Café Coffee Day IPO is a high risk bet

Coffee Day Enterprises Ltd (CDEL) is the parent company of the Coffee Day Group, which houses Café Coffee Day that pioneered the coffee culture in the chained café segment in India.

In terms of the number of chained café outlets, CDEL had a market share of approximately 46% in India. In addition to the coffee business, CDEL operates other select businesses that are aimed at leveraging India’s growth potential, namely, development of ITITES technology parks, logistics, financial services, hospitality and ITITES through its subsidiaries.

CDEL mulls expansion of its outlets and Kiosks, manufacturing and assembling of vending machines refurbishing of existing outlets and vending machines and setting up of a new coffee roasting plant. It has also planned prepayment/repayment of debts and raise corpus fund.

To part finance this objectives, the company is coming out with its maiden IPO of 3.64 crore to 3.51 crore equity shares of Rs. 10 each (based on lower and upper price band) with a price band of Rs. Rs. 316-328. Out of the total issue, shares worth Rs. 15 crore are reserved for eligible employees. Company hopes to mobilize Rs. 1150 crore.

The issue opens for sub subscription on October 14 and will close on October 16. Minimum application is to be made for 45 shares and in multiples thereon, thereafter.

On performance front, the company has (on consolidated basis) posted an average negative EPS of Rs. 6.29 for last three fiscals. For FY 2015 it posted net loss of Rs. 159.47 crore on a turnover of Rs. 2548.72 crore. For Q1 of current fiscal it has reported net loss of Rs. 40.36 crore on a turnover of Rs. 634.97 crore. Based on this, the issue pricing is greedy.

Due to heavy expenditures in increasing outlets, higher depreciation and initial break-even periods have caused negative earnings so far. Turnaround will take few more years. All these along with its branding are well discounted in asking price. CDEL mulls opening of 135 stores every year. Teams of lead managers have mixed track records for its past mandates.

Remarks: Considering continued negative earnings till date and its greedy pricing, this offer is a “HIGH RISK” one.