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Shares of Coffee Day Enterprises listed today on an extremely bearish note. The parent company of the popular Cafe Coffee Day (CCD) chain of coffee shops allotted shares to investors at INR328 per share but the listing at INR317 per share hammered investors’ hopes of making money in the IPO. To add insult to the injury, the stock tumbled further and hit an intraday low of INR266.3 apiece. It recovered marginally to close the day at INR271 apiece, still marking a huge discount of 17.4% on the allotment price.
To make the matter worse, retail investors received full allocation as the subscription in the category was just 0.9 times. This means whoever applied in the retail category, was allotted shares. The company raised INR11.5 billion from the IPO which was aimed at reducing indebtedness of an extremely diversified business model.
Poor listing despite big names
Poor listing of the VG Siddhartha promoted company – which had a long list of investors including New Silk Route, KKR, Standard Chartered Private Equity, Nandan Nilekani, and Rakesh Jhunjhunwala – once again highlights that small investors need to be extra cautious with IPOs amid turbulent stock markets. Another relevant question is of valuation and pricing – here was a loss making company asking for investors’ money but without a clear focus on a business. The name of Coffee Day Enterprises is a bit misleading as the holding company derives only 51.6% of its annual revenues by selling coffee. Among its other prominent businesses are development of IT- ITES technology parks, logistics, financial services, and hospitality.
In our analysis, we found that this diversified business model was eligible for a discount usually reserved for conglomerates. However, many brokerage houses recommended investors to subscribe to the IPO claiming valuations are justified given Cafe Coffee Day’s leading position in its domain. For us, leadership at the cost of profits was a big turn off as was the idea of housing several unrelated businesses under a single entity.
The IPO once again proves that the responsibility of selecting chaff from grain has only increased for retail investors in these years. The trend of leaving something on the table for IPO investors – once taken for granted – has virtually ceased to exist and thus, investors need to educate themselves in selecting good IPOs.