Coffee Day Enterprises’ (CDEL) apparently strong coffee business of 1,518 stores across 219 cities is diluted in the myriad of other unrelated capital intensive businesses; coffee retailing accounts for just 30% of capital employed.

Despite being the largest coffee retailer, the coffee business has posted very little operating leverage – ebitda CAGR of 14%, lagging revenue CAGR of 16%. Gross block turns of the coffee business have averaged 1x over FY12-15 with a near-negligible RoCE (pre-tax RoCE of 3%). The scope to improve RoCE (>10% excluding taxes) hinges on high like-to-like (LTL) growth, translating to higher LTL margin, which we believe 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 (40% of stores).

The company’s structure (40 subsidiaries) and 5 diverse and unrelated businesses make the company’s structure that of a conglomerate; moreover, all the businesses have a history of poor RoCE. Capital allocation to and utilisation of free cash flows from the coffee business to non-coffee businesses is a risk. Undisputed leader in café business with integrated back-end CDEL through its subsidiary CDGL operates the largest coffee chain business with over 1,500 stores across 219 cities in India with a market share of 46%.

Given the multitude of asset intensive and unrelated businesses, the valuation of Coffee Day Enterprises (CDEL) should be approached in an SOTP manner; we refrain from giving a view on the overall enterprise valuation but given our understanding of the retail business, its missing profitability despite 15 years in existence and using a few relative valuations leads to an enterprise valuation of R27-38 billion, using a 15-20x FY15 EV/ebitda multiple.

Restaurant businesses (such as Jubiliant Foodworks-Dominos Pizza, Westlife Development-McDonalds and Speciality Restaurants) in India (with a brand recall as high as that of CCD) fetch a high multiple (40x FY15 EV/ebitda) given high profitability and RoCE; meanwhile global small QSR formats in developing nations trade at 14x. Whilst valuing CDEL’s coffee business, one needs to consider the fact that the company is exposed to not only high competition from global entrants but also to the rising capital/operating costs/needs which will make it difficult for it to post respectable RoCEs.

CEDL is a holding entity with varied and diverse business interests, ranging from Café chains to logistics to real estate and financial services. The coffee business accounted for about 51% of CDEL’s turnover and 55% of ebitda over FY13-15. The coffee business accounts for only 30% of the capital employed, with real estate, hospitality financial services and logistics business (Sical Logistics – Listed) accounting for the rest.

Share price of DB Realty soared 11.21 per cent to Rs 69.95 on BSE after the company informed stock exchanges that its subsidiary has decided to enter in a joint venture agreement with Vishwaroop Estates for development of a project in Bandra, Mumbai. (Express Photo)

Share price of DB Realty soared 11.21 per cent to Rs 69.95 on BSE after the company informed stock exchanges that its subsidiary has decided to enter in a joint venture agreement with Vishwaroop Estates for development of a project in Bandra, Mumbai.

Shares of DB Realty opened at Rs 62.30 and hit a high and low of Rs 73.30 and Rs 62.30 during the day. Sensex closed 57.58 points down at 26,846.53.

Around 3.53 lakh shares exchanged hands on BSE on Tuesday as against an average daily volume of 76,000 shares in the past two weeks.

In a BSE filing, DB Realty said, “MIG (Bandra) Realtors & Builders, a subsidiary of DB Realty has decided to enter into a joint venture (JV) agreement with Vishwaroop Estates and Developers (Radius Group, a Sanjay Chhabria Venture) for the development of MIG CHSL Group I, Gandhi Nagar, Bandra (E), admeasuring approximately 20,149 square meters, whereunder, both parties would make investments to meet certain agreed cost lines and share the free sale area in an agreed ratio. The project will be co-branded.”

The total BUA of the project is expected to be over 2.4 million square feet (sq ft). The project land is completely vacant and piling work has commenced. All approvals required at this stage have been received and a formal launch of the project is scheduled in mid-November around Diwali. The revenue from the project on completion is expected to be in the region of Rs 3500 crore.

For the quarter ended June 2015, the company posted net loss of Rs 1.90 crore against net loss of Rs 7.23 crore in the corresponding quarter a year ago. Gross sales of the company jumped 1.45 year-on-year to Rs 62.05 crore.

DB Realty is a real estate development company that focuses on residential, commercial, retail and other projects, such as mass housing and cluster redevelopment, in and around Mumbai.

Shares of Reliance Capital surged 6 per cent on Tuesday after Japan’s Nippon Life acquired 14 per cent additional stake in fund house Reliance Capital Asset Management Company for Rs 1,196 crore, hiking its stake to 49 per cent. ( Express photo)

Shares of Reliance Capital surged 6 per cent on Tuesday after Japan’s Nippon Life acquired 14 per cent additional stake in fund house Reliance Capital Asset Management Company for Rs 1,196 crore, hiking its stake to 49 per cent.

The stock jumped 5.83 per cent to Rs 401.60 on BSE. On the NSE, shares of the company gained 6 per cent to Rs 401.85.

This pegs the valuation of RCAM, which runs Reliance Mutual Fund and is part of Anil Ambani led conglomerate Reliance Group’s financial services arm Reliance Capital, at Rs 8,542 crore or USD 1.3 billion.

Nippon Life Insurance (NLI), which holds 35 per cent stake in RCAM at present, today signed definitive agreements to increase its stake to 49 per cent in the Reliance Group company, RCAM said in a statement.

The Boards of Directors of both NLI and RCAM have approved the increase in stake by the Japanese partner.

The Japanese company will invest an aggregate value of Rs 1,196 crore (USD 184 million) to acquire an additional 14 per cent stake in RCAM, in tranches, to reach a 49 per cent stake.

The transaction pegs RCAM’s valuation at Rs 8,542 crore (USD 1.3 billion), the highest valuation till date for any asset management company in the country, the statement claimed.

Shares of Suven Life Sciences gained as much as 6 per cent in the intraday trade on Tuesday after the company informed BSE that it has been granted patent by Australia, China, Europe, South Korea and the US (Photo: Reuters)

Shares of Suven Life Sciences gained as much as 6 per cent in the intraday trade on Tuesday after the company informed BSE that it has been granted patent by Australia, China, Europe, South Korea and the US for a drug used in the treatment of neuro-degenerative diseases.

At 12.35 pm, Suven Life Sciences shares were trading 4.45 per cent up at Rs 291.30. The scrip opened at Rs 280.70 and had touched a high and low of Rs 295.90 and Rs 278.90, respectively, in trade so far. Sensex was down 0.16 per cent at 26,861.20.

The patents are valid until 2031, 2030, 2031, 2030 and 2031, respectively, Suven Life Sciences said in a BSE filing. Suven Life CEO Venkat Jasti said: “We are very pleased by the grant of these patents to Suven for our pipeline of molecules in CNS arena that are being developed for cognitive disorders with high unmet medical need with huge market potential globally.”

With these new patents, Suven has a total of 22 granted patents from Australia, 19 from China, 17 from Europe, 17 from South Korea and 23 from the US.

For the quarter ended June 2015, the company posted net profit of Rs 20.23 crore, down 41.76 per cent, against Rs 34.74 crore in the corresponding quarter a year ago.

In the past one year, the share price of Suven Life Sciences jumped 46.48 per cent to Rs 278.90 on October 12. Sensex gained 1.97 per cent during the same period.

Suven Life Science is a biopharmaceutical company focused on discovering, developing and commercializing novel pharmaceutical products, which are first in class or best in class CNS therapies through the use of GPCR targets.

The Coffee Day Enterprises IPO will open for subscription on October 14 and close on October 16. (PTI)

Coffee Day Enterprises (CDEL) is entering the market with an initial public offer (IPO) to raise Rs 1,150 crore at a price band of Rs 316-328 per equity share. The company owns the popular coffee chain – Café Coffee Day – and is the largest coffee retail company in India. The company also has diversified business interests through its subsidiaries across segments like logistics, financial services, hospitality, and technology parks.

The Coffee Day Enterprises IPO will open for subscription on October 14 and close on October 16.

The entire issue is for fresh equity which would be used by the company to finance the expansion of its coffee business, repayment and pre-payment of loans to the parent company as well as subsidiary and utilise the rest for general corporate purposes. At present, its promoters hold 63.3 per cent stake in the company; post-issue the shareholding will come down to 52.6 per cent.

CDEL, on a consolidated basis, has reported around 30 per cent CAGR in revenue over FY2010-15 to Rs 2,479 cr. On the EBITDA front, the company reported a 26 per cent CAGR over the same period. However, on account of higher depreciation and interest costs, the company incurred a consolidated net loss of around Rs 87 cr in FY2015.

Data Source: Angel Broking

Here is what experts say on the IPO of Coffee Day Enterprises:

ICICI Securities

CDEL has the largest number of consumer touch points compared to any other company operating in the café retail space. With a sprawling network of 1,538 Café Coffee Day outlets across 219 cities in India and 561 Coffee Day Xpress kiosks, CDEL is better positioned than its competitors to capture the benefits of rising middle class income levels, which would aid in increasing discretionary consumer spending.

ICICI Securities believes CDEL, on the back of the Café Coffee Day business, would be a major beneficiary of a revival in urban discretionary consumption. At the price band of Rs 316-328, a target market cap and EV at the upper end of the price band would be Rs 6,756 crore and Rs 10,510 crore, respectively. Given the investment value of the IT, logistics, real estate & hospitality businesses is Rs 5,025 crore, the coffee business is available at 4.3x EV/sales which is around 15 per cent discount to global coffee chain Starbucks. The brokerage house recommends ‘Subscribe’

Angel Broking

CDEL has diversified across other businesses, which however have failed to deliver impressive financial performances so far. Considering negligible profits/reported losses of subsidiaries and the complex holding structure of the company, Angel Broking believes that the IPO is priced at a slightly higher valuation. Thus, the brokerage house recommend a ‘Neutral’ on the issue. 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.

Bonanza Portfolio

The brokerage house advises investors to avoid subscribing. Most of the proceeds will be used to repay the debt and less than 50 per cent will be used for expansion plans of its coffee business. Moreover the consolidated net loss has witnessed a rising trend in last 3 years. We expect the issue is valued at par and there would barely be any significant gains on listing and going forward.

Sharekhan

At the higher end of the issue price, adjusting for the valuation of the listed plays (SLL and Mindtree) along with IT play, the coffee business is available at 25-26x its FY2015 EV/EBITDA which is in line with some of the listed comparable companies and thus is not cheap. However, given the strong brand image, extensive distribution reach and growing disposable income in India, the company is an attractive play on urban discretionary consumption and investors could look at it with mid-to-long term investment horizon.