 "V G Siddhartha")
It's not easy to build a food brand in India and even less easy to hold out against global big daddies like Starbucks. But V G Siddhartha's passion for the brew has enabled Coffee Day Enterprises to stay as the country's largest chain of cafes. In an interview with Sheetal Agarwal, he says coffee is the only thing that matters. Edited excerpts:
Is Coffee Day Enterprises a conglomerate or a coffee company?
Investors should view us as a coffee company only. In 2008, we took a call to put all the investments in a holding company. Except plantations of around 12,000 acres, all our other interests are in this company. One thing we have told investors and SEBI that in next five years, other than growing the coffee business, we are not going to allocate any capital to other businesses. Our 16.1 per cent stake in Mindtree is worth around Rs 2,100 crore today. That investment has given me 40 per cent IRR over the past 16 years. It has given me capital building. If tomorrow, I have a good inorganic opportunity in the coffee business, I got a reserve with me. Sical Logistics stake is worth Rs 500 crore.
These companies can fund their own growth. These two put together form about Rs 2,600 crore worth reserves. We have an SEZ business where we build buildings and lease them to people. This land I bought in 1991, at Rs 10 per sqft. Today it is around Rs 7,000 per sqft. I built 3.2 million sqft office space and leased out to Accenture, Mindtree, HP, amongst others. I feel next 7 years, it has the potential to go upto 10 million sqft. I dont need any money, rental income i have got Rs 120 crore. These are investments I am not attached to that I can sell anytime. Way2wealth has Rs 80 crore cash, and earns Rs 30 crore EBITDA in last year. I am not putting any capital in these businesses.
What is the potential of the coffee retailing business in India?
If you had asked me in 1996 how many coffee shops India could take, I would have said 15 stores. Today, Cafe Coffee Day store count is at 1,518, till March 2015. All my competition put together is another 450 stores, which means we are four times bigger than all of our competition. But the beauty is that I feel in next five-six years, India will have around 5,000 stores.
How will you utilise the IPO proceeds?
Out of Rs 1,100 crore, we will use Rs 510 crore to reduce debt of the holding company, Rs 125 crore towards debt repayment of retail coffee business and Rs 290 crore for expansion of roasting plant and coffee stores in the next 18 months. We will still be left with another Rs 150 crore which again we will invest in our coffee business.
The coffee business' revenue growth looks very good but profitability has been volatile. What is the reason?
On a Rs 1,432 crore revenue, we made Rs 198 crore cash profit in FY15. The company has Rs 145 crore depreciation. This is precisely the reason we are not putting more than 135 stores a year as it will keep depreciation under check. Our retail business has grown 16-17 per cent over the last five years, which should be sustainable going forward. We have around Rs 300-crore debt in our coffee business which will be reduced to just Rs 175 crore. Plus we are putting additional Rs 300-crore capex. So, interest costs will come down by atleast 30 per cent and improve profitability.
How many stores do you plan to open going forward?
We plan to open 135 stores per year for the next three years . The cost per store is Rs 37 lakh and the break even period is around 3-3.5 years so far. Of these, Rs 2-3 lakh is deposits. Twenty per cent of our total expenses is towards lease rentals. We have all rented stores and none of them are franchises. We give revenue share of 12-25 per cent for some stores. Usually our lease agreements stand for 9-15 years. However, once in every three years on an average we give them 15 per cent hike. Though it is a long term lease, I can vacate by giving a three-six months notice. That option is with our company.
