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Coffee Day: Interesting IPO, Small Quantity To Attempt Allocation, Consider After Listing

A quick note on the Cafe Coffee day IPO:

  • Ends today
  • Rs. 316 to 328
  • Multiples of 45 shares
  • 1100 cr. in size

 

This is me being VERY VERY Late. I know. I’m sorry.

I wasn’t going to bother thinking this is another waste IPO where you won’t get anything due to oversubscription. So no point doing a detailed analysis. But apparently things don’t seem that badly oversubscribed. They only got full subscription just now.

Things to note:

  • VG Siddhartha is the promoter. He  and other promoters will own 52%. He is ex-Karnataka CM, SM Krishna’s son-in-law. This is only as important as you want it to be.
  • Loss making: the last financial year saw a loss of 159 cr. and the first quarter in this year was already a loss of 40 cr.
  • It’s not just the Coffee Day business: the company owns tech parks, a massive stake in Mindtree, a financial services business, hotels and coffee plantations.
  • Ambit’s report says avoid. Because of very low Return on Capital Employed, and a EBIDTA growth rate of only 14%.
  • The coffee business is about 51% of their turnover, and 55% of their EBIDTA
  • The company is raising only 1100 cr. in the IPO – it will repay debt of the holding company, which has taken loans for the retail business and for their stake in Mindtree etc.
  • Only 25% of the money raised will be for new outlets, which will be on highways, and to upgrade the current infrastructure.
  • They will also set up a new coffee roasting facility.
  • The valuation is incredibly difficult to break down but the plantation valuations I don’t agree with. They can sell the mindtree stake when they get a good buyer, and that can be valued. (They own 16%)
  • The market cap is 6800 cr. with this issue, which isn’t very big. However, the scale depends on how the management takes this forward, and they are very smart people.

Coffee day’s coffee isn’t great. Their Arabica variations suck. I think they need to train their buyers better. 

But Coffee Day isn’t about coffee alone. It’s about hanging out with friends and a meeting place and place to read books. That’s something we are likely to grow to love. The startups love it already – any coffee day in BLR is a place to see startups pitch investors, make deals and all that. That’s the scene with all coffee shops.

My Take

It may be too late to do anything right now. I can’t – my online IPO system is not allowing me to buy. But if I could I would apply for a small quantity, around Rs. 50,000 worth. I think the retail coffee business is huge and can scale substantially.

The cost of refurbishing shops should come down as the cost of cement, paper etc. comes down. They have huge advertising potential, and the ability to bag the massive scale we will need in the highway shops, and none of their competitors are in that market.

It may be better to watch it at listing instead, with a low demand it might not list at much of a premium. This is a tiny IPO – just Rs. 1100 cr. – and hasn’t got much attention. But it could just end up being a big hit if Siddhartha pull out all stops, moves into the highways and gets a much lower real estate cost on his shops. But yes, this is so late you probably can’t act either.

Short take: Buy small, bet on longer term growth, no listing gains expected. Wait till listing.

  • Karthik says:

    Complete agree with your analysis. The highway coffee shops is the unexplored territory. A 100 km drive from Bangalore to Mandfya will pop out astleast 10 outlets.
    Mindtree, Sical logistics business and techpark in Bangalore all have huge potential to add revenue in long run.
    PS: II have applied for IPO

  • Saurabh says:

    Profitable in at least 3 years out of the last 5 years?

  • Angad says:

    I think they hold ~16% in Mindtree!

  • Biplob says:

    Coffee shops, that’s the key of this IPO, but I’m surprised to hear the cheer for highway coffee shops from you.
    I live in Pune and as I see it, People sit in CCDs in metro cause:
    1. The city air sucks, is hot & dirty. Open cafes are few & far between.
    2. Couples want some privacy and silence.
    But both can be had in any cafe in the highway, especially in the western (& eastern) ghats. So this highway idea shouldn’t sell in cities like Bombay, Pune, Bangalore, Chennai, Vizag.
    Just to be contrary to myself: the only crowded McDs I’ve seen on highways were between Bombay & Lonavla, I’m like why!!

  • Shashank k s says:

    Now retail portion is under subscribed and qii portion is oversubscribed. How will the floor price be determined ?? Will be it be same for all or different for different portions according to their subscription ??

  • Shraddhesh says:

    A aw… You have manged to maintain fine balance in not hurting the company promoters and still being honest to your readers. That is very sweet. I read it as sweetest way to advise No.

  • Getafix says:

    Basically a company aiming for valuations from the very first day, serving bad coffee, stale snacks, manned by the cheapest labor they could find.
    Maybe a cool hangout place, but certainly not a coffee shop based on product and service. Bad experience every time I stepped into one.
    Don’t expect things to improve post IPO but may get worse.

  • Milind says:

    Expecting a not so ‘VERY VERY Late’ analysis of Indigo ipo from you, Deepak
    🙂