Mumbai: Coffee Day Enterprises Ltd (CDEL), the holding company of the Café Coffee Day (CCD) chain of restaurants founded by V.G. Siddhartha, on Friday filed draft documents with the market regulator for an initial public offering (IPO) of shares to raise Rs.1,150 crore.
Kotak Mahindra Capital Co. Ltd, Morgan Stanley India Co. Pvt. Ltd, Citigroup Global Markets India Pvt. Ltd, Axis Capital Ltd, Yes Bank Ltd and Edelweiss Financial Services Ltd are managing the IPO.
Private equity firms KKR India Advisors Pvt. Ltd, New Silk Route PE Asia Fund Lp and Standard Chartered Private Equity Fund are investors in the company. According to the draft papers filed with the Securities and Exchange Board of India, KKR holds a 3.43% stake in CDEL.
KKR India Advisors, New Silk Route PE Asia and Standard Chartered Private Equity invested $149.07 million in the holding company in February 2010, according to VCCEdge, which tracks investments.
CDEL is valued at Rs.6,200 crore based on a pre-IPO round of funding that was concluded in March. CDEL, earlier known as Coffee Day Resorts Pvt. Ltd, raised Rs.100 crore from five investors in this round, including Infosys Ltd co-founder Nandan Nilekani, investor Rakesh Jhunjhunwala’s Rare Enterprises and stockbroker Ramesh Damani. Nilekani, an old friend of Coffee Day co-founder Siddhartha, led the investment round, infusing Rs.74.99 crore. Nilekani holds 1.77% of the company.
CDEL plans to use the IPO proceeds to set up new outlets and kiosks, refurbish existing outlets, manufacture and assemble vending machines, and set up a new coffee roasting plant, along with a coffee and tea-packing facility.
A large portion of the funds raised will also go towards repayment of loans of the firm and its subsidiaries.
CDEL owns Coffee Day Global Ltd (formerly known as Amalgamated Bean Coffee Trading Co. Ltd), the company that runs the cafe chain. CDEL also owns Coffee Day Hotels and Resorts Pvt. Ltd, Global Technology Ventures Ltd and Tanglin Developments Ltd.
The firm operates its coffee shops under three formats—Café Coffee Day, Café Coffee Day The Lounge and Café Coffee Day The Square.
Under the flagship format of Café Coffee Day, it operates 1,423 outlets across 209 cities in India and 16 international outlets across Austria, the Czech Republic and Malaysia.
CDEL reported consolidated revenue of Rs.1,808.6 crore for the period from 1 April to 31 December 2014 on a loss of Rs.75.2 crore. In financial year 2014, the firm reported revenue of Rs.2,352.7 crore on a loss of Rs.77 crore.
According to Dhanraj Bhagat, partner at Grant Thornton India Llp, the consumer story remains strong in India given a huge middle class population, changing lifestyles and an increase in number of nuclear families.
However, he cautions that scalability remains a big challenge in the industry, especially in the food and beverage space. “To gain scale you will have to open more outlets across different geographies. But when companies start doing that, then sometimes the business arithmetic starts to go wrong,” said Bhagat.
Companies have to very nimble in their strategy, shutting outlets that are not doing well, so that the overall business doesn’t get dragged down because of a few bad stores, he said.
Also, over the years, competition in the café business has intensified, with international chains such as Starbucks Corp. and Coffee Bean & Tea Leaf entering the market. “Competition also comes from very localized chains which might be present in just one city but their brand is well established in that geography,” said Bhagat.
Apart from increased competition, factors such as high rental costs continue to pose a challenge to companies. High inflation and sluggish growth in the economy also take a toll on the spending power of customers.
There remains a significant opportunity for coffee chains to expand in tier II and III towns, said Bhagat. But they need to ensure that they get their branding, pricing, product mix and store locations right, he added.
