Home >Market >Mark-to-market >Coffee Day IPO: the cup looks half-empty

A little over five years ago, Jubilant FoodWorks Ltd, which runs the Domino’s Pizza chain of quick service restaurants, had an extremely successful initial public offering (IPO). The issue was subscribed by over 30 times and the shares rose 58% on listing. Overall returns since the IPO have been as much as 1,167% or around 60% per annum.

Naturally, there will be a fair bit of anticipation with the forthcoming IPO of Coffee Day Enterprises Ltd (CDEL), which owns the Café Coffee Day chain. The pricing is not known yet, of course; although in March this year, the company made a private placement of shares at a post-money valuation of 6,200 crore.

Will the CDEL IPO be as successful? To start with, the company isn’t merely a chain of quick service restaurants, even though it runs as many as 1,472 café outlets spread across 209 cities under the brand name Café Coffee Day. For the nine months ended December and fiscal year 2014, coffee and related businesses accounted for only about half of consolidated revenues. The remaining came from unrelated businesses such as development of IT- ITES technology parks, logistics, financial services and hospitality services.

Subsidiary Tanglin Developers Pvt. Ltd develops technology parks and related infrastructure for IT-ITES enterprises. CDEL also has a 52.8% stake in logistics company Sical Logistics Ltd and an 85.53% holding in Way2Wealth Brokers Pvt. Ltd. It also owns and operates three luxury boutique resorts under the brand “The Serai". That apart, CDEL’s effective holding in Mindtree Ltd as on 31 December stands at 16.04%, which is valued at 1,700 crore based on Monday’s share price.

While diversification helps de-risk a business model, it’s quite possible that some investors who only want a part of the consumer spending play may get turned off. Note here that Coffee Day Global Ltd, CDEL’s coffee business subsidiary posted a consolidated net loss of 9.4 crore and 10.9 crore for FY14 and nine months ended December, respectively.

Lately, competition has increased with overseas companies such as Starbucks expanding rapidly. Thanks to the company’s head start, CDEL has a market share of approximately 46% in India, with the Café footprint being almost four times larger than the cumulative footprint of the next four competitors. Given this, it will also be interesting to see the strategy devised by the management to continue high growth rates given the already large base.

Further, the success of the technology parks business depends on the performance of the information technology sector and the real estate market, while the logistics business is exposed to risks from slowdown in trading activity. At 36% of revenues for the nine months ended December, the logistics business is the second biggest revenue contributor for the company, followed by the financial services business at 8%.

On an overall basis, revenue growth has slowed to 9% year-on-year in FY14 after reporting a 34% revenue growth in FY13. On an annualized basis, revenue growth has slowed further to 2.8% in FY15.

What about profits? CDEL posted a consolidated net loss for three out of the past five fiscal years and in the nine-month period ended December 2014 as well. To be sure, operating profit performance is reasonable. For the nine months ended December, CDEL’s operating profit margin was 17.4% and operating profit was 261 crore. Operating margins in FY14 and FY13 were 15.9% and 16.4%, respectively.

However, with a debt-equity ratio of eight times, finance costs are a strain. Given the high debt, it’s hardly surprising that one of CDEL’s objectives is to utilize nearly 633 crore from the IPO proceeds towards loan repayments. Successful completion of the IPO may tame debt-equity to more manageable levels.

Debt reduction and the resultant fall in finance costs are definitely welcome. But revenue growth is tapering. With competition increasing, the days of CDEL’s high growth appear to be behind it. It’ll be surprising if returns are spectacular from current levels.

The promoters of HT Media Ltd, which publishes Hindustan Times and Mint, and Jubilant FoodWorks are closely related. There are no promoter crossholdings.

The writer does not own shares in the above-mentioned companies.

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