Coffee day IPO. Subscribe or not…

1320676429957Coffee Day IPO that is opening for subscription on 14th October 2015 to raise 1150 Crores from the markets. The offer is at a fixed band of 316-328. Coffee Day will become a new kind of business to get listed in the markets, should the retail investors go for this investment?

Some of the statistics that can help us decide on, whether to investment or not.

  1. This company is not a single business entity. It is a group that consists of Financial Services, Logistics, IT-ITES business, Hospitality and also combined with the investments in Mind Tree.

First suspicion arises here, only businesses that have core competency have more value among mature investors. This model is                              confusion. Why all these entities have been merged?

  1. Apart from promoter ownership of 92.74% in the company the other major shareholders are KKR & Nandan Nilekani. KKR being the shareholder is good, as this company is known for some good selection of investments, while all the choice they make may or may not be correct. Nilekani being invested is not a surprise.
  2. The company has 1472 outlets across 209 cities having a market share of 46% of the Indian market. There are plans to open 45 new stores each year for the next 3 years. Something we have to note is that, the number of stores that are being closed down for various reasons is about 25 in the last 3 years and it expected to increase to 40, which means that the growth is going to be negligible. And so many franchisees moving out of the business will create a negative publicity to the company and hinder growth.
  3. Is the business making profit?

FY15, loss is ₹77 Crores. In FY14, the loss was ₹21.40 Crores. Phenomenal increase of losses is not good. In the nine month period last              fiscal, the company had losses of ₹75.20 Crores which in the last quarter got increased while it was lesser loss.

Why should someone invest in a loss making company? Well versed investors will not.

4.         The company has a total net debt of ₹2863.83 Crores, of this ₹500 Cr is going to be cleared after IPO. To service this debt alone the                        company has to make a minimum of ₹350 crores profit per annum. Even if the company manages to have a 25% Operating Profit                          Margin like the IT companies, which is a distant possibility, the company’s sales should be ₹1400 Crores which looks like a distant                    dream, at least for the immediate future. Still the Profit will be zero or negative.

Given a choice, we will never think of owning this business. So, how will this issue sail through? The public obviously and some institutional investors like Mutual Fund houses who take to the fancy of owning this business. The decision will just be on the basis of the visibility the company has through its outlets.

This issue will kick start the IPO losses in the current bull market. IN case the stock performs well in spite of all these issues, never get in, lured by the stock performance in the markets. All the hype will also be due to the brand presence craze, if it is.

Please be advised that, a company that is making losses from its business will not be able to command good stock price over a longer period. It will very soon adjust to the actual valuation of the company, which will be the fair valuation. The valuation the company has made for the purpose of IPO will vanish into thin air very soon.

Similar would be the case in future when a number of startup’s will hit the market in a couple of years, where the hungry or greedy investors, those that are pumping in money to the startups today will take exit from their investments. If the public gets lured, they are struck for a life time, losing their hard earned savings.

This IPO should have come into our market a little later, it is unfortunate that it is hitting the market, even before the other startup’s are even thinking of getting in. Whatever happens is for good.

Do not get lured and get struck. There are a number pf businesses which are having very good prospects, invest in them and grow your wealth. Later if Coffee Day becomes profitable, then we can think of investing in it. For now, let it work its way to profitability.

-Views expressed are of the author & may not coincide with industry views. Investment decisions shall not be made based on the writeup.