ValuePickr Forum

Cafe Coffee Day - Will you Date?

Café Coffee Day well known for its CCD outlets operates outlets since 1996. They are present in about 209 cities in India. They have a market share of about 46% and are the largest in terms of total number of chains. Café Coffee Day (CCD) has come out with an IPO for an amount of Rs 1150 crores with fresh issue of 35060976 shares valuing the company at ~ Rs 6756 crores approximately. Post issue Promoter Holding will stand at ~52.55%

Apart from this CCD owns about 16.6% stake in Mindtree. Their consolidated debt stands at 2762 crores.

Logistics Business:
Sical Logistics Limited is a listed company and most of the financial information for this company is available in public forum. This company is available at a market cap of ~900 crores.

Techparks Business(Similar to NESCO):
They have 2 tech parks in Bangalore and Mangalore with a built-up area of 3.1mn square feet. This division does a top-line of around ~95-100 crores on a yearly basis. This is around 4% of their top-line.

Coffee Division:

Coffee division #s:

The above table has the break-up of Coffee segmental revenues reported for this company. Of this 80% of the revenues are from retail outlets and these outlets operate at an EBITDA margin of ~20%. The other 20% of the revenues come from trading business which has an EBITDA margin of about ~2%.

So their retail coffee business is doing approximately 1000 crores/FY. Their retail coffee business is operating at an EBITDA of ~20% going by their EBITDA.

Consolidated Revenue from all divisions:

The company is planning to raise around Rs 1150 crores and the objective of this issue is to accomplish the following major heads:
1. Repay loan amount of about ~630 crores.
2. Set-up 215 new CCD outlets at a cost of 37lakhs/outlet – ~79 crores
3. Set-up 8000 new vending machines at a cost of 1.2lakhs/machine - ~97 crores
4. Set-up 105 new kiosks at a cost of 7.4lakhs/kiosk - ~7.77crores
5. Refurbishment of existing outlets – 60 crores
6. Setting up an additional 7000 MT coffee roasting plant capacity – 41 crores

Conservatively assigning Holding price discount for their investments in Sical Logistics & Mindtree:

  1. Sical’s market cap is 900 crores. They have a 50% stake. So at 1/6th (holding price discount), Sical investment can be valued at 80-90 crores.
  2. Mindtree’s market cap is 10,500 crores. They have a 16.6% stake. So at 1/6th (holding price discount), Mindtree investment can be valued at 338 crores.
  3. They have cash/cash equivalents of about 197 crores.
  4. Techpark & Financial services contributes to 4% & 10% respectively to their top-line. (150crores valuation on the optimistic side?)

At the issue price of 328/share the company is asking for a valuation of 6756 crores. Factoring in the above valuation for their other businesses, you roughly get the coffee business(retail + trading) at a market cap of 5815 crores. Add debt of about 2100 crores. The company’s enterprise value stands at 7900 crores.

Coffee retail business doing a top-line of about Rs 1000 crores, operating at 20% EBITDA has a market share of about 46%. Even if they manage to do 8-10% PAT margin (on the optimistic side), you get PAT of 80 crores(very optimistic #). Jubilant is valued at 100 PE. Most of the front end retail companies are valued at north of 70-80PE.

From here valuation of CCD is an individual’s call.

The big negatives here for me are:
1. Poor capital allocation – Their cash cow is their retail coffee business, they are pumping in money in to low RoE Techpark, Financial & Logistics business. They borrow to do this. Most of their borrowings stand at around 13-15%. So they borrow at this rate and invest in these low RoE business
2. No specific Niche – As an investor I am interested only in their 40% retail business. This IPO is looking to raise cash for their holding company :frowning:
3. Their culture of funding growth(??) through Debt.

Thanks,
Ravi S

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No, I won’t date here as I cannot two time my existing partner CCL Products :wink:

Anyway, seriously, at 1 billion USD valuation and a PAT of 80 crore as per your above post, it is straight away getting 70 PE? While strictly not comparable, CCL Products is available at 15-17 times FY17E EPS of 14-15 and 24 times FY16E 10-11 EPS.

However, India is a predominantly a Tea drinking country as so far we did not have this coffee culture, westernisation thing not yet penetrated broadly. I myself in my 20s felt aspirational drinking coffee in a Barista or Coffee day so with Indian demographics in support the coffee culture is going to explode and market opportunity could be huge.

After reading the above post, I personally would stay away from this IPO as the capital allocation strategy is not encouraging and so is the company’s stake in unrelated fields. Also, the business is real estate intensive. For coffee culture, you need to be present in HIGH cost locations with appealing interiors etc.

But the amount raised through ipo is used only in coffee business outlets which is a positive sign and also debt which has been a roadblock to its profitability is been given due concern by a promoter …
Also it’s market share is much higher than its competitors .
So can’t it overweight the negatives of poor capital allocation and running other businesses .

I would like to know whether the company is worth investing at this price by the knowledgeable contributors of this forum .

Disclosure - Thinking to apply in ipo

Good analysis above. Not analyzed the numbers myself but the link says company has been in net loss over the past 3 years. Assuming the numbers are correct, no way I’ll risk my money in a unprofitable business again! + Dividend is out of the picture.

People who want to make highly speculative bets can surely go ahead and invest!

I’ll stick to Charlie Munger’s philosophy -
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, ‘It’s the strong swimmers who drown.’

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Found this on a moneycontrol analysis:

In Financial Years 2012, 2013 and 2014 and the nine month period ended December 31, 2014, 36, 42, 44, and 175 cafés were closed down. These closures were owing to a variety of business related factors such as non-renewal of leases, low revenue generation from outlets and unfavourable location of outlets. CCD expects to continue to close anywhere between 25 to 40 outlets every year.

I am wondering if the 175 cafe closure at the end is important. In effect, they are opening 215 cafes with the IPO proceeds (after they closed 175 in a year :P).

Discl.: Based on what I am reading here and other sites, I will definitely not invest in a loss-making company when there are far better companies in India that will benefit when the economy turns around.

The valuation is well explained above and I will not get into those aspects. My 2 cents

  1. The major objective is not to grow the business but to to retire the debt - negative.
  2. Please do a scuttlebutt in Bangalore about the Group and if anybody speaks high of the Group, then invest.
  3. Mr V G Siddhartha is the son in law of ex CM S M Krishna - political link and hence negative.
  4. Sical Logistics cannot stand against competition from VLS, Blue dart,etc and it applies to other divisions also.
  5. Coffee competition is stiff and so many brands . Can this brand stand against Tata Coffee, Nestle, Barista, Starbucks,etc
  6. See the growth in interest. Funding a business thru equity than debt is an expensive proposition and I think the Company is under pressure to pay off the debt. No prudent management will do this.
  7. If possible, anybody can find out who owns the coffee plantation - the company or somebody else. I think Tata Coffee owns plantation, CCL - I dont know

Red Flag as pointed out by Roysavio - Closure and then reopening.

Nothing very attractive to invest and valuation is stiff for a loss making company.

Rgds

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No PE investors are exiting through IPO. Does it imply they are expecting good growth going forward or having high regard for the management team? If they are in dire situation, most PE’s would look to exit.

Haven’t looked into the valuations yet. But here we are getting a market leader who has almost 50% market share. If the strategy is correct, and with debt repayment it might turn profitable. No competitor comes close to it.

Disc: Not decided yet whether to apply

This is not really accurate. Coffee is predominant in South India, & there is nothing westernized about it. This is not really germane to the discussion, but wanted to correct the perception here.

Lets not base our decision based on what p/e investors are doing. They have deep pockets to take risk and even if something goes wrong they will be compensated behind the screen. Listing can be an exit route for p/e investors.

See the total debt level.Consolidated debt of Rs. 3,800 Cr. as of February 15, 2015. d/e 3.90.
The Company faces competition from QSR - McDonald’s, Dominos, Dunkin Donuts, KFC, Pizza Hut, etc in addition to pure coffee chain. Mr Ambaliga who has worked in the Group has commented that the company is incurring losses on coffee shops and it tallies with closure of 175 shops.

They are in the business for the last 15 years and why still losses. Its arms are also making lossess. No dividend history. When such a business with a long existence is still making losses and using IPO money to pay off debts, it is not a good business.

It may be a leader with 1500 outlets ( far ahead of Barista) but whether it makes cashflow that is important. A good business pays off debt by internal accruals and again equity financing is expensive than debt.

I have given the facts and view and it is for the individual to take a call. My single biggest risk factor is debt and would refrain from posting further on this.

Rgds,

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rakesh junjunwala is invested in the name of rare enterprises

I will stay clear from this. I have heard that it is highly politically connected company. Most of the value comes from real estate acquisition at “right time” at “right place”. Supposed to be recipient of huge favours from Cong or non-BJP govts. The core business is going to face tough competition from Starbucks. I have used their vending machines in our offices and it used to be under maintenance every second day. Coffee they serve is ok but snacks menu is avoidable with no clear differentiation. Also, laden with unrelated businesses.

Yeah agreed to your points with regard to debt. But I am not basing my decision only on PE investors. Not even a single PE investor going out says something which we as a retail investor may not know. If I were in their place and if there is no growth, I would use this opportunity to exit.

I feel, it might take atleast 5 years for the competition to catch up though not completely grab the market share, before which I suppose it might turn profitable.

Again in all depends on the valuations for the offer price!!!

I hold the Cafe Coffee Day brand highly. CCD and Amul are 2 brands that I always thought I would have invested in, if they ever get listed. So CCD IPO prospectus was the first one that I ever read completely (almost!). It was a huge document and to be honest, I came out of it feeling extremely negative. (Subsequently, went through Nuziveedu prospectus and felt equally negative. May be reading them is just not my thing!)

IMO a lot of it could be to do with their drive to have a huge number of stores. Apparently, the only ones to have more numbers than CCD are the army canteen stores. I remember at Bellandur in Bangalore - a place in the outskirts of Bangalore but right in middle of the IT clusters - there were about 5-6 CCD stores of different categories within less than a kilometre range! While at times, CCD’s on the highways have been a life-saver and a regular stopover otherwise, it surely can do better by having a conservative site selection policy. I think the VGS’s dream of being among the top 3 retailers in the world – it is in top 6 by number of stores - could be pushing them towards higher numbers rather than focus on profitability. They have been regularly closing down 3-4% of their stores and far higher (12%) this year. So they are closing unviable stores but wasting capital and management focus. “It’s mainly about finding the right location in restaurant business” as per all of those whom I know in this business! And I know a fair amount of them due the place where I come from! :smile: It’s one of the toughest part and so we could give CCD some leeway to get their act right in this matter.

Breaking down different aspects of the business:

From various sources, mainly the company prospectus.

As per VGS in below interview, he is fine with shifting his investments in various businesses to fund his main focus, the coffee company:

To know more about VGS, go through this old article:


Once you are done reading it, take a pause and then go through the comments. Both are important for the sake of “informed decision making”! :smile:

I feel that once they are done with their expansion spree, they may be able to get hold of their debt. Even though my gut feeling says they will do extremely well, I’ve got to admit that I am now circumspect as to when exactly I should be investing here!

Note:
Like a normal South Indian, my taste buds are fixated on the regular filter kaapi. And like many, I try to find that same taste in cafe coffee and fail. Initially I used to think that there was something wrong in these cafes. Then realised that my taste buds are biased and it isn’t fair to compare them! :stuck_out_tongue:

Interesting articles:


http://articles.economictimes.indiatimes.com/2014-06-08/news/50420986_1_cafe-coffee-day-amalgamated-bean-coffee-india-s

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yes i to had same feeling of not to apply after reading all above.
as i said earlier “rakesh junjunwala is invested in the name of rare enterprises”.
he always make investments in the name of rakesh junjunwala and rekha junjunwala and trading bet"s in name of rare enterprise.

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People have listed various problems with this company for reasons of not investing in it but my own reasons are: Their retail coffee chain would find it hard to grow.

I’ve seen CCD outlets besides highways where few people come, mostly in the more prosperous parts of the country. In cities like Pune, they are everywhere and hence few areas where they can set-up their outlets.

The only places left for them to have outlets are :

  1. Small towns in west & south.
  2. In east of country viz. UP, Bihar, WB etc.

For the first there is no male-female meetup culture, the primary reason for people to use such places. As such I don’t see them setting up profitable franchisees here.

For the second, most middle class people don’t have enough money to spend on CCD. And this would be the case for some time to come. Then there is the crime and the society in UP, Bihar.

If they can’t increase their number of outlets, that doesn’t mean their shares are not investible, just that they don’t deserve the premium they’re asking.

The 17 institutional investors who bought shares a day before the IPO opened include global assets management giant Blackrock, Government Pension Fund Global, ICICI Prudential Mutual Fund, Reliance Life Insurance, Merrill Lynch, Swiss Finance Corp, Axis MF, Faering Capital India Evolving Fund, Jupiter India Fund, Platinum Asia Fund and Tarra Fund, a release from the company said
look at this, Bennett, Coleman & Co. Ltd and/or its subsidiaries hold 0.80% of the equity capital of Coffee Day Enterprises Limited, as on the date of filing of the DRHP with Sebi.

Sorry I am a bit lost here with your calculations whilst evaluating the company.

You say

  1. market cap of Sical is 900 cr so 50% is 450 cr. 1/6 of 450 is indeed 75 cr (as you suggest) so the value of the holding should be 5/6 (discount = less by 1/6) which is 375 cr.

  2. Similarly for the Mindtree valuation. 16.6% of 10,500 cr is 1743 cr of which 5/6 is 1452.

Both together contribute 375 + 1452 = 1828 approx. Add cash of 197 = 2025 so you get the other parts of the company for 6756 - 1828 = 4732 cr. Then add 2100 cr for debt EV = 6832cr (as opposed to your calculation of 7900 cr).

The difference in calculations is that you discount the value of the holdings of Sical and Mindtree to 1/6 whereas I discount by 1/6.

Maybe I am doing something wrong. Please advise.

Nevertheless, the story does not look good to me with the political angle and capital allocation.

BTW, apart from Rakesh Jhunjhunwala I believe his mentor Radha Kishen Damani is also an investor through his Derive investments. But why go by them. RJ also invested in A2Z maintenance and Bilcare.

Regards
Kumar

Dating with Loss making company will end up like Breakup relationship with lot of strain on minority dater.
i keep myself away from this IPO reason it’s loss making company and poor allocation of funds into low
ROE on their portfolio. as rightly said CCL is better performer compared to CCD

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Quite a bad response for the IPO but went through only due to the Qualified Institutional buyers. I too didn’t invest! However, I do feel CCD will do extremely well as it is the largest chain of restaurants in India with margins on the higher end. But I wasn’t quite sure if the IPO was the right time to get into this. Maybe I will get a better opportunity later or maybe I will just keep waiting :smile:

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