Future Supply Chain IPO Review: Better than Mahindra Logistics?

After a couple of disappointing listings and the ensuing lull, India’s IPO market is back on track with back to back offers of Shalby Hospitals and Future Supply Chain. While the public offer of Shalby Hospitals will open on 5 Dec, Future Supply Chain Limited (FSCL) will follow the next day. Priced in the range of INR660 – 664 per share, the IPO aims to raise anywhere between INR645.78 crore and INR649.70 crore. All the 9,784,570 shares in Future Group’s logistics arm will be sold through an Offer For Sale (OFS) by existing shareholders. Through Future Supply Chain IPO review, we try to find out if the company’s valuation leaves something on the table for investors.

Future Supply IPO Review:  All OFS, no fresh shares  

As mentioned above, all the shares in the IPO will be sold through OFS route. As such, the company will not get any proceeds from the offer. These shares will be offered by parent Future Enterprises Limited (1,956,914 shares) and private equity investor Griffin Partners (7,827,656 shares).

The dilution for Future Enterprises will be quite small at less than 10% but Griffin Partners will be clearing more than half of its stake. This is not bad considering the private equity firm invested in June 2016 at an average cost of acquisition of INR323 per share. That’s 2X in less than 18 months!!

Griffin Partners has been on a selling spree and sold 19.63 lakh shares to two Edelweiss Group entities – Edelweiss Crossover Opportunities Fund and EW Clover Scheme – at INR636.60 per share.

Through its investment in the company in July 2015 through Compulsorily Convertible Debentures, GTI Capital Gamma Pvt Ltd is another important expernal investors with an equity stake of nearly 2.3%. Nevertheless, GTI is not participating in the IPO. As the table shows, Kishore Biyani directs holds just 100 shares in the logistics arm.

Future Supply IPO Review: Business of Future Group

Future Supply Chain Solutions offers third-party logistics services into various verticals including retail, fashion and apparel, automotive and engineering, food and beverage, fast-moving consumer goods (FMCG), e-commerce, healthcare, electronics and technology, home and furniture and ATMs. The company is a pan-nation player and operated 42 distribution centres across the country as of 31 July 2017. In addition, it also operates two distribution centres of its customers. The company’s hub-and-spoke distribution model comprises 14 hubs and 105 branches across India. In total, Future Supply Chain Solutions covers 11,228 pin codes across 29 states and 5 union territories in India.

Without any qualms, Future Supply Chain states that it primarily undertakes the logistics functions for various Future Group entities. In fact, its dependency of the group entities is only increasing. In the last three years – FY2017, FY2016 and FY2015 – group companies accounted for 62.5%, 49.5% and 46.5%, respectively, of its revenue from operations. This figure increased to 69.7% in the six months ended 30 September 2017.

Future Supply IPO Review: Financial performance

Since the company gets most of its revenues from Future group, it has been doing well on the back of the success of Big Bazaar and other group entities. This is visible in the revenue growth of the company which went from INR354.1 crore in FY2013 to INR577 crore in FY2017. In the same period, its earnings swung from a loss of INR4.2 crore to INR45.6 crore. Last year was also the best year in terms of profitability which stood at 7.9%.

FY2013 and FY2014 figures are based on Indian GAAP accounting standards. 

Financial figures for subsequent years are based on Indian Accounting Standards (Ind-AS).

In the six months ended 30 September 2017, the company has maintained its upward journey with growth in revenue, profits and margins. During the latest six months, the company has recorded a profit of INR33.2 crore which translates into a net margin of 9.1%.

Future Supply IPO Review: Should you invest?

As seen so far, Future Supply Chain has made good progress with its business and we can’t really fault the company on any parameter except may be for the high reliance on a single client. And that’s the overall design of the group, so Future Group’s high contribution in the logistics arm’s revenues is likely to persist in the future as well. This is understandable as having Future Group onboard as the biggest client, there is limited scope and incentive for the company to cater to other clients who may have different requirements. For example, most e-commerce players require a last mile delivery logistics service with extremely fast turnaround. This doesn’t go well with Future Supply Chain’s scope of operations which mostly revolves around deliveries in bulk. Future Supply Chain indeed got into e-commerce in FY2016 but promptly discontinued its operations as the “business was not economically viable”.

The company has priced the IPO in the range of INR660 – 664 per share and its FY2017 Earnings Per Share (EPS) of INR11.24 translate into Price/Earnings (P/E) ratio range of 58.72 – 59.07. This is quite high for a logistics player as we made it amply clear in our analysis of Mahindra Logistics IPO. The subsequent poor show of Mahindra Logistics on the exchanges has reinforced our view that capital preservation should be given a preference over running after potential profits at any cost.

However, there are notable differences between Mahindra Logistics and Future Supply Chain. While the first one purely works on an asset-light business model, Future Supply Chain has a sizable capital locked into assets. Nevertheless, Future Supply Chain makes up for it through higher margins and yet manages a strong balance sheet with a debt equity ratio of 0.27X. Its Return on Net Worth (RONW) of 15.6% is higher than 13.1% for Mahindra Logistics. As the performance in the six months has improved further, valuation multiples are set to take a dip on the basis of improved annualized earnings. For example, P/E ratio dips to just below 40 at the higher end of the price band. This is still not the level at which a retail investor can think of making a fortune by holding longer.

In totality, Future Supply IPO review tells us that the company’s business is growing steadily and has strong profit margins with room for further improvement. While valuations on the basis of FY2017 earnings are stretched, multiples get much better when H1 FY2018 performance is taken into account. Yet there is not a lot left on the table so the IPO is essentially for high-risk investors.