Cafe Coffee Anyone ! ? ~ Successful IPO at Rs 328 ~ Awaiting Listing

I’m sure most of us have had a Coffee at one of the Chain Outlets of Cafe Coffee Day (CCD)

It’s parent Company Coffee Day Enterprises Ltd (CDEL) just concluded a successful IPO and fixed the IPO price at the upper band of Rs 328

Most had recommended to avoid the Issue as the Pricing was very High

I  hold a contrary opinion and had recommended the Issue but not as a Stag as there does exist the risk of listing gains not being available

Here are some relevant extracts from the IPO note prepared by us

 

Subscribe but not as a Stag ~You Need Not Sit Out !

Further Lowering of Debt will significantly transform the Financials Dynamics ~ Low Floating Stock ~ It’s Not an Offer For Sale ~ 16.73 % Equity Stake in listed Mindtree worth @ Rs 2000 crs currently
Immediate Risk : Listing Gains may not be available as IPO Pricing is perceived to be on the higher side

Five Positives in our View

1. Huge Brand Recall & therefore Significant Brand Value ~ CDEL,through its subsidiary, operates the popular Cafe Coffee Day Chain of 1538 stores across 219 cities with a 46% Market Share.It has been recognised as the second best Indian Brand.This Intangible Asset is not in the Books but clearly is in the Premium sought in the IPO Pricing of Rs 316 to Rs 328

2. CDEL has a 16.73 % (10.41 % directly and 6.32% through 88.97% owned subsidiary Coffee Day Trading Ltd) Non Promoter Equity Stake in the listed Software Company Mindtree which is worth @ Rs 2000 crs based on Share Price of Mindtree ~ if monetised it will make CDEL free of net debt instantly and add Rs 250 crs + to bottomline on interest saved=> that’s an incremental EPS of Rs 12 itself !.CDEL had a net consolidated debt of Rs 2864 crs at December 31,2014. Mindtree quoted @ Rs 1400 (FV Rs 10) with a Market Cap @ Rs 12000 crs has just declared a very good Q 2 FY 16 with a Networth as on September 30,2015 of Rs 2243 crs and Book of Rs 267 and Annualised EPS of Rs 70 giving a PBV & PE of 5.25 and 20 respectively.It has also declared a 40% Interim Dividend. Share Price of Mindtree has gained @ 20% thus far in 2015 and holds potential for more

3. The CDEL IPO of Rs 1150 crs is a full fresh issue of Equity Shares and there is no offer of sale from Promoters and other Shareholders.Have a look below at the Pedigree of Non Promoter Shareholders and their pre IPO holdings and cost in CDEL

4. The IPO of Rs 1150 crs has already attracted 17 well known Anchor Investors who have committed Rs 334 crs at Rs 322

5. The IPO comprises just over 17% of post IPO Equity Capital of Rs 206 crs and implies limited floating stock

Five Negatives in our View

1. CDEL has made a net loss of Rs 21.4 crs,Rs 77 crs & Rs 87.2 crs in the last three financial years FY 13 to FY 15 respectively and should report a Loss in FY 16 too.However Cash Flows from Operations have been positive and FY 15 generated free cash flows

2. There are several Civil & Criminal Legal & Other Claims of which @ Rs 1500 crs claims from the Income Tax authorities stand out

3. Relative Valuations based on IPO Pricing are perceived to be on the higher side.The IPO Price to Book Value is @ 4 on the post IPO Book of @ Rs 80.

4. CDEL is actually a Holding Company and has @ 40 subsidiaries across Coffee,Logistics ,Finance & Hospitality and other Business.Share Price on the BSE & NSE may therefore reflect a Haircut on any Group Valuation arrived at

5. The attrition rate in the Hospitality & Restaurant Sector is quite high at one third of the workforce.Per Day Collections per outlet are low at just over Rs 13000 and aggregate under Rs 50 lakhs per outlet.With single digit to negative Returns on Capital Employed in all business,Coffee or Non Coffee it’s a stress on the payback period for Capital Expenditure especially on the Coffee Outlets.CDEL had closed 175 Outlets till December 31,2014 on account of non renewal of lease,low revenues and unfavourable location

CDEL Profile

Promoters

CDEL Group was set up by V G Siddhartha. His Promoter Group currently hold 63945904 Equity Shares at an average of Rs.36.75 per share and which constitutes 37.31% of pre IPO Equity of Rs 170.94 crs after bonus and conversions.This will dilute to a 31% post IPO Stake in the post IPO Equity of @ Rs 206 crs.His wife Malavika Hegde is the daughter of India’s ex Foreign Minister Mr S M Krishna and is also on the Board of Directors.Along with CDEL ,even V G Siddhartha holds a personal @ 3 % Equity Stake in the listed Mindtree in which he is also the CDEL Nominee Director on the Board.
Coffee Business

Though it’s subsidiary Coffee Day Global Ltd,Bengaluru based CDEL owns and operates coffee cafes in India since 1996. The Company is well known for its brand name ‘Cafe Coffee Day’ (CCD). The Company owns a network of 1538 Cafe outlets spread across 219 cities in India. As of June 2015, Cafe Coffee Day has market share of 46% in India in terms of the number of chained Cafe outlets. In addition to having the largest chain of cafes in India, company operate a highly optimized and vertically integrated coffee business which ranges from procuring, processing and roasting of coffee beans to retailing of coffee products across various formats. Company is one of the largest exporters of Indian coffee beans, primarily to Europe, Japan and the Middle East. Consolidated Sales of Rs 2479 crs in FY 15 showed Rs 1263 crs or 50.1% contribution from this Coffee Business

Non Coffee Business

CDEL is also in several other Non Coffee Business to leverage on India’s growth potential.

 Logistics ~ CDEL has a 52.83% Equity Stake in listed SICAL Logistics which is currently has a market value of just over Rs 450 crs with Sical’s Market Cap at Rs 911 crs at Share Price of Rs 164.CDEL’s Consolidated FY 15 Sales showed over 35% contribution from this Segment

 Financial Services ~ CDEL has a 85.53% Equity Stake in Way2Wealth

 IT- ITES technology parks ~ CDEL has a presence through it’s Tanglin Group Subsidiaries in IT Parks in Bengaluru (114 acres of which 2.9 m build up sq ft developed and 12.3 m sq ft further development potential ) & Mangaluru (21 acres of which 0.3 m build up sq ft developed & 1.8 m sq ft further development potential) and earns lease rentals

 Resorts ~ CDEL through it’s wholly owned subsidiary set up in 2008 Coffee Day Hotels & Resorts Pvt Ltd,owns & operates three boutique Resorts in South India in Bandipur(24 rooms), Chikkamagaluru (29 rooms) and Kabini (16 rooms) under the brand ‘The Serai’. In 2014 it also acquired a minority stake and management rights in Barefoot Resort (25 rooms) in the Andaman & Nicobar Islands

Application of the IPO Proceeds of Rs 1150 crs

CDEL proposes to utilise the proceeds  towards funding the following objects:

 

Application of IPO Proceeds	Amt  (Rs Crs)
A. Financing coffee businesses
1. Setting-up of new Café Network outlets and Coffee Day Xpress kiosks	87.7
2. Manufacturing and assembling of vending machines	97.4
3. Refurbishment of existing Café Network outlets and vending machines	60.6
4. Setting-up of a new coffee roasting plant facility, integrated coffee packing & tea packing facility	41.9
B. Repayment or prepayment of loans of the Company and Subsidiaries	632.8
	920.4
C. General Corporate Purposes & Issue Expenses	229.6
Total Proceeds	1150

 

Shareholding of Major Non Promoters all of who are Veteran and well known Investors

Shareholder	Investment  Date	Equity Shares Allotted	Price (Rs)	Total Investment (Rs Crs)	Shares After Bonus*	Avg Cost per share (Rs)
KKR Private Equity	March 31, 2010	500000	1768	88.4	4000000	221
Bennett Coleman & Company Ltd	October 11, 2012	171038	2631	45	1368304	329
Nandan Nilekani	March 2, 2015	258620	2900	75	2068960	362.5
Rare Enterprises	March 2, 2015	34482	2900	10	275856	362.5
Derive Investments	March 2, 2015	34482	2900	10	275856	362.5
Ramesh Damani	March 2, 2015	10344	2900	3	82752	362.5
Ketan Sheth	March 2, 2015	6896	2900	2	55168	362.5
* 7:1 Bonus On May 8, 2015
Shareholder	Investment Date	Security Allotted	Price (Rs)	Total Investment (Rs Crs)	Equity Shares Holding after conversion#	Avg Cost per Share (Rs)
CCPS
Standard C Private Equity (Mauritius) II Limited	Feb 10, 2010	1357410	1768.07	240	13969262	171.8
CCDS
KKR Mauritius PE Investments II Limited	March 30, 2010	27160000	100	271.6	17826912	152.4
NLS Mauritius LLC@	March 31, 2010	35998232	100	360	22412192	160.1
#    Conversion just before  IPO in October 2015 @  On March 31, 2010 CCDs were issued to Arduino Holdings Ltd and recently transferred in 2105 to NLS

Recent Pre IPO Equity Build Up in 2015 in Rs Crs

Pre IPO Equity after May 8,2015 Bonus of 7:1	116.73
+ CCP Conversion just before IPO to Standard Chartered Pvt Equity Mauritius	13.97
+   CCD Conversion just before IPO to KKR Mauritius	17.83
+ CCD Conversion just before IPO to NLS Mauritius	22.4
Pre IPO Equity	170.93
IPO Fresh Issue assuming top end IPO price of Rs 328	35.1
Post IPO Equity	206.03

Conclusion

While the IPO Pricing Range of Rs 316 to Rs 328 appears on the higher side and raises the Risk of Listing Gains not being available ,the business potential going forward in both Coffee and Non Coffee Business is visible . We also visualise CDEL reducing debt further in the coming years .This confidence comes from  the instant fall back lever that CDEL holds of it’s equity stake currently worth Rs 2000 crs in listed Mindtree  and which it can opt to monetise at any time,it being a non promoter holding, albeit higher than even Promoter holding.Moreover the Post IPO Floating Stock on listing is quite low at just 17% of the Equity.This should cap any significant downside on listing.At it’s IT-ITES Tech Parks it also has a further potential to develop 12.3 m build up sq ft in Bengaluru & 1.8 m sq ft in Mangaluru.The whole IPO is a Fresh Issue and not an Offer for Sale by Promoters and well known Non Promoters. The Risks of course are the high Relative Valuations in the IPO Pricing and the IT Claims of @ Rs 1500 crs

Subscribe but not as a Stag in that Listing or Short Term Gains may not be available. If you do decide to stand out this IPO then do keep an eye when CDEL does get listed and developments especially on the debt reduction front