Bright prospects for Future Supply Chain Solutions

While revenue growth should reflect past trends (17% growth over FY15-17), margins, which are in the 13-16 per cent range, should benefit as operating leverage driven by volume growth kicks in

Growth prospects for Future Supply Chain Solutions (FSCS), a third-party logistics service provider, appear strong. This is due to the increasing trend of businesses to outsource their supply chain activities and the implementation of the goods and services tax (GST). While the overall third-party logistics growth, going ahead, is expected to be similar to the 12 per cent seen during FY12-FY17, growth for FSCS should be more than this. This is because a bulk of its business contract logistics, which involves warehousing, distribution and other value-added services, is expected to grow at an estimated 17 per cent. Contract logistics accounts for 70 per cent of revenues for FSCS, while the other major segments are express logistics, temperature controlled logistics or cold chain. In addition to the outsourcing trend what will help the company is its infrastructure across the country, presence across various verticals and relationships with customers. Further an asset-light model, wherein the company leases most of its warehouse and delivery infrastructure as well as automated operations, offers flexibility in scaling up capacity and reducing turnaround time. 
 
While revenue growth should reflect past trends (17 per cent growth over FY15-17), margins, which are in the 13-16 per cent range, should benefit as operating leverage driven by volume growth kicks in. Though prospects appear strong, the valuations of the IPO at 57 times FY17 post issue earnings per share, according to analysts at Emkay, leave limited upside for investors. Antique Stock Broking analysts believe the valuations at 39 times FY18 earnings are rich and they would wait for a better entry point. Given limited near-term upside, investors who have a horizon of at least three years could consider the issue to benefit from the upsides in a rapidly expanding growth market.  

The company, which was set up to cater to the Future group’s requirements, has diversified its customer base to entities outside of the group and these accounted for more than half of its revenues in FY15 and FY16. This proportion, however, came down to 37 per cent in FY17, due to discontinuation of last-mile delivery service of the e-commerce business, impact of demonetisation and decline in express distribution revenues. While the company is meeting about a third of its parent group’s logistics needs and there is scope to increase this, it is looking at incremental business by adding new customers and improving the share of the existing non-Future group business. 
 
Though a higher share of business from the group entities gives revenue visibility, the downside is higher receivable days. This metric over the past three years was elongated at 140-160 days but is is now at about 128 days. The company is looking to bring this down to 110 days. Analysts at Antique Broking say net working capital cycle looks slightly stretched at 40-50 days for Future Supply Chain against Mahindra Logistics’ (less than five days), and this possibly reflects the prolonged payment cycle from the group companies.