Complex structure dilutes flavour.

Strong brand visibility, positive operating cash flows and competitive pricing notwithstanding, unrelated composition of businesses, too many loss-making group entities in related lines of business, poor market discounting of holding ventures, etc. restrict prospects.

OFFER AT A GLANCE
Name	Coffee Day Enterprises Ltd
Public Offer	Fresh Issue of 3.5 cr to 3.64 cr shares of Rs 10 each
Offer % on Total Equity	17.02% to 17.55%
Post-IPO Promoter Stake	52.22% to 52.56%
Offer Price	Between Rs 316 and Rs 328
Offer Amount	Rs 1150 cr
Application Quantity	45 & Multiples of 45
Bid/Offer Opens	October 14, 2015
Bid/Offer Closes	October 16, 2015
Listing	NSE and BSE
IPO Rating	Nil
Book Running Lead Managers	Kotak, Citigroup, Morgan, Axis Cap, Edelweiss, Yes Bank
Registrars	Link Intime

 

The IPO

Fresh issue of 3.5 to 3.64 cr equity shares Rs 10 each at a price band of Rs 316-328 per share aggregating to Rs 1150 cr. A maximum of Rs 340 cr is reserved for anchor investors, Rs 227 cr is earmarked for QIBs (excluding anchor investors) and Rs 227 cr is kept for retail investors. Investors should apply for a minimum of 45 shares and multiples of 45 thereafter.

The present public issue will constitute 17.02 to 17.55% of the post-issue paid up capital of the company (Rs 206 cr to Rs 207 cr).  The promoter group would hold between 52.22% and 52.34% of the enlarged capital. For the IPO, Kotak Mahindra Capital, Citigroup Global and Morgan Stanley have been appointed as global co-ordinators and book running lead managers. Axis Capital, Edelweiss Financial and Yes Bank are acting as book running lead managers.   

 

IPO Object

The IPO proceeds (Rs 1150 cr) are proposed to be utilized for the following:  Financing coffee business operated through the subsidiary to the tune of Rs 287 cr. This will be spent towards a) Setting-up of new Café Network outlets and Coffee Day Xpress kiosks Rs 87 cr; b) Manufacturing and assembling of vending machines Rs 97 cr; c)  Refurbishment of existing Café Network outlets and vending machines Rs 60 cr ; and d) Setting-up of a new coffee roasting plant along with integrated coffee packing facility and tea packing facility Rs 42 cr. Repayment or prepayment of loans of the issuer company and subsidiary up to Rs 633 cr and the balance (Rs 230 cr) net of issue expenditure is earmarked  for General Corporate Purposes.

 

Lineage

Coffee Day is not new to Indian public but its promoter is certainly new to IPO investors. Though hailed from a coffee-grower family, V G Siddhartha (56 years), who is the son-in-law of former Karnataka Chief Minister S M Krishna, started his career during early eighties in stock market related activity. A decade later, in 1993, he set up Amalgamated Bean Coffee Trading Company Ltd (ABCTCL). Since 1995, he has forayed into coffee retailing and has established India’s largest Café chain network.

While coffee being his main-stay, Siddhartha made investments in IT/ITES companies including a significant stake in Mindtree. He also invested in technology parks on the outskirts of Bangaluru and in Mangaluru to tap into the office space demand. In 2011, he acquired the SPIC group’s Sical Logistics Ltd and took management control. All these now constitute the Coffee Day group.       

As regards the corporate structure of the group, the company which is now going public, Coffee Day Enterprises Ltd (CDEL) is the group’s ‘holding venture’ in which the promoter group have 63% and private equity investors KKR Mauritius, NLS Mauritius, Standard Chartered (Mauritius) along with ‘private treaty’ holder, Bennett & Coleman Co. control 37%. CDEL in turn holds 85.1% in Coffee Day Global Ltd (CDGL) which operates the Café chain business of the group.

CDEL controls 100% of Tanglin which is into office space business. It has 52.8% in Sical Logistics and 16.1% in Mindtree. The issuer company has 81.9% control in Way2Wealth – the financial service arm of the group. Here 52.8% is held through Tanglin and 32.7% is held through Coffee Day Trading where CDEL holds about 89%. CDEL also holds 100% in the group’s resort subsidiary viz. Serai Resorts. Operationally, whereas coffee contributes 52% of CDEL’s consolidated revenue, Sical accounts for 33%, Way2Wealth 9%, Tanglin 4%, Serai 1% and others 2%.

Even though the promoter family has been in coffee business for many decades and have floated hordes of companies in related line of businesses, they started consolidating their operations only after 2007 when they decided to source outside funding. In February 2008, they formed a partnership firm under the name Coffeeday Holding Co which was converted to Coffee Day Holdings Company Pvt Ltd four months later, in June 2008. The name was changed to Coffee Day Resorts Pvt Ltd in January 2010 and further to Coffee Day Enterprises Pvt Ltd in August 2014.

 

Business

The family of CDEL’s promoter has a history of operating coffee plantations for over a century. The long association has helped the group to develop a deep understanding of the coffee business through the family legacy. The issuer company CDEL is engaged in coffee retailing business through its 85% subsidiary CDGL which opened its first Café Coffee Day outlet in Bengaluru in 1996. Today CDGL has a network of 1,538 café outlets spread across 219 cities. In terms of number of chained café outlets, CDGL has a market share of 46% in India.  The group’s presence across the entire coffee value chain enables them to exercise effective control over various segments within the coffee business, ensuring quality and consistency in the entire process from procurement, processing and roasting to consumption across multiple points targeting multiple consumer segments.

CDEL’s wholly-owned subsidiary Tanglin Development Ltd is engaged in the development and management of technology parks and related infrastructure, offering custom-made infrastructure facilities for ITITES enterprises. As of June 30, 2015, Tanglin two technology parks, namely Global Village situated in Bengaluru, with a land parcel spread over 114 acres and Tech Bay situated in Mangaluru, with a land parcel of 21 acres.

Sical Logistics Ltd, in which CDEL holds 52.83%, is one of the integrated logistics solution providers in India with over five decades of experience. SLL is listed on the BSE and NSE and has a market capitalization of more than Rs 900 cr.  Another subsidiary, Way2Wealth Securities Pvt Ltd (W2W) in which CDEL holds 85.53%, is a retail focused investment advisory company which provides wealth management, broking, portfolio management and investment advisory services.

CDEL owns and operates three luxury boutique resorts (one directly through the company, and two through a wholly-owned subsidiary, Coffee Day Hotels & Resorts Pvt Ltd under the brand The Serai. The resorts are located in Karnataka (Chikkmagaluru, Bandipur and Kabini). In addition, CDEL also holds a minority interest in and manage a luxury resort located in Andaman and Nicobar Islands.

CDEL has investments in certain IT-ITES and other technology companies such as Mindtree in which it has 16% and promoter Siddhartha has 3%. Mindtree, listed on both BSE and NSE, commands m-cap of over Rs 11,800 cr. CDEL’s other investee companies include Ittiam, Magnasoft and Global Edge.

 

Financials

Being a holding company of complicated and complex group structure, CDEL’s financials are not as appealing as its coffee business.  On a consolidated basis CDEL’s top line has grown at a CAGR of more than 24% in last five years. From Rs 1024 cr in FY11, operating revenue reached Rs 2479 cr in FY15. Operating profit has grown from Rs 205 cr to Rs 445 cr and Operating margin has improved from 12.9% to 15.1% in this period. However, the company’s bottom line has gone deeper into red in last four years. A solace is that the operations have continuously resulted in positive cash flow. At the end of last fiscal CDEL has consolidated accumulated loss of about Rs 332 cr.

The more prominent entity of the CDEL conglomerate – the coffee subsidiary (CDGL) has impressive standalone financials but, its consolidated financials are also none too commendable. From Rs 954 cr in FY11, CDGL’s consolidated operating revenue grew to Rs 1263 cr in FY15. Operating margin climbed from 11% to 15% amid volatility during this period. Yet, the company’s bottom line, which was positive Rs 11 cr in FY11, turned to negative Rs 20 cr in FY15. Nevertheless, like CDEL, the company generated positive cash flow from operation as significant amount was accounted for depreciation. At the end of fiscal 2015 CDGL has consolidated accumulated loss of around Rs 7 cr. 

 

CONSOLIDATED	COFFEE DAY ENTERPRISES			COFFEE DAY GLOBAL
(in lakh)	Mar-15	Mar-14	Mar-13	Mar-15	Mar-14	Mar-13
Gross Revenue	254872	235277	214914	127176	115419	112639
Operating Profit	44454	38475	34923	19826	18947	17030
Operating Margin %	15.1	13.9	14.3	15.0	15.6	13.7
Interest	32623	27779	21037	5550	4494	3998
Cash Profit	11830	10696	13886	14276	14453	13032
Depreciation	26550	24854	20264	15795	15408	12086
Net Profit	-15947	-13810	-7389	-1964	-941	11
Net oper. cash flow	142	857	5571	31315	23046	16000
Equity Capital*	1459	1425	1425	1626	1551	1551
Reserves	70626	63508	64870	74365	66678	67300
Accummulated Loss	-33176	-20430	-12462	-672	0	0
Goodwill on Cosolidation	49770	49177	49605	1676	1507	1507
Net Block	297795	283610	263983	92758	95601	91294
Total Borrowings	354957	357785	284705	43140	52119	51517
5-Yr Revenue CAGR	24.7%			7.3%
* Capital of CDEL has leapt from Rs 14.59 cr in Mar’15 to Rs 170.94 cr in Sep’15 due to 7:1 bonus and  conversion of CCPs and CCDs

 

While the consolidated financials of both CDEL and CDGL fail to enthuse, the standalone performance of CDGL’s coffee operations compares well with its QSR peers like Jubilant Foodworks (Domino’s Pizza) and Harcastle (Mcdonald’s). Jubilant which is a franchisee of foreign brands registered revenue of Rs 2082 cr in FY15 against a Net Block of Rs 735 cr. It reported an operating margin of 13% and posted cash profit of Rs 222 cr. Hardcastle Restaurants, another franchisee of a foreign brand, Mcdonald’s, netted Rs 764 cr revenue in FY15 on a Net Block of Rs 485 cr and posted 4.1% OPM which resulted in loss at the net level.

CDGL which owns the Coffee Day brand that enjoys 46% market share has generated revenue of Rs 889 cr in FY15 on a standalone basis on a Net Block of Rs 627 cr and the company posted an impressive operative margin of around 24% and earned cash profit of Rs 150 cr.          

 

HOW COFFEE DAY’s STAND-ALONE FINANCIALS COMPARE WITH QSR PEERS
QSR (COMPANY)	EQ	RES	NB	REV	EBITDA	CP	NP	OPM	CPM
	(Rs Cr)							(%)
Domino’s (Jubilant)	66	580	735	2082	270	222	123	13.0	10.6
McDonald’s (Hardcastle)	31	530	485	764	32	21	-29	4.1	2.8
Coffee Day (CD Global)	16	800	627	889	212	150	4	23.9	16.9

 

Valuation

Being a holding company of diversified interests, CDEL may not be directly comparable to any listed company. Also the company’s present bottom line, which is in red, denies any P/E multiple. CDEL’s net worth which was Rs 532 cr in March 2015 has depleted to Rs 456 cr in June 2015. The net asset value (NAV) per share was Rs 31.14 in March 2015 which too was reduced to Rs 26.69 in June 2015. Further, the promoter’s cost of acquisition is only Rs 36.35 a share. Considering these, the issue price of Rs 316 to Rs 328 (Rs 1150 cr) may look steep.

Nevertheless, the present valuation of quick service restaurant peers like Jubilant Foodworks and Westlife Development (holding company of Hardcastle Restaurant that runs McDonald’s west and south chain) gives reasonable comfort for CDEL’s pricing. Jubilant is currently priced at more than Rs 1550 (market cap Rs 10,200 cr) discounting its net earnings 92 times and cash earnings about 48 times. Westlife commands a market cap of over Rs 4000 cr discounting its cash earnings more than 150 times.

CDEL, which enjoys better operating margin, is valued at Rs 6550 cr to Rs 6750 cr discounting its cash earnings 55 to 57 times. CDEL’s price discounts its revenue 2.6 to 2.7 times which is far more attractive than both Jubilant and Westlife. In fact, when CDEL unlocks the value of its investments in CDGL (coffee business), Sical (logistics), Mindtree (IT-ITES) and Tanglin (real estate), the share’s worth may be much more than the current offer price. But when will that happen? The promoter alone can answer.    

 

HOW CDEL CONSOLIDATED COMPARES WITH QSR INDUSTRY PEERS
CO_NAME	MCAP	EQ	REV	CP	NP	P/E	P/CP	P/R	P/NB	OPM	Price
	(Rs.Cr)					(X)				%	(Rs)
Jubilant	10,202	66	2,094	212	111	92	48	4.9	13.5	12.2	1556
Westlife	4,044	31	763	25	-29	–	159	5.3	8.8	2.6	260
Coffee Day	6,756	206	2549	118	-87	–	57	2.7	2.3	15.1	328
	6,552	207	2549	118	-87	–	55	2.6	2.2	15.1	316

 

Concerns

While the coffee business of CDEL has lot of aroma to attract investors, it also has significant risks attached.  For instance, the coffee subsidiary takes on lease most of the property occupied by its Café Network and, according to the offer document a significant number of the lease agreements for the outlets may not be duly registered or adequately stamped. As payments under the leases accounted for a significant portion of its operating expenses (Rs 103 cr, Rs 118 cr and Rs142 cr for the fiscals 2013, 2014 and 2015 respectively), the effect of inadequate stamping and non-registration of documents may have significant impact on the business and the financials in the event of any dispute.

Also in last three fiscals 262 cafés were closed down owing to a variety of business related issues such as non-renewal of leases, low revenue generation and unfavorable location of outlets. By its own admission, the management is expected to close anywhere between 25 to 40 outlets every year, in line with past business practice. Closure of a large number of café outlets may result in a reduction of revenue and materially affect the results of the operations. The offer document also reveals that there is a contingent liability in the form of claims against the company not acknowledged as debt Rs 147 cr and claims in respect of dues under statutes about Rs 70 cr.

A most disturbing aspect of the Coffee Day group is its penchant for floating companies. The group has more than 40 entities in its fold of which 17 have made losses in last fiscal.  In fact 15 companies have negative net worth. What’s more, 27 entities have common pursuits. History tells us promoters having too many companies in related line of business never proved to be investor friendly.