Coffee Day Enterprises IPO Opens: Should You Subscribe?

Coffee Day Enterprises IPO Opens: Should You Subscribe?

CCD, which opened its first store in 1996, is India's biggest food and beverages chain

Bangalore-based Coffee Day Enterprises, the parent company of Cafe Coffee Day retail chain, is diluting (issuing fresh shares) 17.55 per cent stake in the company for Rs 1,150 crore. Coffee Day Enterprises is aiming for a valuation of Rs 6,750 crore through India's biggest initial public offer (IPO) in three years. CCD, which opened its first store in 1996, is India's biggest food and beverages chain with 46 per cent market share as of December 2014, according to Technopak consultancy.

Here are 10 things to know before investing in Coffee Day IPO:

1) Coffee Day Enterprises is selling shares (face value of Rs 10) in a price band of Rs 316 to Rs 328 in its offer than opens on October 14 and closes on October 16. Investors can buy shares in a lot size of 45. Trading will begin on November 2.

2) Coffee Day Enterprises runs around 1,500 CCD outlets in more than 200 Indian cities, over 550 kiosks and nearly 31,000 vending machines. Beverages are 59 per cent of coffee retail business, while food is 37 per cent; exports are 25 per cent of coffee business, while retail (including vending) is 75 per cent of sales, according to Prabhudas Lilladher.

3) Coffee Day Enterprises runs several businesses - it has 40 subsidiaries and five unrelated businesses, but coffee is the biggest, accounting for about 51 per sales and 37 per cent of EBIT (operating profit), according to Prabhudas Lilladher. Besides running CCD outlets, Coffee Day Enterprises procures processes and exports coffee beans.

4) The company is also involved in real estate, hospitality, financial services (Way 2 Wealth Securities), and logistics business. Coffee Day Enterprises owns about 16 per cent in IT major MindTree (market cap around Rs 11,500 crore) and about 53 per cent in Sical Logistics (market cap around Rs 900 crore). It also owns two technology parks in Karnataka.

5) The company has been posting losses for the last three years (FY15 net loss at Rs 87 crore) because of high depreciation and interest costs, though revenue has grown at 30 per cent CAGR over last six years (FY10-FY15) to Rs 2,479 crore, according to Angel Broking.

6) More than half of the Rs 1,150 crore raised will be used for repayment of the Rs 4,500 crore debt, according to ICICI Securities. But, the company will continue paying high interest and this will be a drag on earnings, analysts say. Funds will also be used for setting up of outlets, refurbishment of existing cafes, and setting up of a roasting plant. 

7) Cafe Coffee Day competes with Starbucks, Costa Coffee, and Barista among others. The average cost of a beverage is the lowest in a Cafe Coffee Day, according to research by Ambit. CCD's popularity is higher in Hyderabad and Kolkata as compared to Mumbai, Bangalore and NCR, which account for 40 per cent of its outlets, the brokerage added.

8) The cafe market in India was worth about Rs 1,800 crore in 2014 and is growing at 20 per cent annually, according to Technopak estimates. While growth potential is huge, CCD's same store sales growth has been tepid - low to mid-single digits in the past four year, according to Prabhudas Lilladher. The company has shut around 300 stories in the last four years as part of restructuring even as it faces increasing competition from new entrants. Brands like Starbucks have weaned away a lot of premium customers from CCD.

9) Coffee Day Enterprises would be a major beneficiary of a revival in urban discretionary consumption, said ICICI Securities. It has a "subscribe" rating on the IPO. But most analysts have a cautious to negative view about the company. Coffee Day Enterprises' retail business has not been profitable despite 15 years in existence, says Ambit. It has an "avoid" rating on the IPO. Angel Broking gave a "neutral" rating citing negligible profits/reported losses of subsidiaries and the complex holding structure of the company. Unproductive investments, complicated organization structure and low throughput in the Cafe business are a drag, said Prabhudas Lilladher. It recommended investors to "avoid" the issue.

10) On Twitter too, many widely tracked analysts sounded cautious about Coffee Day Enterprises IPO.

"Cafe Coffee Day should be asked how many of 1,538 cafes were breaking even as of last month? 80:20 rule? Revenue needed 20,000/day against 13,000/day. To break even will take 5 years," Mr Baliga tweeted.

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