Coffee Day IPO selling turnround story

The domestic Indian IPO is part of Coffee Day Enterprises’s business plans to shrug off deepening losses and restore profitability.

Senior management at Coffee Day Enterprises are hoping to convince investors they are capable of driving the coffee chain back into the black as they ready their domestic initial public offering later this month.

India’s biggest coffee chain is looking to raise Rs11.5 billion ($175 million) from the sale of about 35 million to 36.4 million new shares, according to a term sheet seen by FinanceAsia, which would make it the country's biggest IPO so far this year.

Despite a dominant 46% market share, the company has struggled in the face of growing competition from global coffee brands such as Starbucks and Costa Coffee. In response, it has closed some outlets to cut costs and plans to use the proceeds raised from its IPO to fund its growth through the purchase of vending machines.

The shares will be offered at a price band of Rs316 to Rs328 per share. Depending on the final price, the amount of shares issued in the IPO will be adjusted to meet the company's fundraising target. At the bottom end of the pricing range the company will sell 36.4 million new shares equating to 17.55% of the enlarged share capital.

Coffee Day is launching the sale on the back of a five-day rally in Indian shares, with the country's benchmark Sensex index up 5.5% since September 29, reclaiming the 27,000-point mark for the first time since August 21. The index, though, is still roughly 1,000 points, or 4%, away from its late July trading levels.

The company apparently missed a good window within which to launch the deal in mid-August after a two-week pre-marketing campaign, as the Sensex lurched sharply downward, spooked by a 8.5% correction in China’s Shanghai Composite Index on August 24.

According to the revised timetable Coffee Day is now scheduled to take institutional orders between October 14 and 16 and list on both National Stock Exchange and Bombay Stock Exchange on November 2.

At $175 million the Coffee Day share offering would surpass Inox Wind’s $163 million deal in March to become the year's largest Indian IPO, according to data provider Dealogic.

Half of the shares on offer will be offered to qualified institutional buyers, while 35% will be allocated to retail investors and 15% to high-net-worth individuals.

Citi, Morgan Stanley, and Kotak Mahindra Capital are the designated joint global coordinators on the Coffee Day IPO.

Black coffee goal

The targeted price range values Coffee Day at some Rs65.5 billion to Rs67.5 billion or at a historical price-to-sales ratio of 2.57 to 2.65 times.

By comparison Jubilant FoodWorks, which is the sole operator of Domino’s Pizza outlets in India and is its closest domestic comparable, trades at a much more expensive 5.23 times sales multiple and at 56.12 times earnings on a rolling twelve-month basis. 

But unlike Jubilant FoodWorks, which has reported annual earnings of at least Rs10 million since 2011, Coffee Day has operated at a loss in recent years. It reported a Rs214 million loss in the 2013 financial year, which tripled to Rs770 million a year later. 

The loss widened further to Rs872 million in the financial year ended March 2015, indicating that the company is still struggling with its operational expenses – including raw materials, financing costs, and tax payments – which have been rising at a faster rate than its 8.3% revenue growth.

Coffee consumption in India has traditionally been lower than other Asian nations because of its deep-rooted tea-drinking culture. It was not until the late 90s when the gradual opening of coffee shops caused a spike in coffee consumption among Indians.

Established in 1996, Coffee Day is currently the largest coffee chain in India with 1,472 outlets in operation, according to the company’s red herring prospectus. Its retail network is far bigger than the 169 stores run by Barista Lavazza, the second-largest coffee chain by number of outlets.

But Coffee Day’s profitability has not been in line with its dominant market share since the influx of international coffee brands such as Starbucks and Costa Coffee after 2000.

Costa Coffee started its presence in India in 2005 with local partner Devyani International, while Starbucks entered the local market through a joint venture with Tata Group in 2012 and operated 72 stores as of the end of June.

In response to the increasingly intense competition, Coffee Day plans to begin selling through vending machines and to venture into the packaged coffee powder business. In its red herring prospectus it unveils plans to use part of the IPO proceeds to manufacture some 5,000 vending machines over the next three years.

To effectively reduce costs the coffee chain also closed 96 outlets in the last nine months of 2014, citing lower levels of performance and high rental renewal as the main reasons for the closures.

¬ Haymarket Media Limited. All rights reserved.
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