Logistics - The recipe for successful cold chain logistics in India - ICICI Securities

We hosted Mr. Sunil Nair, CEO of Snowman Logistics, for a fireside chat. With 500+ trucks (300 owned), 24x7 temperature monitoring and over 10,000 pharma pallets, Snowman is ready to handle Covid-19 vaccine storage and distribution. However, the impetus remains to focus on pharma as a sectoral revenue augmentator, rather than get carried away in capital allocation or return expectation behind Covid-19 vaccine distribution. Mr, Nair was also categorical on his emphasis for disaggregated capacity creation pan-India and then building on utilisation, rather than chasing scale - given the demand profile of the country. FMCG, quick service restaurant (QSR), pharma and seafood segments offer better yield, growth in volumes. Judicious capital allocation, with prudent sectoral choice, more focus on value add, selection of strategic customers (like Amazon) and trying to follow an asset-light model can be the recipe for a successful cold chain logistics service in India.

- How to capture the Covid-19 opportunity? Conversation highlighted the uncertainty around the investment in additional cold chain capacity keeping Covid - 19 opportunity in mind. While Snowman has existing 10,000 pallets which can cater to vaccine distribution (including Covid-19 vaccine distribution), the management is more comfortable to look at additional capacities for broad-based growth that pharma may bring as a sector over the next few years, rather than trying to capture interim demand bulge that Covid-19 vaccine distribution may bring.

- Pros and cons of a demand bulge. There are benefits which a probable demand bulge out of Covid-19 vaccine distribution opportunity may bring through: i) Better utilisation and better gross margins, despite a chance that government may cap pricing, ii) better pricing to tactical customers given capacity diversion - especially given the lack of compliant cold storage faciltiies in the country, high prevalence of agri cold storage with low probability of interchangeability. Also, it's difficult for existing players to divert functional food cold storage towards Covid-19 vaccine distribution - given business economics.

- The outlook on capacity. Following facts on capital allocation for new cold storage capacities came to the front: i) Disaggregated capacity across locations to improve customer attractiveness, rather than large centralised capacity due to disaggregated demand pattern in India, ii) closer to demand centres, starting out small, with a mix of ambient and temperature controlled and expanding/augmenting as utilisation picks up; case in point being the Mumbai facility for Snowman, started with a 5,000 pallet facility and subsequently expanded into 23,000 pallets - similar strategy is being pursued by Snowman for Siliguri and Coimbatore. A typical 5,000 pallet facility with a capital cost of Rs300mn has optimised business economics. Further, capital allocation decisions/locations are better secured through 60-65% of demand being provided by the existing customers.

- Yields and customer mix. Mr. Nair is of the view that cold chain pricing is due for a reset. As industries move from conventional warehousing to cold chain - the element of comparison is a glass ceiling. With more tailor-made demand from customers benchmarking globally, yield can have a cost-plus component. But for tactical customers, with limited cold chain specific demand considerations, the pricing is still driven lower by competitive bidding. Snowman wants to improve the mix, as much as market permits with more strategic customer i.e relationship with Amazon for perishable supply chain which the company wants to extend as an ecommerce offering.

- Sectoral mix, also key to optimise pricing. Four segments, which stand out in terms of volume growth and yield per pallet are FMCG, quick service restaurant (QSR), pharma and seafood. Pricing of these segments are encouraging and each segment is growing ~15%. Other segments like meat, ice cream are high yield segments but offer less growth opportunity (8-10%). While, previous cold chain facilities for Snowman were sector agnostic, of late, a lot more thought has gone into targeting specific sectors wherever possible. Also, capacities are targeted at export gateways with seafood export to EU being the prime enabler. Last year, Snowman had taken 4-5% price increase from all customers; this year Covid-19 pandemic hindered any price increase. At the same time, none of the cold chain companies have offered any discounts to customers in terms of pricing or monthly rentals.

- Reefer transport profitability being impacted on account of oversupply. Thus, EBITDA possibility in reefer is lower than warehouse. Therefore, Snowman, has not been investing in refrigerated transport and is happy to work with 200 partner trucks. Also, multi-temp trucks (4-5 te) for last mile delivery with separate engine for refrigeration remain the common mode of disaggregated delivery. Management sounded reassured that differential in pricing /yield obtained by using such multi-temp trucks makes more than for the differential rental vis-à-vis a normal truck.

Source : Equity Bulls

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