 "Girls sit at the window of a Cafe Coffee Day outlet in Mumbai,")
Once again it is time to put your money where your mouth is. Your neighbourhood coffee joint Café Coffee Day offers an opportunity to invest in a company in the high visibility food and beverages business. Coffee Day Enterprises, the holding company which owns the Café Coffee Day seeks to capitalise on the investment boom in the Quick Service Restaurant (QSR) business.
Till August this year, investment by private equity funds in the restaurant space has been around $ 111 million in ten deals. Over the last five years, 57 deals have been struck amounting to $638.1 million. While these deals have all been in the private equity space, Coffee Day Enterprises, the largest of them all is approaching the common man to raise money. The company had already raised money through the private equity route earlier.
But, unlike other companies, investment in Coffee Day Enterprises is a different bet altogether. Firstly, its not a pure QSR story. Apart from the Café Coffee Day chain, the holding company houses other businesses namely, development of IT-ITES technology parks (Tanglin Development Limited), logistics (Sical Logistics), financial services (Way2Wealth Services), hospitality (Coffee Day Hotels & Resorts Private Ltd) and investments in companies like Mind Tree (16.34 per cent of the equity).
Within the maze of companies, it’s the coffee business that accounts for the lion share of 50.1 per cent of revenue followed by 36.9 per cent of logistics, 7.5 per cent of financial services and 3.3 per cent of technology parks. Coffee Day Enterprises’ chairman VG Siddhartha has however said in an interview with Business Standard that they have assured investors and SEBI of investing only in the coffee business for the next five years.
Since investors are looking at the company as a proxy for Café Coffee Day, we shall look at the coffee business in a little more detail.
The company opened its first outlet in 1996 in bangalore and established the largest footprint of café outlets in India and now has a network of 1,472 café outlets spread across 209 cities. It has a market share of approximately 46 per cent in India, and is nearly four times bigger than all the other competitors put together. It’s nearest competitor Barista has a market share of only five per cent.
The company has 28,777 vending machines; nearly 50 high-end coffee outlets called ‘The Lounge’ and ‘The Square’. Furthermore the company has 424 Coffee Day Fresh & Ground outlets and 590 Coffee Day Xpress kiosks. It is also one of the largest exporters of Indian coffee beans, primarily to Europe, Japan and Middle East.
Despite having a leadership position in most of the areas, the company is not profitable. At the net level the company has posted a loss of Rs 141 crore in FY14 and a loss of Rs 135 crore till nine months ending December 2014. The company is profitable at the operating level but its high level of debt is resulting in losses. Coffee Day Enterprises has a long term debt of Rs 3,187.96 crore and short term debt of Rs 491.39 crore at the end of December 2014. It paid an interest of Rs 248.33 crore on an operating profit of Rs 309.73 crore.
Siddhartha however says that Rs 500 cr out of the proceeds of the IPO will go towards reducing its debt level which could make the company profitable at the net level in FY16 and cash surplus in FY17.
The issue has been priced in a band of Rs 316 to Rs 328 with the company expecting to raise Rs 1100 cr at the higher end of the band.
In a report on Jubilant Foodworks, Nomura highlights the issue in the highly competitive space in which Coffee Day Enterprises operates. At the end of 2014, quoting Technopak’s estimates the report says there are approximately 100 café and bakery chain brands with an estimated 3,200 outlets spread across various cities in India. In this sort of environment, it becomes essential to develop the right expansion strategy and to understand the correct mix between number of outlets, demand and cannibalization.
Retailers such as Café Coffee Day, Barista and Costa Coffee seem to be struggling to get the mix right and have been closing outlets recently. Café Coffee Day, a leader with a 46% market share, seems to be struggling operationally despite starting its operations in 1996. Its EBIT margins, too, are significantly volatile.
Further, Café Coffee Day is at the lower end of the market. It’s average sales per day per café is between Rs 15,000-20,000. Starbucks Coffee is at the top end with sales of Rs 60,000-65,000 per outlet though on a much lower base. Part of the reason for the lower sales is Café Coffee Day selling more beverages (61 per cent) than food products. Given the integrated nature of the business in the company, Coffee Day Enterprises will be able to weather swings in coffee business, much better than other players.
The company has a well-defined growth strategy of expanding its stores by 135 every year, expense of which is roughly equal to the depreciation charge each year. Such high rate of growth will ensure that the company maintains its lead over its competitors. Investors will give the company a premium for its market share.
Coffee Day Enterprises will become a proxy vehicle for betting on the aspiring middle class in the country. Broking firm Ambit feels that the company is a strong candidate to be included in the market index by 2025.
