Future Supply Chain Solutions' Rs 650 crore IPO kicks off: Here's why you should subscribe with caution

 BusinessToday.in        Last Updated: December 6, 2017  | 13:07 IST
Future Supply Chain Solutions' Rs 650 crore IPO kicks off: Here's why you should subscribe with caution

The IPO of Future Supply Chain Solutions Ltd (FSCSL) is now open for subscription at a price band of Rs 660-664 per share. On offer is a mix of fresh shares by promoters Future Enterprises, which will lead to a dilution of 4.43% of their stake, as well as an offer-for-sale by private equity investor Griffin Partners aggregating to 20% of equity. Together, the issuer will sell 24.43% or nearly 98 lakh shares for up to Rs 650 crore.

Retail investors can reportedly bid for a minimum lot of 22 equity shares and in multiples of 22 equity shares thereafter. Edelweiss Financial Services, CLSA India, Nomura Financial Advisory and Securities (India), IDFC Bank, IIFL Holdings and Yes Securities (India) are the book-running lead managers to the IPO.

The third party logistics (3PL) company had already garnered nearly Rs 195 crore from its 16 anchor investors, including HDFC Trustee Co., Reliance Capital Trustee Co. Ltd, L&T Mutual Fund and IDFC Mutual Fund, ahead of the IPO. Here are 5 things you need to know if you are considering bidding for it before the IPO closes on December 8:

Business overview

FSCSL, the logistics arm of the Kishore Biyani-led Future Group, is one of India's largest 3PL players, according to its red herring prospectus. The company, with nearly 4 million square feet of warehouse space, has presence in three business segments-contract logistics, which generated the bulk of its revenues, express logistics and temperature-controlled logistics. The latter segment, covering cold-chain warehousing, transportation solutions and distribution of perishable products, started in financial year 2015-16 and is yet to break even, according to a BloombergQuint report.

Though it depends largely on business from other Future Group entities such as Future Retail and Future Consumer, the company's  external client list reportedly includes Pepe Jeans India, Reckitt Benckiser (India), and Kellogg India. Post offer, promoter holding will drop by around 5% to 52.5%, but FSCSL will continue to remain a subsidiary of Future Enterprises.

Company financials

Over the past three financial years, revenue grew at a compounded annual growth rate of 17% to Rs 561.2 crore while net profit rose by 36% to Rs 45.75 crore. Earnings before interest, tax, depreciation and amortization (EBITDA) margins contracted from 15.7% to 13.2% in the same period. FSCSL's net worth reportedly stood at Rs 326 crore for the half-year ended September 2017, translating into a book value per share of Rs 81, and the company has not declared any dividend during the last five financial years.


According to analysts, at the higher end of the price band of Rs 664, the issue is priced at PE of 58.1 times on FY17 and 39.9 times on first half of FY18 basis, and hence appears to be fairly valued compared to its peers. For instance, Mahindra Logistics-which recently came out with an IPO that was at an expensive valuation-is currently trading at Rs 441, 3% above its issue price and PE of 68.8 times on FY17 basis. Interestingly, the company has a similar business model and asset structure to Future Supply Chain but generates nearly five times the revenue. Also, as Angel Broking pointed out in its report, Mahindra Logistics has lower promoter group business (revenue coming from sister companies), which is 54% compared to 70% for FSCSL. "Further, Mahindra Logistics had reported non-promoter revenue CAGR of 46% v/s. de-growth of FSCSL over FY15-17," the brokerage added. "Considering the above observations, we are of the view that the issue is aggressively priced leaving limited room for further upside. Thus, we assign 'Subscribe with Caution' rating to the issue," said Choice Broking in its report.

Other risks SMC Research, in its report, highlighted that the firm is heavily dependent on machinery and equipment for its operations. "Any breakdown of its machinery or equipment will have a significant adverse effect on its business," the brokerage said, adding that the issue is offer for sale and no amount would go to the company.


Long-term advantage

According to Emkay Research, FSCSL is well-positioned to capitalise on upcoming opportunities in the logistics sector. For investors with a 3-5 year time horizon, it will offer steady compounding returns. Given that the company is also expected to benefit from the GST, the IPO seems suitable for retail investors with a high risk appetite looking to make a long term investment.

With PTI inputs


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