Coffee Day makes tamest debut in three years

Stock hit an intra-day low of Rs 266 after listing at Rs 317, 3% below its issue price on the NSE

Shares of Coffee Day Enterprises (CDE), the parent company of Café Coffee Day, closed 18 per cent lower at Rs 270 on Monday, against its issue price of Rs 328 a share on the National Stock Exchange (NSE). This was the weakest debut in the past three years.

Earlier in the day, the stock hit an intra-day low of Rs 266 after listing at Rs 317 — three per cent below its issue price on the NSE. On the BSE, the stock listed at Rs 313 a share — five per cent below its Initial Public Offering (IPO) price, before closing at Rs 270.

Of 16 new issues listed during 2015, eight closed below their issue prices on listing day, Capitaline Plus data show.

A word of caution

Given the steep pricing at which the Coffee Day Enterprises IPO was priced, most analysts had advised investors to give it a miss. The financials, too, were a cause for concern. Coffee Day Enterprises saw its net loss widen from Rs 21 crore in FY13 to Rs 87 crore in FY15. According to reports, at the price band and a fully diluted equity base, the IPO was priced at 21-21.5 times the FY15 ratio of enterprise value (EV) to earnings before interest, taxes, depreciation and amortisation (Ebitda).

“Considering negligible profits/reported losses of subsidiaries and the complex holding structure of the company, we are of the view that the IPO is priced at a slightly higher valuation. 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 after the listing of the IPO,” cautioned Amarjeet S Maurya of Angel Broking in a pre-IPO note.

Abhishek Ranganathan, an analyst tracking the company with Ambit, too, had maintained an 'avoid' rating.

“Given the multitude of asset-intensive and unrelated businesses, the valuation of CDE should be approached in an SOTP (sum-of-the-parts) manner. Whilst valuing CDE’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 (return on capital employed),” he had said in a note.

Strategy

Given the steep fall on the listing day, G Chokkalingam, founder and managing director at Equinomics Research & Advisory, suggests buying the stock from a long-term perspective.

He believes the fall is mainly on account of continued weakness in the equity market, ever since it opened the public issue and also due to a lack of valuation comfort in the short-term.

“The offer was slightly overvalued at IPO, and left nothing much for the short-term investors. However, for the long-term investors, this could be a good opportunity as it now trades around 1x book value and after this correction, its EV-to-Ebitda at 16x is comparable to the valuation of Starbucks. Here, around Rs 65 per share is attributed to the value of its investment holdings. With anticipated growth in revenues and profits, I am sure the long-term investors with time horizon of two to three years would make significant return by entering at the current price,” he says.