Avoid Cafe Coffee Day IPO

Coffee and related businesses accounted for approximately half of consolidated revenues of CDEL. The remaining came from unrelated businesses such as development of IT- ITES technology parks, logistics, financial services and hospitality services. Investors who are only interested in pure coffee play and QSR Segment will be disappointed with exposures to other unrelated businesses which have their sector-specific risks.

On consolidated levels, compound annual growth rate (CAGR) for the revenue for FY13-FY15 has slowed to 8.7% from around 43.3% CAGR for FY11- FY13.

CDEL posted a consolidated net loss for three out of the past five financial years and in the three-month period ended June 2015 as well.

Operating profit performance is reasonable with EBITDA Margin range of 13% - 15% in previous five financial years. However, with a debt-equity ratio of 8.5 time for quarter ended 30 June 2015, high finance cost is burden for CDEL. Given the high debt, it's hardly surprising that one of CDEL's objectives is to utilize nearly Rs 6.3 bn (~55%) from the IPO proceeds towards loan repayments. This will reduce overall debt by about 16%. However, this will not help much in lowing the leverage levels as total debt stands at around Rs 38 bn as on 30 June 2015. With revenue growth tapering and competition increasing, it will be difficult for the company to maintain growth momentum.

Taking into account these factors, we recommend investors to AVOID the IPO.