We think the IPO of Coffee Day Enterprises Limited (CDEL) is overpriced. A more realistic price range could have been Rs 240-250, compared to the Rs 316-328 price set by bankers. Besides the valuation, we have several concerns about the business itself. Growth rates are simply not good enough. And the promoter's keenness to build a diversified empire seems to be robbing the valuable consumer franchise of resources. Balance sheet is highly stretched, and does not say good about management's financial stewardship

1. 14 OCTOBER 2015
COFFEE DAY ENTERPRISES LIMITED
RS 316-328Company Report: India-Consumer-IPO Note
www.indiabusinessreports.com 1
Basic Stock Info
Market Cap Rs 6757 crore
(at Rs 328)
Listing BSE, NSE
Face Value Rs 10
IPO 14-16 Oct’15
IPO Price Rs 316-328
Shareholding Pattern (%)
Pre-IPO Post*
VG Sidhartha (CMD) 37.41 31.05
Promoter Total 63.34 52.57
VC funds 8.17 6.78
Foreign Corporate Bodies 25.88 21.48
HNIs 2.61 2.16
New shareholders 17.02
*at Rs 328
Brief Financials
Year ending Mar 31 FY12 FY13 FY14
Net Sales (Rs mn) 21,823 23,797 25,784
EBITDA (Rs mn) 2,996 3,190 3,752
EBITDA Margin (%) 14% 13% 15%
PAT (Rs mn) -739 -1,381 -1,595
Net worth (Rs mn) 6,498 5,560 5,323
Debt (Rs mn) 25,980 35,489 32,929
Sales Growth (%) 33.6% 9.0% 8.3%
PAT Growth (%) 319.9% 86.9% 15.5%
ROE (%) -11.7% -22.9% -29.3%
ROCE (%) 3.9% 3.3% 4.0%
D/E (x) 4.00 6.38 6.19
KEY POINTS
We think the IPO is overpriced. A more realistic price range
could have been Rs 240-250.
Here are our key concerns about the stock, apart from the
valuation itself:
Slow growth: The core consumer facing coffee dispensing
business, the Café Coffee Day (CCD) brand, appears to be
growing under 10%. Barely 16-17% of the IPO proceeds
appear targeted towards expansion. So it is unlikely the IPO
is going to lift growth rates.
Growing Competition: While CCD has a great job of creating
a new category of consumption, and remains the market
leader, it faces strong headwinds. Starbucks, with its JV with
Tata Group will be a formidable competition. Anecdotal
evidence suggests that given a choice, consumers would
rather be seen in a Starbucks than CCD.
Less than half is coffee: CDEL is highly diversified. Non-
coffee is more than 50% of revenue. And this is sectors like
logistics, financial services, realty etc. Those sectors are not
exciting and cannot command same valuations as CCD.
And why exactly other sectors? We are not enthused by
CDEL’s collection of businesses. Why is the promoter not
putting all might behind building a stronger franchise for
CCD?
Stretched Balance Sheet: All kinds of odd investments has
meant that balance sheet is in a bad shape. The IPO will be
used to retire some loans, which it appears were taken to
refinance old loans. The financials till FY15 don’t look like
they were supporting the debt on books.
Management Intent: What if the management continues to
be profligate in future? Why not sell the Mindtree stake,
retire debt, and grow the consumer business better?
Clearly, desire to build an empire is hurting the consume
business. We think there is good chance VGS will continue
to build the investment portfolio. That’s a risk

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NOT JUST A COFFEE COMPANY
Coffee Business only half the pie
The Café Coffee Day or the CCD
business is what CDEL is being
associated with. But that is not all
Coffee Day Enterprises Limited (CDEL) houses India’s leading café
chain Café Coffee Day (popularly referred to as “CCD”). Indeed, for
an average investor, that’s what the IPO is about.
But the Coffee business is just about half of the total revenues.
So how much is the coffee business?
As can be seen, from 88% in FY11, the
main ‘coffee’ business is around 48%
It is not clear if entire CDGL revenue is
from CCD business
The above chart shows the revenue share of Coffee Day Global
Limited (CDGL), a subsidiary. CDGL was earlier known as
Amalgamated Bean Coffee Trading Company Limited.
CDGL houses the CCD franchise, but it is not clear if that is all CDGL
does. Its earlier avatar - Amalgamated Bean Coffee Trading
Company – was also into coffee trading and running coffee
plantations. The IPO prospectus is slightly hazy on this point. It
seems to suggest that trading is now part of the parent CDEL – “We
are also engaged in coffee trading through CDEL and Coffee Day
Trading Limited.”
But let’s say we benefit of doubt to CDEL, and say that entire CDGL
revenue is CCD.
Why are we belabouring this point? Because we think that ideally is
the main attraction in this stock – the CCD business.
But remember, you will be buying some other businesses too
The key think the investor needs to
know is – CDEL is actually a highly
diversified stock. Like say Mahindra &
Mahindra
So 52% of the revenue comes from businesses other than CDGL, its
main subsidiary. The IPO Prospectus puts it this way: In addition to
our coffee business, we operate other select businesses that are
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
FY11 FY12 FY13 FY14 FY15
CDGL/CDEL Sales (%)

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aimed at leveraging India’s growth potential, namely, development
of IT- ITES technology parks, logistics, financial services, hospitality
and ITITES
40 subsidiaries!! What is the scale of this ‘other’ stuff? Oveall CDEL has 40
subsidiaries, besides some significant portfolio type investments.
SOME KEY SUBSIDIARIES
The ‘other’ business
No point getting into 40 subsidiaries. We quickly mention here
some key ones.
Sical Logistics, a listed co CDEL owns 52.83% of a listed logistics company called Sical
Logistics Limited (“SLL”). Sical is listed on the BSE and NSE. This was
acquired in 2010 by a subsidiary Tanglin Retail Realty Development.
Sical’s share price has doubled since
investment
The acquisition has worked out well for CDEL. This company was
acquired at a price of Rs 80 per share. Current market price is Rs
166.
Way2Wealth is the financial services
business
Another important subsidiary is Way2Wealth Securities Private
Limited (“W2W Securities”), in which CDEL holds a 85.53% equity
holding. W2W is a retail focused investment advisory company
which provides wealth management, broking, portfolio
management and investment advisory services.
There are several companies under the W2W business, but that is
normal in financial services business.
Significant minority investment in
software company Mindtree
CDEL also has investments in certain IT-ITES and other technology
companies such as Mindtree in which it owns a 16.75% equity
holding (effective holding being 16.04%) as of June 30, 2015.
As per the Prospectus, investment in Mindtree Limited was first
made through CDTL, currently a subsidiary, in 2000. In 2012, the
stake was hiked from 6.6% to 17.8%, and currently stands at the
number stated above.
Value of Mindtree stake is almost Rs
20B
Mindtree’s market cap currently stands at Rs 118B, so the value of
CDEL’s stake is almost Rs 2000 crore (Rs 20B).
CDEL’s other key investments
 21.9% in Ittiam Systems

4. India-Consumer-IPO Coffee Day Enterprises 14 Oct’15
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 24.43% in Global Edge Software
PURPOSE OF IPO
Largely to repay debt
Almost 60% will go to repay debt.
CDEL is struggling with debt
Only 30% goes into coffee, of that
also, some of it is for refurbishment
Only 17% of the IPO appears to be
targeted at creating growth at this
point
FINANCIAL ANALYSIS
Not in a good shape
We don’t like the quality of financials of CDEL.
There is a growth problem
CCD business has ~46% market share according to the company. It
has grown to a network of 1,538 café outlets spread across 219
cities, as of June 30, 2015.
However, we find there are serious growth issues with this business.
Check the chart below, the revenue is growing at an anaemic pace.
CDGL is growing at 7% CAGR, hardly
exciting
25%
55%
20%
Use of IPO Proceeds
For Coffee Business To Repay Debt General Corp Use
9538
10326
11076
11435
12626
F Y 11 F Y 12 F Y 13 F Y 14 F Y 15
COFFEE DAY GLOBAL REVENUES

5. India-Consumer-IPO Coffee Day Enterprises 14 Oct’15
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The CAGR growth over this period is 7.3%.
Even the non-coffee business is
barely growing in double digits
The non-coffee business is not growing either
In general, growth seems to be a problem for CDEL. Businesses
other than coffee are also growing in single digits.
While, there is a jump in FY12 that is more due to inorganic growth.
This was the year in which Sical become majority owned. In FY14
and FY15, growth rates have fallen sharply.
EBITDA appears reasonable
Profitability of the business is perhaps reasonable.
EBITDA margin of CDGL is around 14-15%, in FY15, the margin
actually decreased to 15%, from 15.6% a year ago. Consumer
businesses tend to have EBITDA margins in 15-20% range, so this
may be reasonable.
The ‘other’ business, which is an amalgam of all kinds of businesses,
has a similar EBITDA margin. But given that it is a mix of businesses,
it is hard to say is say 14% EBITDA margin is reasonable.
Balance Sheet highly stretched
Balance sheet badly stretched The real cause of concern is the balance sheet, which always is a
good indicator of the management mindset. It appears to us that VG
Siddhartha is more of an empire builder, and not quite bothered
about quality of his balance sheet.
Loans appear to have been taken to
repay other loans. Given the losses,
servicing ability was poor before IPO
The company is highly leveraged, with total debt of over Rs 35B. In
FY15, the total finance cost shown in the P&L was Rs 326 crore or Rs
3.26B. This was 13% of revenues. This is a key reason for the
consistent losses the company is showing.
Interest as a % of sales has been rising steadily. Essentially, the
company is not in a position to service debt. From the loan profile
also, this is clear. Quite a few loans have been taken to retire
existing loans.
1225
6014
10747
12362
13158
F Y 11 F Y 12 F Y 13 F Y 14 F Y 15
NON - COFFEE BUSINESS -
REVENUES

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VALUATION OPINION
Overpriced
CDEL has sought a market cap of Rs 6750 crore (Rs67.5B), and a
entity value of around Rs 100B. This is an EV/EBITDA of ~23x
While this may be reasonable if the company was growing well, we
think this company has a growth problem, its track record suggests
it is growing at less than 10%.
We think a good IPO price should
have been Rs 240-250. At current
price, investors should stay away
Looking at sum of parts, our quick view is:
 For CDGL, one can give an EV of Rs 3800 crore, based on 20x
EV/EBITDA
 For the investment portfolio, the EV equivalent would Rs
2000 crore, with a little holdco discount.
 For the ‘other business’ we get another Rs 3000 crore of EV,
giving 15x EV/EBITDA
This leads to a total EV of Rs 8000 crore (Rs 80B). This is about 20%
less than the EV the company is asking for.
In market cap terms, taking out Rs 30B of debt, essentially we think
the company should get a market cap of Rs 5000 crore or Rs 50B
instead of Rs 67.5B being asked for.
This translates into a price of ~Rs 240 per share.

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FINANCIAL DETAILS
Consolidated P&L
(INR M) FY12 FY13 FY14 FY15
Net Sales 16,340.0 21,823.0 23,797.0 25,784.0
RM 9,213.0 12,112.0 13,258.0 13,033.0
Power&F 289.0 334.0 358.0 409.0
Salary 1,603.0 2,045.0 2,263.0 2,542.0
Other OPC 361.0 405.0 457.0 504.0
G&A - - - -
Sales&D 2,638.0 3,359.0 3,908.0 4,733.0
Misc 296.0 492.0 511.0 539.0
Total Exp 14,447.0 18,827.0 20,607.0 22,032.0
PBDIT 1,892.0 2,996.0 3,190.0 3,752.0
Other Inc 686.0 496.0 658.0 694.0
Int 1,235.0 2,104.0 2,778.0 3,262.0
Dep 1,472.0 2,026.0 2,485.0 2,655.0
PBT -128.0 -638.0 -1,416.0 -1,472.0
PAT -176.0 -739.0 -1,381.0 -1,595.0
Consolidated Balance Sheet
(INR M) FY12 FY13 FY14 FY15
Equity 154.0 159.0 159.0 162.0
Networth 6,178.0 6,498.0 5,560.0 5,323.0
Minority Interest 6,341.0 4,883.0 4,980.0 5,118.0
Total Debt 25,155.0 25,980.0 35,489.0 32,929.0
Total Liabilities 37,674.0 37,361.0 46,029.0 43,370.0
Gross Block 24,565.0 32,018.0 35,176.0 37,007.0
Less: Accumulated
Depreciation
6,751.0 8,153.0 10,308.0 12,224.0
Net Block 17,814.0 23,865.0 24,868.0 24,783.0
CWIP 6,325.0 7,493.0 8,410.0 9,973.0
Total Fixed Assets 24,139.0 31,358.0 33,278.0 34,756.0
Investments 8,802.0 10,407.0 11,006.0 10,972.0
Net Current Assets 4,951.0 -4,117.0 1,998.0 -2,101.0
Deferred Tax -218.0 -287.0 -253.0 -257.0
Total Assets 37,674.0 37,361.0 46,029.0 43,370.0

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Ratios
FY12 FY13 FY14 FY15
Growth (%)
Sales 51.8% 33.6% 9.0% 8.3%
PBDIT 43.0% 58.4% 6.5% 17.6%
PBT -185.9% 398.4% 121.9% 4.0%
PAT -366.7% 319.9% 86.9% 15.5%
Margins (%)
PBDIT 11.6% 13.7% 13.4% 14.6%
PAT -1.1% -3.4% -5.8% -6.2%
Capital Efficiency (%)
ROE -2.8% -11.7% -22.9% -29.3%
ROCE 3.5% 3.9% 3.3% 4.0%
Leverage
D/E (x) 4.07 4.00 6.38 6.19
Debt/Ebitda 13.30 8.67 11.13 8.78
Working Capital (days)
Inventory t/o 75.8 81.1 77.6 78.8
Debtors t/o 46.0 48.0 45.4 43.4
Payable t/o 307.0 329.5 347.6 373.9
WC Cycle -185.2 -200.4 -224.6 -251.7

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