In an interview to CNBC-TV18, VG Siddhartha, CMD of Coffee Day Enterprises spoke about the IPO listing and business strategy going forward.
Below is the verbatim transcript of VG Siddhartha’s interview with Latha Venkatesh & Sonia Shenoy.
Latha: Don’t you think that coming up with pure coffee business initial public offering (IPO) would have been better than a holding company IPO where there is a complex structure and exposure to business which investors may not want?
A: I raised money five years back from three great private equity players —KKR, Standard Chartered Bank and New Silk Route. I raised the money in the holding company so there they own 34 percent of the equity in this company and they are not disinvesting. The money that we are raising of Rs 1,150 crore, directly going to the company; in that almost Rs 625 crore will go to the repayment of the debt of holding company and coffee company. Remaining Rs 500 crore will go for the coffee business expansion.
We have clearly told everybody that the money raised in next five years will go for the coffee business expansion. So, other businesses, Mindtree and Sical Logistics put together is worth around Rs 2,500 crore in our balance sheet, but we are not going to put one pie to any of these businesses or they need any of our money because they are listed.
Sonia: You put all the money in the coffee business so why are you doing the IPO for the entire holding company?
A: I clearly told you that I got a 34 percent shareholders in my company who also own other businesses. I had promised them five years back that I will take this company public.
I believe we can build a great coffee business and any of the investments, if there is any great opportunity to grow the coffee business, we will take a right call to disinvest and grow the coffee business. As of today next two to three years I don’t see any opportunity because we are sitting with so much cash now after the issue.
Latha: Then why are you raising money? You could easily have sold 16 percent stake in Mindtree and realised Rs 2,000 crore. That would be double the amount of the IPO money.
A: It is not strategic, it is the investment. Just to tell you, Mindtree has given 40 percent internal rate of return (IRR) to me in last 16 years. It is not a bad investment, if I am right. I know I am not a great investor but it has given me a 40 percent investment and I feel it is doing well and I will be there.
At any time Mindtree or Sical or Tanglin are not going to do well or give me 15-20 percent IRR for a longer time, I will take a right call as to what is good for me and my investors.
Sonia: Will you at all look at selling the stake that is there in Mindtree, any time in the near future.
A: As I told you other than coffee business anything which is not going to grow for 15-20 percent in next two to three years I will take a right call as to what is good for the investor and me.
Latha: Coffee retailing business of the company accounting for 50 percent of its revenues is also growing in single digits. FY15 same sales growth was 3.06 percent, now is that good? What growth would you expect for coffee business going by your standards?
A: Last year all the food guys showed anywhere between 6 and 18 percent negative growth. We are the only brand which showed the positive growth. Just for your information last three months whatever the red herring prospectus (RHP) we have filed, we have shown that we have grown at 6.4 percent same store growth.
Other than that our office coffee business, we are growing at 30 percent since last five years. One year in a 20 year game or one quarter, I don’t think it really matters. We are interested in building a great brand out of India. This brand is owned by the company, it is an Indian brand and we are happy to tell you in the last survey of the most exciting brands of India, the top 25, we are in the top four Indian brands.
Sonia: I don’t have any doubt in the fact that the brand is very strong but what about the way forward?
A: You wait and watch for a slightly longer-term. Brand building is a game. Take any US brand; it takes 50 years to build a brand. You can’t expect a result in 19 years. In 19 years, we are pan India operating in 219 cities of India and 12,500 corporate of India. I think me and our team has done a great job. I think we believe we can take this brand to the next level in couple of years.
Latha: The aggregate net loss in the company is nearly Rs 205 crore in the last 39 months, why is that?
A: It is all depreciation loss. Rs 198 crore is the profit we made last year. After interest, cash profit before depreciation was Rs 137 crore. We have put in 800 stores last four years and we have put in 20,000 vending machines, all those assets are sitting in books and that is the reason it is depreciation.
If I had not shown that depreciation, there would have been enough profit coming there. We believe in building the brand that is the reason we have taken so much asset in the company. Henceforth that is the reason we are putting only 135 stores to improve the profitability. I am very sure that very soon we will show good profits.
Sonia: The Company’s four years revenue compound annual growth rate (CAGR), the last four years has been about 6.3 percent. How much growth do you anticipate in the next say one to three years and which vertical are you the most upbeat on?
A: You are wrong; in retail we have grown last five years compounded 16 percent. We have got Rs 300 crore of the procurement in the export business. Purposely we have not grown that business because the margin in that business is not great. It is only 2.5-3 percent margin.
However, our retail business last five years compounded growth is 16 percent. Out office coffee business growth for last five years is 30 percent. So, if you remove the export we can easily we can see 16-17 percent growth in our books.
Sonia: So 16-17 percent growth is that what you are anticipating going ahead?
A: No, I can’t predict the growth today. We will discuss one day after the issue.
Latha: Then give us an idea of how the net debt will look post IPO and over the next two years?
A: Holding company will have only Rs 500 crore debt and the coffee business will have Rs 125 crore debt. However, coffee business we are infusing more than Rs 290 crore for expansion. This means in coffee business there won’t be any debt but holding company will have Rs 500 crore debt and investment dividend is good enough to take care of that Rs 500 crore debt.
Latha: What are you going to do with leasing IT Park and hospitality business. They don’t seem to be your core investment?
A: We are getting Rs 120 crore rental income. We have got 3.2 million square feet already occupied by the client. So, we are not real estate guys but we think that business also will grow at a decent pace. Other businesses are very small let us not worry about it.
Latha: Even if I compare the coffee retailing business of Coffee Day with Jubilant FoodWorks, your valuations are not exactly looking attractive?
A: I personally feel you can’t compare any franchise brand with company owned brand. Ours is a company owned brand. This brand can be Indian pride brand in next 20 years. Please don’t compare any franchise brand. I got respect for them but it is a franchise brand. However, company brand takes money and time to build own brands.