Coffee Day Enterprises’ (CDEL) apparently strong coffee business of 1,518 stores across 219 cities is diluted in the myriad of other unrelated capital intensive businesses; coffee retailing accounts for just 30% of capital employed.
Despite being the largest coffee retailer, the coffee business has posted very little operating leverage – ebitda CAGR of 14%, lagging revenue CAGR of 16%. Gross block turns of the coffee business have averaged 1x over FY12-15 with a near-negligible RoCE (pre-tax RoCE of 3%). The scope to improve RoCE (>10% excluding taxes) hinges on high like-to-like (LTL) growth, translating to higher LTL margin, which we 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% 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%.
Given the multitude of asset intensive and unrelated businesses, the valuation of Coffee Day Enterprises (CDEL) should be approached in an SOTP manner; we 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 R27-38 billion, using a 15-20x FY15 EV/ebitda multiple.
Restaurant businesses (such as Jubiliant Foodworks-Dominos Pizza, Westlife Development-McDonalds and Speciality Restaurants) in India (with a brand recall as high as that of CCD) fetch a high multiple (40x FY15 EV/ebitda) given high profitability and RoCE; meanwhile global small QSR formats in developing nations trade at 14x. Whilst valuing CDEL’s coffee business, one needs to consider the fact that the company is exposed to not only high competition from global entrants but also to the rising capital/operating costs/needs which will make it difficult for it to post respectable RoCEs.
CEDL is a holding entity with varied and diverse business interests, ranging from Café chains to logistics to real estate and financial services. The coffee business accounted for about 51% of CDEL’s turnover and 55% of ebitda over FY13-15. The coffee business accounts for only 30% of the capital employed, with real estate, hospitality financial services and logistics business (Sical Logistics – Listed) accounting for the rest.