Networth November 2015

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Why does any firm go for an IPO?
All companies are looking for easy money. Although public markets demand increased
scrutiny, a companys valuation can increase multiple folds in a short time frame. The firm is
also perceived as less risky and may allow for borrowing at cheaper rate in future. After getting
listed the companys shares are more liquid and it can also start offering ESOPs.
A private equity player or a venture capital fund looking to exit its investment would also drive
the IPO of a firm.

Indian IPO Market

The year 2015 has seen an uptake in the IPO market, with IPO of both low-cost airline Indigo
and coffee chain operator Coffee Day Enterprise oversubscribed.
Indigo launched ~Rs.3,000cr IPO in Oct this year, which was oversubscribed ~6x. This was
primarily led by healthy response from QIB who oversubscribed it about 18x, followed by HNI
at 4x and retail investors at 0.9x. The company had declared a price band of Rs700 to Rs765
per share for offer. The subscriptions were at the upper end of this band, signalling the
willingness of investors to pay more in hopes of higher returns. This was in fact one of the
most awaited IPOs and the largest in about 3 years. In 2012, Bharti Infratel, a telecom tower
infrastructure provider, was the last big IPO that raised ~Rs.4,200cr.
Coffee Day Enterprise, parent company of CCD, which also launched its Rs.1,150cr IPO
earlier in Oct, received a relatively tepid response, with investors bidding for 1.8 times the total
shares on offer. One reason for the relative lack of confidence in CDEL, among investors, was
that on offer was the holding company of CCD and not the pure play coffee retail business.
In the past, IPOs have received better investor interest. In August 2014, Snowman Logisticss
IPO was oversubscribed 60 times.
These IPOs mark the revival of the IPO market, which had seen little activity in last few years
given poor investment sentiments and lacklustre economic growth. There were a total of 3
companies in 2013 and 6 in 2014 raising about Rs.1,300cr in each year. A total of Rs.6,938cr
and Rs.5,966cr was raised in 2012 and 2011 respectively. The highest-ever mobilisation
through IPOs in a single year was in 2010 at Rs.37,535cr.
There are several others forthcoming with their IPO such as L&T Infotech, the IT unit of
engineering and construction giant L&T, eyeing Rs.2,500cr, Alkem Laboratories Rs.1,5003,500cr, and Matrimony.com Rs.600-700cr. Others in the queue include Team Lease
Services, VLCC Health Care, Dr Lal Pathlabs, Matrix Cellular, Infibeam Incorporation, Parag
Milk Foods, Narayana Hrudayalaya, RBL Bank and Quickheal Technologies.

Networth November 2015

Interglobe Aviation (Indigo) IPO Review

Indigo has been one of most successful airline operators in India, with revenue and net profit
of Rs.14,300cr and Rs.1300cr respectively. This represents a 38% and 22% revenue and net
profit CAGR in last 5 years. In fact, it is one of the only two major airlines that made a profit in
the 2015 fiscal year. Apart from regular passenger revenue from fare, Indigo also earns a
significant portion of its revenue from trading in aircraft. It does not own its aircrafts, rather
buys it at discount from Airbus and enters into sale and leaseback transaction, thus earning
the difference in the price of the aircraft at the time of delivery and price at the time of placing
the order.
Fast growing Indian aviation market
India has one of the lowest air travel penetration rates in the world of 0.08 annual seats per
capita vs. 0.35-0.65 in developing countries like Brazil, Turkey, Indonesia and China. This
under-penetrated market has been dominated by Indigo (an LCC player) with a market share
of 37.4% as on August 2015 (up from 12.5% in FY09). Further, pending orders of 430
A320neos will help the company to grow its fleet at 11% CAGR in the next seven years and
maintain leadership in the Indian aviation market.
6

Annual domestic seats per capita

0
India

China

Mexico Indonesia Columbia Turkey

Market share
Indigo (%)
Jet Airways (%)
Air India Ltd. (%)
Spice Jet (%)
Go Air (%)
Kingfisher (%)
Others (%)
Total (%)

FY 09

FY 10

Brazil

FY 11

Malaysia

FY 12

US

FY 13

Australia Norway

FY 14

FY 15

13
28
16
10
3
28

15
26
17
13
5
23

18
26
16
14
6
20

20
27
16
15
6
16

27
26
17
19
8
2

30
24
18
19
9
0

34
22
17
15
9
0

2
100

2
100

0
100

0
100

0
100

0
100

2
100

Operational efficiency
The magnitude of order of 100 aircraft in 2005 has enabled Indigo to have a structural cost
advantage by reducing cost related to acquisition, maintenance and operation of aircraft.
Further, high aircraft utilisation and lower turnaround time have helped Indigo to maintain
lowest cost in the industry and places it in a better position compared to its peers. As the
A320neos are 15% more fuel efficient, the company will also be able to have a competitive
edge over its peers in terms of maintaining lower cost.

Networth November 2015

Fuel cost per ASK in US cents

3.6

Total cost per ASK in US cents

12

3.4

10

3.2

2.8

2.6

2
Spice Jet

Indigo

Jet
Air India
Airways

Go Air

Indigo

Go Air

Spice Jet

Jet
Air India
Airways

Indigo has the lowest cost per available seat km (ASK) within its peer group.
Valuation
The proposed issue price band of Rs.700-765 implies an EV/EBITDA of 13.6-14.8x and
EV/sales of 1.8-2.0x which factors in all major positives of lower than industry cost structure,
low crude prices and sustained mid-teen ASK growth. The valuation also commands a
premium over select global peers that are trading at average EV/sales of 1.5x and EV/EBITDA
of 9.3x.
EBITDA (%)

PAT (%)

ROCE (%)

ROE (%)

FY15

FY13

FY14

FY15

FY13

FY14

FY15

FY13

FY14

FY15

FY13

FY14

FY15

EV/
Sales

EV/
EBITDA

EasyJet (UK)*

14.3

15.5

17.4

9.3

10.0

11.5

15.0

16.9

NA

20.9

21.5

NA

1.4

7.9

Ryan Air

21.5

20.1

25.1

11.7

10.4

15.3

9.6

9.1

12.6

17.3

15.9

23.7

3.1

12.4

Wizz Air

NA

NA

16.6

NA

NA

11.9

NA

NA

52.6

NA

NA

59.1

0.7

4.3

WestJet*

16.4

17.7

20.3

7.4

8.0

9.3

12.8

11.8

NA

17.6

16.9

NA

0.7

3.6

Norwegian*

9.6

(3.4)

9.7

2.0

(5.4)

3.3

5.9

(6.0)

NA

12.4

44.0

NA

1.2

11.9

Indigo

9.5

4.4

13.1

8.3

4.1

9.1

20.3

4.5

20.0

201.4

112.5

304.1

2.0

15.4

Average

14.2

10.8

17.0

7.7

5.4

10.1

12.7

7.2

28.4

53.9

24.6

129.0

1.5

9.3

Key risks and concerns

Increase in crude oil prices
Crude oil forms a major part of operating expenses of the company. Fuel cost has fluctuated
from 35.0% to 52.0% (% of sales) over the past 6 years, which has hit the companys
profitability. Any sharp increase in prices will impact the profitability.
High competitive intensity
The airline industry is characterised by low entry barriers given the availability of leasing
options and external finance. Further, over the past, the industry has faced intense price
wars. Any increase in competitive intensity will adversely impact companys profitability.
High dividend payout just before IPO
A high dividend payout projects a positive image among investors and maintains healthy
return ratios. Indigo follows the same strategy. Over FY11-15, it has paid 94% of cumulative
PAT as dividend. However, during Q1FY16, the company cashed out more than it earned
through dividend (including tax) of Rs.1,200cr. This resulted in negative net worth during
Q1FY16 and raised concerns among investors. Indigo could have reduced the debt by the
same amount just before the IPO, given the volatile nature of the airline industry. If the
company continues to opt for the aggressive dividend payout strategy, then this step will
not be viewed as a major concern.

Networth November 2015

Coffee Day Enterprises IPO Review

Coffee Day Enterprises (CDEL), the parent company of the Coffee Day Group, is a Bengalurubased business organisation with diversified business interests in the areas of coffee,
technology parks, logistics, hospitality and financial services. The company has 40
subsidiaries. The company operates in the chained caf segment in India under its flagship
business, Caf Coffee Day. The company opened its first Caf Coffee Day outlet in Bengaluru
in 1996 and currently has a network of 1538 caf outlets spread across 219 cities in India
under the above brand name.
Format

Description

Caf Coffee Day

outlet

a mix of coffees, teas and other

beverages and food options

The Lounge
The Square
Vending business
Fresh & Ground
outlet
Coffee Day Xpress
kiosks
Production,
Processing & Exports

a mix of exotic coffees, teas, cocktails

and international cuisines options
specialty coffees and teas and fine
dining options
a variety of coffees and teas; coffee is
freshly brewed
22 exclusive varieties of freshly
brewed coffee powder
basic offerings of coffees and teas
and light snack options
green coffee beans

Presence
1489 outlets across 219 cities in India and
14 international outlets across Austria,
Czech Republic and Malaysia
42 outlets across seven cities in India
7 outlets across four cities in India
3916 vending machines across India
412 outlets across seven states in India
561 kiosks across 12 cities in India
one of the largest exporters of Indian
coffee beans, primarily to Europe, Japan
and the Middle East

Largest network of cafs compared to any other peer

CDEL has the largest number of consumer touch points compared to any other company
operating in the caf retail space. With a network of 1538 Caf 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.
Healthy topline growth in recent past
The topline has grown at a healthy 24.7% CAGR in FY11-15. Moreover, its coffee and related
business segment, which contributed 51.6% to total sales in FY15, has also grown at a steady
pace of 7.6% CAGR in FY11-15. CDEL has also maintained competitive prices across product
offerings at its Caf Coffee Day outlets vis--vis its peers, which has helped drive revenues
for the coffee business.
Strong brand identity in form of Caf Coffee Day
The flagship caf business, Caf Coffee Day, has a strong brand recall in the minds of
consumers and has a significant following especially among the youth of the country. With
India being a young country (median age of ~27 years), we expect Caf Coffee Day to be a
direct beneficiary of the premiumisation in the beverages industry and growing brand
consciousness among the youth on the back of an increase in consumer preference for quality
products.
Valuation
With the kind of perception CDEL enjoys among urban youth, rising aspirational consumption
coupled with higher disposable income levels are also expected to work out in its favour. At

Networth November 2015

the price band of Rs.316-328, a target market cap and EV at the upper end of the price band
would be Rs.6,756cr and Rs.10,510cr, respectively. Given the investment value of the IT,
logistics, real estate & hospitality businesses is ~Rs.5025cr, the coffee business is available
at 4.3xEV/sales which is ~15% discount to global coffee chain Starbucks. Considering a large
part of the proceeds of the IPO will be utilised for partial repayment of debt, the IPO at this
price band is available at reasonable multiples for long term investors.
Rs. cr
Targeted Mcap

6,756.9

Debt

4,496.8

Cash

742.8

EV

10,510.9

Mkt value of Mindtree

2,103.4

Value of integrated multimodal logistics business segment

1,426.3

Value of leasing of commercial office space business segment

1,029.3

Value of hospitality services business segment

466.1

EV of coffee business

5,485.8

Coffee & related business revenue

1,280.4

EV/Sales of coffee business (x)

CDEL
Starbucks
McDonald's

FY11-15
Sales CAGR
7.6%
11.3%
3.3%

4.3

EBITDA
margin
15.7%
23.7%
33.3%

EV (Rs.
cr)
5,485.8
582,018.5
715,621.8

EV/sales

EV/EBITDA

4.3
4.9
4.3

27.7
20.6
12.8

Key risks and concerns

Debt-laden balance sheet
CDEL needs to remain cautious on the presence of debt to the tune of Rs.4,497cr on their
balance sheet as of FY15. CDEL had incurred an interest cost of Rs.326.2cr in FY15. CDEL
has proposed to use a portion of the IPO proceeds to lower its debt by Rs.632.8cr.
However, this is not expected to lead to a significant reduction in CDELs debt. A post-issue
debt-to-equity ratio of CDEL is estimated at 2.3. High interest outgo may prove to be a drag
on the earnings front for the company.
Subdued macroeconomic environment may weigh on growth
A prolonged weak economic scenario may impact CDELs business, especially the retail
caf business, as it is directly linked with customer traffic and consumer discretionary
spending.
Regulatory risk
CDEL operates in the food industry space wherein there exists a regulatory risk pertaining
to failure to conform to quality standards and comply with procedures laid down by
respective government authorities. Any adverse impact on the companys caf retail
business due to regulatory issue may hamper the companys growth prospects.

Networth November 2015

IPOs in the last year

Date

Company Name

26-OCT-2015

Interglobe Aviation (Indigo)

12-OCT-2015

Coffee Day Enterprises

24-AUG-2015

Indian Oil Corporation - OFS

21-AUG-2015

Navkar Corporation Ltd

06-AUG-2015

Power Mech Projects

27-JUL-2015

Power Finance Corporation: OFS

23-JUL-2015

Syngene International

19-JUN-2015

Manpasand Beverages Ltd

07-MAY-2015

PNC Infratech

24-APR-2015

UFO Moviez India Ltd

21-APR-2015

MEP Infrastructure Developers Ltd

09-APR-2015

VRL Logistics

08-APR-2015

Rural Electrification Corporation - OFS

17-MAR-2015

Inox Wind

09-MAR-2015

Adlabs Entertainment

02-MAR-2015

Ortel Communications

29-JAN-2015

Coal India

03-DEC-2014

Monte Carlo Fashions Ltd

03-SEP-2014

Sharda Cropchem Ltd

25-AUG-2014

Snowman Logistics Ltd

Sources:
Forbes, Economic times, ICICI direct