Coffee Day Enterprises (CDEL) entered the market with an initial public offer (IPO) to raise Rs 1,150 crore at a price band of Rs 316-328 per equity share. The Coffee Day Enterprises IPO opened for subscription on Wednesday (October 14) and will close on Friday (October 16).
The initial public offering (IPO) of Coffee Day Enterprises gained traction on Thursday, with the issue clocking 75 per cent subscription on the second day of the book building process. The IPO had recieved 13 per cent subscription when it opened on Wednesday.
The company owns the popular coffee chain – Café Coffee Day – and is the largest coffee retail company in India. The company also has diversified business interests through its subsidiaries across segments like logistics, financial services, hospitality, and technology parks. VG Siddhartha is the chairman of Coffee Day Enterprises.
The entire issue is for fresh equity which would be used by the company to finance the expansion of its coffee business, repayment and pre-payment of loans to the parent company as well as subsidiary and utilise the rest for general corporate purposes. At present, its promoters hold 63.3 per cent stake in the company; post-issue the shareholding will come down to 52.6 per cent.
Kotak Investment Banking, Citigroup Global Markets, Morgan Stanley (India), Axis Capital, Edelweiss Financial Services and YES Bank are financial advisors to the issue.
Coffee Day Enterprises raised Rs 334.27 crore on Tuesday by issuing shares to institutional investors. The Bengaluru-based company issued a little more than 1.03 crore shares to anchor investors at Rs 322 apiece, a stock exchange announcement said.
CDEL, on a consolidated basis, has reported around 30 per cent CAGR in revenue over FY2010-15 to Rs 2,479 cr. On the EBITDA front, the company reported a 26 per cent CAGR over the same period. However, on account of higher depreciation and interest costs, the company incurred a consolidated net loss of around Rs 87 cr in FY2015.
|FY 2013||FY 2014||FY 2014||1QFY16|
|Net Sales (Rs crore)||2,100||2,287||2,479||623|
|Net Profit/(Loss) (Rs crore)||(21)||(77)||(87)||(20)|
Data Source: Angel Broking
Here is what experts say on the IPO of Coffee Day Enterprises:
In terms of sweating of assets, both coffee and non-coffee businesses appear poorly utilised. Destimoney Securities believes the coffee business requires massive course correction required to catch up return profile of matured global QSR/ Coffee chains like McDonald, Dunkin Donuts and Starbucks. Hence an investor should subscribe to the IPO only with long term horizon of three to five years.
CDEL has the largest number of consumer touch points compared to any other company operating in the café retail space. With a sprawling network of 1,538 Café Coffee Day outlets across 219 cities in India and 561 Coffee Day Xpress kiosks, CDEL is better positioned than its competitors to capture the benefits of rising middle class income levels, which would aid in increasing discretionary consumer spending.
ICICI Securities believes CDEL, on the back of the Café Coffee Day business, would be a major beneficiary of a revival in urban discretionary consumption. At the price band of Rs 316-328, a target market cap and EV at the upper end of the price band would be Rs 6,756 crore and Rs 10,510 crore, respectively. Given the investment value of the IT, logistics, real estate & hospitality businesses is Rs 5,025 crore, the coffee business is available at 4.3x EV/sales which is around 15 per cent discount to global coffee chain Starbucks. The brokerage house recommends ‘Subscribe’
CDEL has diversified across other businesses, which however have failed to deliver impressive financial performances so far. Considering negligible profits/reported losses of subsidiaries and the complex holding structure of the company, Angel Broking believes that the IPO is priced at a slightly higher valuation. Thus, the brokerage house 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.
The brokerage house advises investors to avoid subscribing. Most of the proceeds will be used to repay the debt and less than 50 per cent will be used for expansion plans of its coffee business. Moreover the consolidated net loss has witnessed a rising trend in last 3 years. We expect the issue is valued at par and there would barely be any significant gains on listing and going forward.
At the higher end of the issue price, adjusting for the valuation of the listed plays (SLL and Mindtree) along with IT play, the coffee business is available at 25-26x its FY2015 EV/EBITDA which is in line with some of the listed comparable companies and thus is not cheap. However, 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 could look at it with mid-to-long term investment horizon.
Despite being the largest coffee retailer, the coffee business has posted very little operating leverage – ebitda CAGR of 14 per cent, lagging revenue CAGR of 16 per cent. Gross block turns of the coffee business have averaged 1x over FY12-15 with a near-negligible RoCE (pre-tax RoCE of 3 per cent). The scope to improve RoCE (>10 per cent excluding taxes) hinges on high like-to-like (LTL) growth, translating to higher LTL margin, which the brokerage house believe has limited head room, as there are limited operating levers; fixed costs are already low and pricing growth has limited headroom given the target audience of the value conscious youth segment rates this below average in metros (40 per cent of stores).
The company’s structure (40 subsidiaries) and 5 diverse and unrelated businesses make the company’s structure that of a conglomerate; moreover, all the businesses have a history of poor RoCE. Capital allocation to and utilisation of free cash flows from the coffee business to non-coffee businesses is a risk. Undisputed leader in café business with integrated back-end CDEL through its subsidiary CDGL operates the largest coffee chain business with over 1,500 stores across 219 cities in India with a market share of 46 per cent.
Given the multitude of asset intensive and unrelated businesses, the valuation of Coffee Day Enterprises (CDEL) should be approached in an SOTP manner; Ambit Capital refrain from giving a view on the overall enterprise valuation but given our understanding of the retail business, its missing profitability despite 15 years in existence and using a few relative valuations leads to an enterprise valuation of Rs 27-38 billion, using a 15-20x FY15 EV/ebitda multiple.
The company is bringing the issue at price band of Rs 316-328 per share at p/b ratio of approx 3.92-4.07 on post issue book value of approx Rs 80.53 per share. Though the company has strong promoter background, brand name, pan India presence but looking after the valuations issue looks steeply priced at present level. Also the company has posted consecutive losses from last few years which doesn’t instill confidence for investment in short term, however in long term investment is advisable only when company will start posting profits. Hence, we recommend ‘Avoid’ on issue.