Mumbai: Coffee Day Enterprises Ltd (CDEL), which runs India’s largest cafe chain, received investor demand for 14% of the shares it’s selling in a 1,150 crore initial public offering that got off to a slow start on Wednesday.

As of 5pm, the institutional investor category was subscribed 16% while the retail and high net-worth individuals categories were subscribed 2% and 16% respectively, according to data from stock exchanges.

CDEL, whose IPO closes on Friday, is selling 25.8 million shares in a price band of 316-328.

Valuation, complex organization structure, performance metrics and allocation of IPO proceeds for non-coffee businesses are the main concerns over the IPO by CDEL, which runs the Cafe Coffee Day chain, market experts and brokerages said.

Several experts flagged valuation as their biggest concern.

In a note on Tuesday, IIFL Holdings Ltd, a financial services company, said that although CDEL has a strong promoter background, strong brand identity and pan-India presence, which instills confidence in its business model, the issue looks richly priced when the valuations and key metrics are considered.

“Near term upside appears limited, if any. However, investors with long term horizon must monitor stock post listing for attractive entry points," IIFL analysts wrote in the note.

The structure of the business, which has several unrelated businesses under the parent company, is also a concern, said others.

“Coffee is just a part of a larger but unbalanced dish. 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 (return on capital employed)," Ambit Capital said in a report on Monday.

Capital allocation to and utilization of free cash flows from the coffee business to non-coffee businesses is a risk, Ambit added.

On Tuesday, CDEL raised 334.2 crore from anchor investors, including both foreign and domestic institutional investors, according to the company’s filings with the stock exchanges. The shares were issued to these investors at 322 apiece.

The firm, founded by V.G. Siddhartha, is raising 1,150 crore, including the anchor investor allocation.

“One major concern is that the business for which he is raising money is not where he is going to use the money," said Arun Kejriwal, director, Kejriwal Research and Investment Services. The firm is using the IPO proceeds to retire over 500 crore debt that does not relate to the Café Coffee Day business, he said, adding that investors would be better off buying the stock from the secondary market rather than in the IPO.

The weaker performance metrics of the coffee business, when compared with other listed food and beverage businesses such as Jubilant FoodWorks Ltd, which runs the Domino’s Pizza franchise in India, is also a concern for investors.

“Faster growth, strong store economics and a simple corporate structure put it (Jubilant) in a superior position to peers, including CDEL, in the new listing," said Credit Suisse in a report dated 13 October.

“Daily per store sales at Domino’s are approximately 70,000 and Dunkin’s (Dunkin’ Donuts, also run by Jubilant in India) 45,000 is higher than CCD’s 13,000. With higher capex intensity and deprecation, EBIT (earnings before interest and taxes) margins at CCD are 3%, compared with 8% at Jubilant," Credit Suisse analysts said in the report.

An investment banker involved in the issuance acknowledged that the issue witnessed weaker-than-expected demand on the opening day.

“The demand is expected to pick up over the next two days. We expect institutional investors category to be subscribed by 4 to 5 times, while retail and HNI categories should be subscribed over one time each," he said, requesting anonymity.

Foreign institutional investors who subscribed to the firm’s shares on Tuesday included Merrill Lynch, Platinum Asset Management, Jupiter Fund Management Plc and BlackRock; while domestic investors included ICICI Prudential Mutual Fund, Axis Mutual Fund, Reliance Life Insurance and private equity fund Faering Capital.

Kotak Mahindra Capital Co. Ltd, Morgan Stanley India Co. Pvt. Ltd, Citigroup Global Markets India Pvt. Ltd, Axis Capital Ltd, Yes Bank Ltd and Edelweiss Financial Services Ltd are managing the IPO.

Private equity firms KKR India Advisors, New Silk Route PE Asia and Standard Chartered Private Equity invested $149.07 million in the holding company in February 2010, according to VCCEdge, which tracks investments.

CDEL had 1,538 stores as on 30 June, with 61% of them located in seven cities—Delhi, Mumbai, Bengaluru, Chennai, Pune, Kolkata and Hyderabad.

The promoters of HT Media Ltd, which publishes Mint, and Jubilant FoodWorks are closely related. There are, however, no promoter cross-holdings.

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