Mumbai: Coffee Day Enterprises Ltd (CDEL), the holding company of the Cafe Coffee Day (CCD) chain of restaurants founded by V.G. Siddhartha, will raise 1,150 crore (nearly $180 million) through an initial public offering (IPO), according to three people familiar with the matter.

The company will file a draft red herring prospectus (DRHP), a pre-IPO document, with the market regulator next month, the three people said on condition of anonymity.

The proceeds of the issue will be largely used to repay existing debt; a part of it will also be used to open new outlets. Most of the company’s existing private equity investors may not exit as part of the IPO, said two of the three people mentioned above.

750 crore will be used to repay its debts and around 290 crore will be used for capital expenditure on new stores, refurbishing existing stores, for the vending machines business and a new processing plant," said the first person, who is directly involved in the process.

An external spokesperson for the company declined to comment.

CDEL owns Amalgamated Bean Coffee Trading Co. Ltd (ABCTL), the company which runs the cafe chain. CDEL also owns Coffee Day Hotels and Resorts Pvt. Ltd, Global Technology Ventures Ltd and Tanglin Developments Ltd.

CDEL is valued at 6,200 crore based on a pre-IPO round of funding that was concluded in March. CDEL was earlier called Coffee Day Resorts Pvt. Ltd.

According to documents available with the registrar of companies (RoC), CDEL raised 100 crore from five investors, including Infosys Ltd co-founder Nandan Nilekani, investor Rakesh Jhunjhunwala’s Rare Enterprises and stock broker Ramesh Damani.

The shares were issued at 2,890 apiece, which adds up to a post-money valuation of 6,200 crore. Nilekani, an old friend of Coffee Day co-founder Siddhartha, led the investment round, putting in 74.99 crore. Siddhartha is the son-in-law of former Union minister S.M. Krishna.

Founded in 1996, CCD has 1,650 outlets across 200 towns and cities in the country and overseas, according to an August 2014 report by rating agency Brickwork Ratings.

According to the second person cited above, CDEL had consolidated revenue of around 1,800 crore for the first nine months of 2014-15. The company reported a loss of about 75 crore during this period.

Data filed with the RoC by ABCTL, which directly runs CCD, showed revenue of 1,088 crore for the year ended 31 March 2014, compared with 1,067 crore the previous year. ABCTL reported a net profit of 7.6 crore in 2013-14, compared with 11 crore the previous year.

Over the years, competition in the cafe business has intensified, with international chains such as Starbucks Corp. and Coffee Bean & Tea Leaf entering the market. Apart from increased competition, factors such as high rental costs continue to pose a challenge to the companies. Meanwhile, high inflation and sluggish growth in the Indian economy took a toll on the spending power of customers.

“Larger cafe brands which have grown massively have both good and bad stores and these brands need to focus on profitability rather than the numbers game. The brick-an-mortar business simply has to make money," said Hemu Ramaiah, who runs Shop 4 Solutions Pvt. Ltd, a retail consulting firm.

Ramaiah added that expansion is an expensive proposition.

“Once you open a new store you have to pay for the rent and overheads every month and thus one needs to close their bad stores if they are not working," she said, while not directly commenting on CCD.

Still, investors remain positive on the business going by their decision to stay invested despite getting an option to exit.

“As of now the investors have not indicated any intention to exit the firm; the fundraising program is being undertaken to raise growth capital for the company," said the second person.

According to VCCEdge, the financial research platform of VCCircle, in February 2010, KKR India Advisors Pvt. Ltd, New Silk Route PE Asia Fund Lp and Standard Chartered Private Equity Fund invested $149.07 million in the holding company.

Sequoia, which invested about $10 million in ABCTL in 2006, exited in 2012.

In emailed responses, private equity funds KKR, New Silk Route and Standard Chartered PE declined to comment.

“Coffee remains divided into two markets. The south market, which is a traditional coffee hub, remains very strong. In Tier I and II markets elsewhere, coffee is not just a drink, but an experience. That’s the catchment most coffee chains are working on," said Raja Lahiri, partner at Grant Thornton India Llp.

He added that the food and beverage (F&B) segment is growing at more than 20% annually even though there has been some moderation over the last two-to-three years.

“For PE investors, the consumer sector remains a strong theme. We haven’t seen too many exits in the F&B space within the consumer sector. Exit in the space is a function of scale; unless you have scale you cannot list or look at strategic investors. Most investments in the space are still on the way to achieve significant scale," Lahiri added.

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