By Geetanjali Kedia

Coffee Day Enterprises is entering the primary market on Wednesday 14^th October 2015, to raise Rs. 1,150 crore, via fresh issue of equity shares of Rs. 10 each, priced in the band of Rs. 316 to 328 per share. The issue represents 17.02% and 17.55% of the post issue paid-up capital at the upper and lower end respectively and closes on Friday 16^th October.

Coffee Day Enterprises is the holding/associate company for bunch of unrelated businesses:

1. 85.09% stake (reduces from 90.53%, post conversion of convertible preference shares and debenture, as stated on Pages 29 & 225 of RHP) in Coffee Day Global Limited, which runs 1,538 Café Coffee Day (CCD) outlets across 219 cities in India and abroad, and operates 30,916 coffee vending machines, as at 30-06-15.
2. 100% stake in Tanglin Development, which has IT parks in Bengaluru and Mangaluru, with current occupied / built-up area of 3.2 mn sq. ft.
3. 52.83% stake in listed firm Sical Logistics, held since FY12.
4. 85.53% in financial services and wealth management company Way2Wealth Securities.
5. 100% stake in hospitality business, comprising 3 resorts under ‘The Serai’ brand in Karnataka and minority holding in an Andaman and Nicobar resort.
6. 16.73% stake in Mindtree Limited. Company’s promoter Mr. V G Siddhartha, in his personal capacity, holds an additional 3.01% stake in Mindtree, making the latter an associate company. Coffee Day Enterprises holds 10.41% in Mindtree, while its 88.97% subsidiary Coffee Day Trading holds 6.32%, taking its effective stake in Mindtree to 16.04%, as of 30-9-15.

For FY15, on a consolidated basis, company reported total revenue of Rs. 2,549 crore and EBITDA of Rs. 445 crore (17.9% margin), but resulted in net loss after minority interest and associates of Rs. 87 crore. Even on PBT levels, loss stood at Rs. 147 crore. Indeed disappointing.

For Q1FY16, consolidated total revenue was at Rs. 635 crore, with EBITDA of Rs. 114 crore, with net loss before tax of Rs. 36 crore. Net loss after minority interest and associates stood at Rs. 20 crore for the first quarter as well. Aggregate net loss of Rs. 205 crores, in last 39 months (1-4-2012 to 30-6-2015), will spoil the taste for the prospective investors.  

As of 30^th June 2015, company’s equity and net worth stood at Rs. 118 crore and Rs. 456 crore respectively, with total debt at Rs. 4,475 crore, along with cash and equivalents of Rs. 893 crore, leading to a net debt of Rs. 3,581 crore. Post conversion of convertible debentures and convertible preference shares on 28^th September 2015, by 2 PE firms, equity has expanded and currently stands at Rs. 171 crore, while net debt has reduced to Rs. 2,950 crore, narrowing the debt equity ratio to 2.7:1 currently.

IPO proceeds will repay debt of Rs. 633 crore and finance coffee business expansion worth Rs. 287 crore - (i) 216 new cafes and 105 new kiosks with investment of Rs. 88 crore, (ii) 8,000 new vending machines for Rs. 97 crore, (iii) refurbishing existing 240 cafes and 7,000 vending machines for Rs. 61 crore, (iv) new coffee roasting facility by May 2016 for Rs. 42 crore. Post IPO, promoter holding will shrink to 52.56% (assuming price discovery at upper band), from current 63.34%, while debt equity ratio will contract to 1:1, as net debt reduces to Rs. 2,317 crore, on account of repayment.

To value the company as a whole, one needs to understand each of its businesses, individually:

Coffee Retailing: FY15 revenue of Rs. 1,272 crore (10% YoY growth) and EBITDA of Rs. 198 crore (15.6% margin), with net loss before tax of Rs. 15 crore, on account of heavy depreciation and interest charge. Company’s last 4 year revenue CAGR has been only 6.3%, while FY15 same store sales growth at 3.06% is much below the annual rate of inflation. Strangely, cost of material consumed, at roughly 50% of revenue, is also quite high (Peer Jubilant Food reports only 25% of revenue, as material cost). For Q1FY16, company just about managed to break-even with net profit of measly Rs. 49 lakh, on revenue of Rs. 342 crore and EBITDA of Rs. 55 crore.  

Listed quick service restaurant (QSR) chain Jubilant Food, for FY15, clocked EBITDA of Rs. 270 crore (13% margin) on revenue of Rs. 2,074 crore (20% YoYgrowth). Its average sales per day per outlet, at ~Rs. 61,100, is over 4 times, that of Coffee Day’s Rs. 13,200, in addition to former commanding 72% market share in its segment, as against 46% for Coffee Day. Besides being debt-free, Jubilant Food has also been reporting a consistent 5% net profit margin. With 982 outlets (921 Dominos and 61 Dunkin Donuts), Jubilant Food is ruling at EV/EBITDA multiple of 34 times, based on FY16E earnings. On this basis, Coffee Day, reporting losses, sluggish topline, lower turnover per outlet, along with debt burden, deserves a much lower multiple. Applying an EBITDA multiple of 20x, Coffee Day Global’s value comes to Rs. 4,500 crore, based on expected EBITDA of Rs. 225 crore for FY16, which results in EV/Sales multiple of 3.23x, vis-à-vis 4.30x for Jubilant. 85.09% of Rs. 4,500 crore leads to a value of Rs. 3,830 crore for Coffee Day Enterprises’ stake in the coffee retailing business.

To throw some light, fancy towards QSR has been dying down among investors. Euphoria surrounding Jubilant Food has tapered in the past couple of years. So also, Mainland China owner Speciality Restaurants, which came out with an IPO at Rs. 150 per share in May 2012, is ruling close to issue price currently, even after 3 years. 

Leasing IT Parks: 2.9 mn sq. ft. occupied in Bengaluru and 0.3 mn sq. ft. built-up area in Mangaluru, resulted in lease rentals of Rs. 103 crore in FY15 and Rs. 29 crore in Q1FY16. Discounting FY16 expected lease rentals of Rs.120 crore, with yield of 8% p.a., will help arrive at the Net Present Value (NPV) of Rs. 1,500 crore for both the properties of Tanglin Development. This company, along with its 99.90% subsidiary Tanglin Retail Realty Developments, had debt of Rs. 1,075 crore and Rs. 125 crore respectively, as of 31-8-15. Reducing this Rs. 1,200 crore debt from the NPV, resultant equity value of the realty leasing business comes to Rs. 300 crore.

Logistics: Shares of Sical are ruling at EV/EBITDA multiple of close to 15x, while bigger peers (2x – 5x in size) with lower debt levels (0 to 0.6:1x for peers versus 1.6:1 for Sical) are ruling at EBITDA multiples in range of 7-12x. Sical’s PE multiple of 42x is also exceptionally high, versus peers quoting at sub-20x. Shareholding structure, as of 30-6-15, reveals concentrated holding, which may explain the high valuation. While promoter holding is 69.31%, 88 HNIs control 14.95%, leaving barely 15.74% in the open market, with institution participation at 0.52% also very thin. Without digging deeper in peer valuation, Sical’s current market cap of Rs. 917 crore (which is unrealistic and too high) leads to a value of Rs. 485 crore for 52.83% stake.  Applying a 20% holding company discount, stake of Coffee Day Enterprises in Sical is valued at ~Rs. 400 crore.

Financial Services: Way2Wealth posted FY15 topline of Rs. 222 crore (9% YoY growth) and operating profit of measly Rs. 14 crore. This business has shown a turnaround at the operating level, only in FY15, despite being in the existence for over a decade. Thus, despite presence across 21 states, this business has not taken-off in the true sense of the word, when all other financial services have grown manifold in the past decade. Applying operating profit multiple of 6 times, on expected FY16 operating profit of Rs. 15 crore, value for this piece is Rs. 90 crore. Company’s 85.53% stake, in turn, gets a value of Rs. 76 crore.

Hospitality: Assigning a value of Rs. 40 crore per resort, since The Serai has boutique properties, Rs. 120 crore is the value for the hospitality business, which is still reporting losses at the operating level (FY15 operating loss of Rs. 2.33 crore).

Investment in Mindtree: Mindtree has a current market cap of Rs. 11,800 crore, which leads to a value of Rs. 1,895 crore for effective 16.04% stake held by Coffee Day Enterprises. Applying 20% discount to the current price, this investment is valued at Rs. 1,515 crore.

Holding company discount becomes an important factor under consideration and can vary significantly. In some cases, it even goes up to as high as 75% ,point in case being Uniphos Enterprises, holding stakes in UPL and Advanta.

Below is the sum-of-the-parts (SOTP) value for Coffee Day Enterprises Limited:

*Represents annual lease rent

At Rs. 328 per share, company’s equity will rise to Rs. 206 crore, which will be seen very high, compared to Rs. 66 crore of Jubilant Food, thanks to its baggage of other unrelated investments, held by the company. Market cap will be at Rs. 6,757 crore and adding net debt of Rs. 2,317 crore, enterprise value will be at Rs. 9,073 crore. As against this, the equity value, based on SOTP valuation above, is Rs. 6,240 crore, which leads to a value of Rs. 303 per share. This can be considered as the share’s fair value, at which it must get listed.

Moreover, in the IPO, there must be some discount to the fair value, as the unwritten rule of primary markets suggests leaving at least 15% on the table, for the prospective investors, which translates into a price of Rs. 257 per share. Thus, in the current IPO offering, share is more than fully priced both at the upper and lower end of Rs. 328 and Rs. 316 respectively, much higher than its fair value as well, leaving no potential upside.

Company had allotted equity shares to savvy investors like RK Damani, Rakesh Jhunjhunwala, Nandan Nilekani in March 2015, at an effective price of Rs. 362.50 (after adjusting bonus issue of 7 shares for 1 share held) for total of Rs. 100 crore, and at Rs. 329 to Bennett Coleman & Co. in October 2012.  The current issue is priced much lower, vis-à-vis the most recent issuance, which indicates fall in the perception, valuation and appetite. Also, historically, IPOs have always happened at the higher rates, compared to that of pre- IPO placement price. Does this mean that the froth has settled or exuberance died down in the past 7 to 12 months, given the jittery secondary market conditions?

Also, page 261 of the RHP reveals that the post of key managerial personnel of Company Secretary has seen  M.S.Sharada having resigned 5 times, and has been re-appointed 4 times, within a matter of 22 months. A key compliance post being handled so lightly, having marquee global PEs like KKR and Standard Chartered! Strange.

The company has been holding investments and interests in other unrelated and undesired business, which are commanding much lower valuations, than organised retail, which may not be able to attract the institutional investors, as they don’t like this kind of investment basket and business models. Also, if the company needs money for expansion and debt reduction, what is preventing it from not exiting Mindtree investment or realty annuity-yielding assets?

The promoter group is probably quite inclined towards investment business. Pg 265 of the RHP details top 5 group companies, largest being Shankar Resources Pvt. Ltd. (having earned PAT of Rs. 17 crore on net worth of Rs. 139 crore in FY15), which incidentally has been holding 4.11% stake in listed Lakshmi Electrical Control,  since March 2007, an LMW Group company. Not seen very profitable. So, is there any compulsion?    

Coffee retailing business of the company, accounting for 50% of its revenues, is also growing only in the single digits, which is also seen disappointing. Few HNIs are seeing Café Coffee Day more as a place to hang out for young couples or self-employed, having no office space, by sitting for couple of hours or even more, simply with a cup of coffee. Average daily sales per outlet, as stated above, reinforces this claim.

To put it simply, an investor seeking exposure to retail business may be averse to investing in commercial lease rental business, returns of which is more like that of a debt-fund, having an annual yield of 8%, with limited scope seen for capital appreciation now as well, that too, if it is largely financed by debt. Had the coffee business been separately listed, it would have been received in a better manner by the investment fraternity – both retail and institutional.

Given the complex corporate structure, comprising a maze of 6 unrelated businesses, coupled with share being expensively priced at both the ends of the price band, the IPO looks unattractively priced.  

Hence, clear advice to remain away.

Disclosure: Not applying in the IPO.