic linkages with its parent, Gateway Distriparks Ltd (GDL; holding 40.25% stake in Snowman). The rating also factors in Snowman’s adequate financial risk profile, with improving operating profitability and prudent funding mix for proposed capacity expansion plan. These strengths are partially offset by exposure to funding risks related to capex, susceptibility to competition and volatility in end-user segments.

Analytical Approach

For arriving at its rating, CRISIL Ratings has adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) by excluding lease rental components from fiscal 2020, by Snowman with depreciation and finance costs to comply with IndAS116 on lease accounting. Accordingly, CRISIL Ratings has not included lease liabilities in debt.

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Established market position in the temperature-controlled logistics industry: Snowman is the largest provider in the highly fragmented temperature-controlled warehousing, transportation and logistics industry in India. The company provides quality service and end-to-end solutions to customers in the temperature-controlled industry, thereby resulting in repeat orders and long term contracts providing about 80% revenue visibility. As on December 31, 2020, the company had warehousing capacity of 106,128 pallets in 31 strategic locations across 15 cities. It also had 264 refeers providing last-mile, inter-city distribution services through a consignment agency model. It caters to marquee customers in diversified end-user industries, such as seafood, pharma, dairy and Quick Service Restaurant (QSR). The company is also setting up dedicated warehouse facilities for large e-commerce players, thereby providing steady revenue and profitability.

 

• Continued parentage of GDL: Post settlement of agreement between Snowman and Adani Logistics Ltd (ALL) in July 2020, GDL is the single largest owner with 40.25% stake in the company and substantial control on the board. The rating continues to benefit from moderate operational and strategic linkages with GDL, as both the companies offer complementary services in the logistics industry, thereby providing cross-selling opportunities to customers. GDL is one of the largest private players in the container freight station, railways and inland container depot businesses in India. Furthermore, Snowman is well established amongst the leading organised players, providing temperature-controlled services in India. 

 

• Adequate financial risk profile and improving operating profitability: Gearing stood at 0.15 time as on March 31, 2020, and is expected to moderate in fiscal 2021, after factoring in additional debt for part-funding the ongoing capex. The company has capacity of 1,06,128 pallets and addition of 12,000 pallets at cost of about Rs. 70 crores is underway which is expected to be completed in fiscal 2022. Any further capacity expansion plan would be funded from internal accruals and equity infusion. With no additional debt-funded capex planned and healthy internal accruals, gearing is expected to remain below 0.25 time over the medium term. Debt protection metrics are adequate with interest coverage and net cash accrual to total debt ratios estimated at around 10 times and 63%, respectively, in fiscal 2021. Any higher-than-expected debt for funding capex could adversely impact the capital structure and debt protection metrics and will remain the key monitorable. 

 

• Snowman’s revenue has grown at compound annual growth rate (CAGR) of 8% over the three fiscals through 2020 to Rs 241 crore, driven by healthy capacity utilisation and increasing realisation in its warehousing business. Revenue during the first nine months of this fiscal fell 3% year-over-year to Rs 173 crore while operating profitability improved to 21.4% from 16% in the same period last year, mainly due to improved utilisation of its warehouses to 86% from 79% last year. However, realisations moderated by 8% to Rs 1,380 per pallet per month, amidst the Covid-19 pandemic. Snowman’s revenue is expected to be marginally lower in fiscal 2021, as compared to last fiscal, due to adverse impact of the pandemic and lockdown in the first quarter of the fiscal. Healthy utilisation and increasing focus on margin-accretive end-user segments, such as pharmaceuticals and seafood are expected to sustain operating profitability at 22% over the medium term. With improvement in operating performance, debt protection metrics are expected to improve over the medium term.

 

Weaknesses

• Exposure to risks related to capacity expansion

Snowman is adding 12,000 pallets in its warehouse business at a cost of about Rs. 70 crores, which is expected to be completed in fiscal 2022. The company has plans for further capacity expansion across locations in India and almost double its capacity to about 2 lakh pallets over the medium term. The future capex plan is expected to be prudently funded through internal accruals and equity infusion. Snowman will remain exposed to risks related to implementation of capex in a timely manner and healthy occupancy levels subsequently. Any delay in implementation of capex or funding tie-up could adversely impact the company’s financial risk profile and will remain a key monitorable.

 

• Highly capital intensive operations: The business is highly capital intensive, with continued investments in the warehousing and transport assets.  Snowman had incurred about Rs. 200 crores in the capacity expansions over the past five years; however moderate operating performance has resulted in Return on Capital Employed (ROCE) of about 2-4% during this period. With ongoing capex plans and expected sustained improvement in operating profitability, ROCE is expected to improve and will remove the key monitorable.

 

• Susceptibility to competition and volatility in end-user segments: The temperature-controlled industry is highly fragmented, with large presence of unorganised players given low barriers to entry. Snowman’s operations are susceptible to competition from local players across markets. However, they lack quality end-to-end service offerings which helps organised players such as Snowman to garner marquee customers across end-user segments, such as pharmaceuticals, seafood, QSR and fast-moving consumer goods. About 25-30% of Snowman’s revenue comes from seafood customers, which were impacted by two cyclones (Bulbul and Fani) in fiscal 2020, thereby constraining operating profitability to 19.7% as compared to 25.5% in fiscal 2019. Volatility in demand from end-user segments could impact Snowman’s operating performance and will remain a key monitorable. 

Liquidity: Adequate

Liquidity is supported by cash accrual of Rs 50 -70 crore in fiscals 2021 and 2022, which will help meet capex, as well as debt obligation of Rs 9 crore in fiscal 2021 and Rs 15 crore in fiscal 2022. Furthermore, the company has cash surplus of Rs 36 crore as on December 31, 2020, and negligible bank limit utilisation during the six months through February 2021.

Outlook: Stable

CRISIL Ratings believes Snowman will benefit from its established market position and continued parentage of GDL. The financial risk profile is expected to remain adequate, supported by expected improvement in operating performance and prudent funding of capex plans.

Rating Sensitivity factors

Upward factors

• Sustained revenue growth with capacity expansion and stable operating margin above 28%-30%
• Improvement in capital structure with higher equity infusion or faster debt reduction, backed by sharp pick-up in operating performance
• Improvement in operational and financial linkages with GDL or better credit profile of GDL

 

Downward factors

• Weakening of operating margin to below 18-20% on a sustained basis, resulting in lower cash accrual
• Higher-than-expected, debt-funded capex, leading to deterioration in credit metrics
• Weakening of operational linkages with GDL or weakening credit profile of GDL

About the Company

Incorporated in 1993, Snowman provides pan-India, integrated, temperature-controlled warehousing, transportation and distribution services, covering all major cities and regions operating across 31 strategic locations across 15 cities. Its extensive infrastructure includes 15 ISO-22000 certified warehouses, 24 ISO 14001 certified warehouses, 1 GDP (Good Distribution Practices - Pharma) and 6 BRC certified warehouses. As of December 31, 2020, its assets included 106,128 pallets, 264 owned reefer vehicles and transportation assets. As on December 30, 2020, GDL held 40.25% stake in Snowman.

 

For the first nine months through December 2020, Snowman reported net profit of Rs 0.5 crore on revenue of Rs 173 crore, against net loss of Rs 13.8 crore on revenue of Rs 179 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators*

Particulars	Unit	2020	2019
Net sales	Rs crore	240	233
Profit after tax (PAT)	Rs crore	(15)	10
PAT margin	%	-6.2	4.2
Adjusted debt/adjusted networth	Times	0.15	0.21
Adjusted interest coverage	Times	6.68	5.91

*CRISIL Ratings -adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	13.00	NA	CRISIL A/Stable
NA	Working capital loan	NA	NA	NA	10.00	NA	CRISIL A/Stable
NA	Rupee term loan 1	NA	NA	30-Sept-25	46.75	NA	CRISIL A/Stable
NA	Rupee term loan 2	NA	NA	31-July-27	60.00	NA	CRISIL A/Stable