Coffee Day Enterprises IPO Review (Avoid)

Coffee Day Enterprises Ltd (CDEL) is the parent company of the Coffee Day Group, which houses Café Coffee Day that pioneered the coffee culture in the chained café segment in India. It opened its first Café Coffee Day outlet in Bengaluru in 1996 and has established the largest footprint of café outlets in India with a network of 1,538 café outlets spread across 219 cities, including under the established and recognized brand name “Café Coffee Day” (popularly referred to as “CCD”), as of June 30, 2015.

In terms of the number of chained café outlets, CDEL had a market share of approximately 46% in India, with its café footprint being nearly four times larger than the cumulative footprint of the next four competitors.  CDEL’s brand Café Coffee Day ranked second in the Most Trusted Brands in the food service retail category in India, and was one of the only four indigenous Indian brands to be recognized as the Most Exciting Indian Brand in India in 2014

The company is engaged in coffee business through its subsidiary, Coffee Day Global Limited (earlier known as Amalgamated Bean Coffee Trading Company Limited). It is also engaged in coffee trading through CDEL and Coffee Day Trading Limited. In addition to having the largest chain of cafés in India, it operates a highly optimized and vertically integrated coffee business which ranges from procuring, processing and roasting of coffee beans to retailing of coffee products across various formats.

In addition to the coffee business, CDEL operates other select businesses that are aimed at leveraging India’s growth potential, namely, development of IT- ITES technology parks, logistics, financial services, hospitality and ITITES through its subsidiaries.

CDEL mulls expansion of its outlets and Kiosks, manufacturing and assembling of vending machines refurbishing of existing outlets and vending machines and setting up of a new coffee roasting plant. It has also planned prepayment/repayment of debts and raise corpus fund. To part finance this objectives, the company is coming out with its maiden IPO of 3.64 crore to 3.51 crore   equity shares of Rs. 10 each (based on lower and upper price band) with a price band of Rs. Rs. 316-328. Out of the total issue, shares worth Rs. 15 crore are reserved for eligible employees. Company hopes to mobilize Rs. 1150 crore. Issue opens for sub subscription on 14.10.15 and will close on 16.10.15. Minimum application is to be made for 45 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE/NSE. Issue is lead managed by Kotak Mahindra Capital Co. Ltd., Citigroup Global Markets India Pvt Ltd, Morgan Stanley India Co. Pvt Ltd, Axis Capital Ltd, Edelweiss Financial Services Ltd and Yes Bank Ltd. Link Intime India Pvt Ltd is the registrar to the issue.

On performance front, the company has (on consolidated basis) posted an average negative EPS of Rs. 6.29 for last three fiscals. For first three months of current fiscal it has reported negative EPS of Rs. 1.72 (on basic as well as diluted basis). Its RONW for the said periods are at negative 13.36 and 4.39 respectively. For FY 2015 it posted net loss of Rs. 159.47 crore on a turnover of Rs. 2548.72 crore. For Q1 of current fiscal it has reported net loss of Rs. 40.36 crore on a turnover of Rs. 634.97 crore. Based on this, the issue pricing is greedy. After issue of initial equity at par, it has issued shares in a price range of Rs. 1768.00 to Rs. 2900 per share during 2010 - 2015 and has issued bonus shares in the ratio of 7 shares for every 1 share held in May 2015 and done conversion of CCDs in to shares in September 2015. Its current paid up equity capital of Rs. 170.94 crore will stand enhanced to around Rs. 207 crore post IPO. Out of IPO proceeds Rs. 635 crore will go for reducing debt of the holding company and the rest for expansion and other funding needs.

According to management, its prime coffee business brings around 60 per cent revenue and the rest from other activities. Its coffee business has shown 16% CAGR for last five years and hopes to improve upon it with more outlets in years to come. Due to heavy expenditures in increasing outlets, higher depreciation and initial break-even periods have caused negative earnings so far. Turnaround will take few more years. All these along with its branding are well discounted in asking price. CDEL mulls opening of 135 stores every year

Teams of lead managers have mixed track records for its past mandates.