Why Coffee Day Enterprises left a bitter taste for its investors

In 2015, at a press conference ahead of Coffee Day Enterprises Ltd’s initial public offering, V.G. Siddhartha was asked why its offer price was lower than a private placement just a few months earlier. The CDEL founder replied that he wanted to leave some money on the table for retail and institutional investors.

Siddhartha’s intent was to ensure that incoming investors were able to make some profit after the listing of the shares. The eventual tale, however, has only been one of underperformance.

CDEL sold shares at ₹328 apiece. They have since never traded above the IPO price. On Wednesday, the stock closed at ₹123.25 per share.

“Investors were not able to wrap their heads around the conglomerate structure of CDEL, which included the cafe chain, real estate, logistics and investment in Mindtree. It made it difficult for them to value the company,” said a person who acted as an advisor to the IPO, requesting anonymity.

Private equity investors KKR, New Silk Route and Standard Chartered PE (now known as Affirma Capital), who backed the company in 2010 with almost $150 million, too have found it difficult to exit the company, given the stock underperformance. PE firms generally tend to exit companies in 4-5 years.

This clubbing of various unrelated businesses under one roof has masked the success of its coffee and related businesses, which account for about half the group’s revenue, said analysts.

Despite challenges from rival chains and, more recently, from foreign entrants such as Starbucks and Costa Coffee, Café Coffee Day (CCD) has managed to stay profitable and maintain a steady growth.

“They have been positioned differently in the value segment. They are more reasonably and affordably priced. It’s a low margin business in any case. Their competitions are selling at more than one-and-half the price they are selling. They are comfortable playing the volume game and that is a conscious decision by the promoters,” said Shubhranshu Pani, managing director, retail services, JLL India.

However, CDEL’s other verticals, including wealth businesses, real estate and logistics, have dragged down the overall financials of the group.

Deepak Jasani, head of retail research, HDFC Securities Ltd, said investors have not earned the returns they were expecting despite a fairly successful coffee chain.

“Returns have typically been affected due to unrelated diversifications. There are too many businesses in the listed entity, quite a few of which are capital consuming business where the returns are not commensurate,” Jasani said.

Starting off as a single café in Bengaluru’s Brigade road in 1996, CCD today is India’s largest coffee chain. As of 31 March, CCD had 1,752 cafes in 243 cities.

In the last financial year, Coffee Day Global Ltd (CDGL), which operates the CCD coffee chain, posted a 10% increase in its net profit at ₹41 crore. Revenue grew by 8% to ₹1,468 crore.

Jasani also pointed out that the investors have not been too keen on CDEL despite the steady coffee business due frequent changes in strategy by the promoters to ensure faster growth in the face of growing competition from foreign coffee chains.

“The company also borrowed a lot on the way to expand the outlets and feed other businesses, which meant their bottomline (profit) didn’t grow in line with the topline (revenue),” he said.

In a 3 July report, financial services firm Maybank Kim Eng noted that shares of CDEL have lagged due to delays in restructuring into a pure play café business from a conglomerate.

“The process of simplifying the corporate structure from a conglomerate to pure play café business is delayed by six months pending the sale of real estate,” it said.

Last month, the company deferred its plans to sell its real estate venture, Tanglin Developments Ltd, to New York-based private equity giant Blackstone Group Lp for an estimated ₹2,700-2,800 crore, Mint reported.