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Home >Market >Mark-to-market >Coffee Day: not a great investment yet; will IPO investors fare better?

In early March, Coffee Day Enterprises Ltd sold shares to Nandan Nilekani, Rare Enterprises, Ramesh Damani and a few others at 362.50 apiece. This week, the company announced that its initial public offering (IPO) in mid-October will be priced between 316 and 328 per share. The broad markets have declined by 8% since early March, so it isn’t surprising that Coffee Day has had to tone down its expectations.

These investors aren’t the only ones left short (although it is possible the shares will rise and exceed their purchase price). Three years ago, Bennett, Coleman and Co. Ltd invested at 328.80 per share. While it has managed to break even, the markets have risen by over 40% in this period. Private equity investors have managed better, although an annual return of 12-13% isn’t exactly exciting.

Can Coffee Day’s IPO investors expect better returns?

As far as Coffee Day’s mainstay coffee outlets business goes, the company’s big push began around 15 years ago. Its performance is far from impressive. In fact, in a near admission that it grew too fast, too soon, the company closed 176 outlets in the last fiscal year “due to their smaller size, lower level of performance and high rental on renewal of the lease".

Ambareesh Baliga, a stock market expert who has formerly worked with the Karvy and Kotak groups and at an arm of Cafe Coffee Day Enterprises, says Coffee Day’s outlets business is running losses according to his calculations. The company denies this, although supporting numbers are hard to find in its prospectus.

Subsidiary Coffee Day Global Ltd’s results show it was profitable at the Ebit (earnings before interest and tax) level, but reported a net loss of 19.6 crore in FY15. On a consolidated basis, the company reported a net loss of 87 crore in 2014-15.

Baliga says the IPO may have been more interesting had it been launched a few years ago, before the entry of large international chains such as Starbucks. To be sure, competition has increased and while Coffee Day has a 46% market share, maintaining growth from current levels could be a challenge.

There is a lot more to the Coffee Day IPO than just coffee, as we have pointed out earlier. It has a presence in other unrelated businesses such as development of technology parks, logistics, financial services and hospitality services. Besides, it owns a 16% stake in Mindtree Ltd and a 52.8% stake in Sical Logistics Ltd, apart from some other investments. According to a banker, the value of all these businesses adds up to over three-fourths of the pre-money valuation of 5,500 crore. More than half of this is attributed to the business of realty development and special economic zones, where valuations can be questionable.

Analysts say these unrelated businesses can be a dampner for investors who are only interested in the consumer-facing coffee business. In any case, Coffee Day IPO’s success will depend on how markets fare in mid-October. If the days of volatility return, demand can be a problem. As things stand now, the company has chosen a good time to take the plunge.

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

Note: The story has been modified from its orginal version.

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