Coffee Day Primary Market Offer: A Rich Brew?

Coffee Day Enterprises is looking to raise Rs 1,150 crore through an initial public offering of Cafe Coffee Day.

Coffee Day Enterprises (CDEL), which owns Cafe Coffee Day (CCD), India’s largest cafe chain by number of stores, plans to raise as much as Rs 1,150 crore ($175 million) through an initial public offering (IPO), which has been launched today. This is India’s largest IPO in three years.

Let’s first look at the structure of the holding (parent) company, CDEL, and its financials which has raised some concerns among brokerages and potential investors.

• CDEL has been posting losses between FY13 and FY15.
• The company is however, EBITDA positive; EBITDA margin stood at 16.4 percent in FY14 and at 17 percent in the first nine months of FY15
• Revenue growth was in single digits in the last two years.
• The company has diversified business interests through 40 subsidiaries across segments like logistics, financial services, hospitality and technology parks; this could weigh on valuations.
• The company faces stiff competition from Tata-Starbucks.

Mixed Review From Brokerages

Most brokerage firms believe the valuations are somewhat expensive and a bit stretched but it may be a good stock to play in the medium to long term.

Angel Broking says the offer is priced at a slightly higher valuation, considering the negligible profits/reported losses of subsidiaries and the complex holding structure of the company.

We recommend a Neutral on the issue. Investors having conviction in the long-term growth prospects of the company and wanting to tap this perceived opportunity could consider waiting for a possible correction in the stock price post the listing of the IPO.

ICICI Direct says CDEL, on the back of the CCD business, would be a major beneficiary of a revival in urban discretionary consumption.

Given that the investment value of the IT, logistics, real estate and hospitality businesses is Rs 5,025 crore, the coffee business is available at a 15 percent discount to global coffee chain Starbucks. We recommend Subscribe.

Hem Securities believes the issue looks steeply priced at current levels.

The company has posted consecutive losses in the last few years which doesn’t instil confidence for investment in the short term, however in the long term investment is advisable only when company starts posting profits. Hence, we recommend Avoid on the issue.

Sharekhan points out that at the higher end of the issue price, adjusting for the valuation of the listed plays like MindTree, the coffee business is available at 25-26 times in FY15 EV/EBITDA, which is in line with some of the listed comparable companies and thus is not cheap.

Given the strong brand image, extensive distribution reach and growing disposable income in India, the company is an attractive play on urban discretionary consumption and investors can look at it with a mid- to long-term investment horizon.

Issue Details

• The IPO opens today and closes on October 16.
• Price band for the share sale has been fixed at Rs 316-328.
• Stock is likely to be listed on bourses by November 2.
  Size of the issue: Rs 1,150 crore.

CCD is not new to you, but we’ve put together some interesting, lesser-known facts about the parent company, which is going public today:

All About Scale

CCD had 1,423 outlets across India and abroad at the end of last year, a number that has grown to 1,538 stores over the last few months.

Promoter VG Siddhartha, who is also the chairman and managing director, said in a recent interview that the company will add 135 stores every year over the next three years.

Competitive Intensity

Each CCD outlet averages daily food and beverages sales of about Rs 11,927 ($184). In comparison, a competitor like Starbucks makes over five times that amount, according to retail consultancy firm Technopak. However, CCD has many more outlets than Starbucks – the American coffee company had 64 cafes in India as of December 2014 – and cheaper offerings.

The company has a market share of approximately 46 percent in India, with its cafe footprint being nearly four times larger than the cumulative footprint of the next four competitors, as of end December 2014.

In 2014, CCD’s same store sales growth – the percentage change in sales over the previous year – stood at a healthy 9.13 percent according to the draft red herring prospectus filed by the company with the market regulator, Securities and Exchange Board of India.

Diversified Business

Besides coffee outlets, CCD is also in the business of procuring, processing and roasting of coffee beans to retailing of coffee products across various formats. It is one of the largest exporters of Indian coffee beans, primarily to Europe, Japan and the Middle East.

The parent company CDEL has stakes in information technology (16 percent stake in Mindtree), logistics (53 percent in Sical Logistics), Special Economic Zone development (100 percent stake in Tanglin), financial services (81.9 percent in Way2Wealth Securities) and hospitality (100 percent in The Serai Resorts) businesses.

Unexciting Financials

CDEL’s consolidated revenues have grown in only single digits in the past two years and the net loss has increased, from Rs 21 crore in FY13 to Rs 88 crore in FY15. This financial year’s first quarter saw a Rs 20 crore loss, in large part due to interest cost. This may come down as CDEL repays its debt from the cash raised from the IPO proceeds. As of March 2014, debt stood at Rs 3,326.5, increasing from Rs 2,390.5 crore on an annual basis.

CDEL, however, remains profitable at the EBITDA (earnings before interest, taxes, depreciation and amortisation) level, with an EBITDA margin to 16.4 percent in FY14 and 17 percent in the first nine months of FY15.

Promoter Holding

Siddhartha holds a 54.78 percent stake, while all promoters together have a 92.74 percent holding in the company. Among other major shareholders, private equity firm KKR has a 3.43 percent and Nandan Nilekani, Infosys co-founder and the former chief of UIDAI, has a 1.77 percent stake.

Use of IPO Proceeds

A little over half the proceeds of the issue (Rs 633 crore) will be used to repay debt – Rs 510 crore for repaying the parent company debt and the rest for the coffee business. Further, Rs 288 crore will be used to expand the coffee business. This should help improve profits.