Ambit points out that capital cost of store addition in context of the business is high citing that aggressive store addition over the years has seemingly diluted store portfolio.
Even though it is one of the most-anticipated initial public offer, analysts do not seem to be too excited about Coffee Day Enterprises, which owns the popular brand Café Coffee Day. The company is planning to raise Rs 1150 crore via the IPO which has opened on Wednesday and will close on October 16. It has fixed a price band of Rs 316-328 for the share sale. The stock is likely to be listed on bourses by November 2.
So, why is it better to avoid?
With a recommendation to avoid, Ambit Capital says CDEL is diluted in the myriad of other unrelated capital intensive businesses while coffee retail accounts for just 30 percent of capital employed. It says that there is very limited scope to increase return on capital employed (RoCE) as it depends on high like-to-like (LTL) growth, translating to higher LTL margin. But it, too, has limited head room, as there are limited operating levers, fixed costs are already low and pricing growth has limited headroom given the target audience of the value conscious youth segment rates this below average in metros.
Ambit also points out that capital cost of store addition in context of the business is high citing that aggressive store addition over the years has seemingly diluted store portfolio. In FY15 it has shut 411 (over 40 percent) of the Coffee Day Kiosks. "Therefore, capital allocation in store openings has not been at its optimum. The average same-store-sales growth (SSSG) over FY12-15 was 4 percent. As a corollary, there was a spike of 11 percent in average sales per day (ASPD) in FY15 in the absence of a similar spike in SSSG due to closure of underperforming stores,” the brokerage says in a note.
As per CDEL IPO prospectus, 36, 42, 44, and 175 cafés were closed down in FY 2012, 2013, 2014 and nine month period ended December 31, 2014 respectively. “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,” Coffee Day says.
Agrees Hem Securities, that it is better to avoid the CDEL IPO. It reasons that valuation looks steeply priced at current level even though the company has strong promoter background, brand name and pan India presence. Also what worries the brokerage is its consecutive losses from last few years which doesn’t instill confidence for investment in short term.
However, in long term investment is advisable only when company will start posting profits, Hem Securities adds. On consolidated basis, the company incurred a net loss of Rs 77 crore in FY15, up from Rs 21.40 crore in year-ago period. In the nine-month period ending December 2014, the company had a loss of Rs 75.2 crore.
Angel Broking is neutral on the issue. The brokerage also feels that the IPO is priced at a slightly higher valuation given negligible profits/reported losses of subsidiaries and complex holding structure of the company. "Investors having conviction in the long term growth prospects of the company and wanting to tap this perceived opportunity could consider waiting for a possible correction in the stock price post the listing of the IPO,"it says in a note.
However, ICICI Direct is impressed by the issue and believes that Café Coffee Day business, would be a major beneficiary of a revival in urban discretionary consumption. It says that given the investment value of IT, logistics, real estate & hospitality businesses, the coffee business is available at 15 percent discount to global coffee chain Starbucks.
The brokerage says its coffee and related business segment, which contributed 51.6 percent to total sales in FY15, has also grown at a steady pace of 7.6 percent CAGR in FY11-15. CDEL has also maintained competitive prices across product offerings at its Café Coffee Day outlets vis-à-vis its peers, which has helped drive revenues for the coffee business.
ICICI Direct expects Café Coffee Day to be a direct beneficiary of premiumisation in the beverages industry and growing brand consciousness among the youth on the back of an increase in consumer preference for quality products.
Aditya Birla also suggests to subscribe with a view that the stock is priced closer to its fair value at its upper price band. It has set an one year forward September 2016 target at Rs 376 per share. What it likes about the issue is its pan India presence, strong brand name and being only listed paper in the space.
The brokerage also feels that CDEL will be able to furtherleverage and capitalise on the growth opportunities in coffee vending and retailing businesses.
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