Coffee Day Enterprises Lt, the parent company of the Cafe Coffee Day (CCD) chain of restaurants founded by V.G. Siddhartha is planning to raise Rs.1,150 crore (nearly $180 million) through an initial public offering (IPO) which most of the company’s existing private equity investors may not exit as part of. The company will file a draft red herring prospectus (DRHP), a pre-IPO document, with the market regulator next month.
Where Will The Money Go?
The proceeds of the issue will be largely used to repay existing debt – about Rs. 750 crore; a part of it will also be used to open new outlets, refurbishing existing stores, for the vending machines business and a new processing plant – around Rs.290 crore. Founded in 1996, CCD has 1,650 outlets across 200 towns and cities in the country and overseas, according to an August 2014 report by rating agency Brickwork Ratings.
Who Are The Investors?
The company raised Rs.100 crore from five investors, including Infosys Ltd co-founder Nandan Nilekani, investor Rakesh Jhunjhunwala’s Rare Enterprises and stockbroker Ramesh Damani. The shares were issued at Rs.2,890 apiece, which adds up to a post-money valuation of Rs.6,200 crore. Nilekani, an old friend of Coffee Day co-founder Siddhartha, led the investment round, putting in Rs.74.99 crore. That is one generous friend!
Market & Revenue Overview
Over the years, competition in the cafe business has intensified, with international chains such as Starbucks Corp. and Coffee Bean & Tea Leaf entering the market. Apart from increased competition, factors such as high rental costs continue to pose a challenge to the companies. Meanwhile, high inflation and sluggish growth in the Indian economy took a toll on the spending power of customers. CDEL had consolidated revenue of around Rs.1,800 crore for the first nine months of 2014-15. The company reported a loss of about Rs.75 crore during this period. Data show a revenue of Rs.1,088 crore for the financial year that ended on 31 March 2014, compared with Rs.1,067 crore the previous year. ABCTL reported a net profit of Rs.7.6 crore in 2013-14, compared with Rs.11 crore the previous year.
Larger cafe brands that have grown massively have both good and bad stores and these brands need to focus on profitability rather than the numbers game. The brick-an-mortar business simply has to make money stated a retail consultant.
On the CCD front, investors remain positive on the business going by their decision to stay invested despite getting an option to exit. What do you think, will the coffee brand continue to flourish or crumble under heavy competition?